The threat of closure hanging over Brill Shoe Industries Ltd. (TASE: BRIL) military boot manufacturing factory, following the Defense Ministry’s decision not to renew orders, is just the start. Senior executives at defense companies warn that soon many more factories across the country will find themselves in danger of being closed due to the drying up of defense ministry’s orders. It is mostly small and medium sized companies that are at risk, which serve as suppliers for the big companies, such as Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), Israel Military Industries Ltd. (IMI), and Rafael Advanced Defense Systems Ltd. The defense budget cuts are also felt at some of the large companies, some of which report payments that have been postponed for many months.
Last week, Prime Minister Benjamin Netanyahu decided to allocate an additional NIS 2.75 billion to the defense budget. The Ministry of Defense had demanded an additional budget of NIS 4.5 billion. “People following the news reports last week may have gotten the impression that the Ministry of Defense beat the Ministry of Finance in a battle over the budget. There was no such victory here. If the defense budget is low, we will pay the price, and it will be a heavy price. We are on the brink of a catastrophe, and are facing very dark years,” a senior executive at a defense company told “Globes.” “I am afraid that this is the most difficult period we have ever faced - we are no longer bringing in new people to increase output and expand operations. There are 4,500 career officers and NCOs who are slated to be let go by the IDF in the near future. Good people, geniuses among them, who send me their CVs, because, to them, the most natural step following the military chapter of their lives is to move to a defense company. I take their CVs and I throw them in the trash because I have nothing to do with them, other than feel terrible about it. We are already in a deep stagnation this year, and we have fantastic ideas for projects, but they are all on the ice.” Some of the defense companies reported that many months have passed with no new orders from the Ministry of Defense, mostly due to the lack of a defense budget by which they plan their supply for coming years. According to a senior executive at one of the companies, “This is a real crisis. The big companies may have enough breathing room to continue on and roll with the punches, because they export and they have a broad product portfolio. The tragedy is at the smaller companies, who specialize in building a specific product or component, and there is no doubt that this is going to be a critical period for them. They will need to be very creative in order to survive.”
Following the addition of NIS 2.75 billion to the defense budget, the budget stands at almost NIS 54 billion. The Ministry of Defense and the IDF are working on putting together their work plan based on the new budget, but sources close to the matter speculate that it is not likely to include much good news for the defense companies. When reservist training is halted, less ammunition is fired. “The defense companies have more than one good reason to be panicked,” a senior official who is close to sources in the Ministry of Defense told “Globes, “In the coming months, we will see many good people without jobs.”
A senior executive at a major defense company fears that the contraction that is expected in the sector’s companies will harm the IDF’s capability in the future: “We will be set back a few years, in terms of capability. Budget cuts like these mean that technological systems that are intended to serve the military industry in a few years will not exist, because we will not develop them, and we will not maintain them. Large-scale plans, based on infrastructures that took years to develop, are now on the chopping block. The cuts are made in a cold and calculating way, and are all based on the argument that there is no money. The problem is not only with our defense budget, in export markets there have been cuts as well. Governments prefer to buy locally. Also, past exports that took place when the dollar was strong are hit hard because the dollar has been weak for a long time now.”
Growth is hurt
A report issued yesterday by the Manufacturers Association of Israel (MAI) projects layoffs 10,000 workers in the industry, due to cuts in orders from the defense companies and 3rd party companies that provide services to them. These layoffs will come about due to closing projects that have already begun in recent years: cancellation of existing orders by the Ministry of Defense, even at the cost of cancellation fees, and the halting of routine purchases. The MAI added that the planned cuts in the Ministry of Defense’s local orders is expected to lead to loss of NIS 11 billion production over the next five years, NIS 3 billion already in 2014.
According to projections by the MAI and senior executives at defense companies, by next year thousands will find themselves out of work. This is likely to worsen existing trends that defense companies around the world have been struggling with in recent years: increased competition, preference for domestically manufactured products, and now the anticipated hit to Israeli exports. “These cuts are not a long-term solution to the budget problem, but the opposite,” said MAI and Federation of Israeli Economic Organizations President Zvi Oren: “This situation will cause major damage to growth in the industry, a drastic drop in output, and massive layoffs.” According to MAI data, the Ministry of Defense’s annual local procurement budget is NIS 9.4 billion. 80% of this budget goes to the 4 biggest companies, who outsource 30-35% of the orders to small and medium sized subcontractors. In Israel, about 400 companies, with more than 55,000 employees, depend primarily Ministry of Defense orders.
Published by Globes [online], Israel business news - www.globes-online.com - on November 7, 2013
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