"Despite the far-reaching changes that our defense industries have undergone, and although they deserve praise, they are at a disadvantage vis-à-vis their overseas competitors for one reason: those competitors are huge companies that invest massively in research and development and enjoy benefits of scale on all product lines. This is the problem we must solve," said Minister of Defense Shaul Mofaz at the annual conference of the Project Management Institute this morning.
Mofaz began his remarks by enumerating the merits of Israel's defense industries, both publicly and privately owned: they are at the cutting edge of technology; and their high-quality workforce on the research side brings with it operational experience, which lends it an advantage over other defense industries around the world.
Mofaz mentioned the achievements of the past few years, among them a streamlining of the workforce, a doubling of sales revenue per worker, and exports of $4.5 billion with an orders backlog of another $10 billion. Israel's defense industries account for 10% of the global market.
The quality of these industries, Mofaz went on to say, makes possible the security concept under which the Israel Defense Force operates, as it modernizes to become more reliant on technology, in order to maintain its deterrent power despite Israel's numerical inferiority.
Nevertheless, Mofaz warned of four problems that prevent Israel's defense industries from fulfilling their potential. The first is competition between them in bidding for overseas contracts. "Even if one company wins, both lose, because in order to win they offer borderline prices that are almost loss-making," Mofaz said.
A second problem is the duplication in technological infrastructures and production lines. Mofaz proposes overcoming this through mergers and consolidations. A further problem is the dispersal of government investment in research and development across several sectors. The ideal, Mofaz said, would be to bring all R&D investment together into a single, central unit. Another of Mofaz's aspirations is to set up a national science laboratory to serve all the defense industries. The final problem Mofaz mentioned was the lack of management flexibility in the public sector.
"To all these problems, there is one solution: joining of forces and merging of the defense industries until there are only one or two companies, instead of the six to seven we have today. That is too many for a country the size of Israel, and makes it hard for us to compete with giants like Boeing," Mofaz said.
"That is my goal as minister of defense," Mofaz added, "The market forces also understand this, without a guiding government hand, and mergers have already taken place. One of the results will be management flexibility and examination of projects on a profit and loss basis."
Published by Globes [online], Israel business news - www.globes.co.il - on May 18, 2005