Elbit's new Georgian factory could jeopardize Israeli jobs

Elbit Systems

Elbit Systems: Our strategy has enabled us to win more large projects that are expanding production taking place in Karmiel.

Far away from the media spotlight, while industrial leaders are warning about the overseas expansion of Israeli industry at the expense of Israel, Minister of Economy and Industry Eli Cohen took part in a ceremony inaugurating a new plant of Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) subsidiary Cyclone in Tbilisi, Georgia.

When the new Israeli plant now being opened in Tbilisi reaches full capacity, it will employ 300 workers and supply airplane parts made from compound materials to the civil aviation industry, mainly US manufacturer Boeing. $93 million was invested in the development of the new plant, mostly from a Georgian fund for encouraging industrial investments in the country.

For Elbit Systems, the Georgian deal is excellent. It enables the company to manufacture in a comfortable setting, does not obligate it to export unique know-how overseas, provides regulatory concessions and other benefits provided by the Georgian authorities, and provides Elbit Systems with easy access to relatively low-paid personnel, compared with what it pays in Israel.

Georgia is gaining hundreds of jobs, another foothold of a global industrial-defense brand like Elbit Systems, and no less important, marks another milestone in its long and friendly relations with the Israeli defense industries.

For industrial leaders in Israel, however, deals like this one are a materialization of their worst fears. The leaders of the Manufacturers Association of Israel have been circulating for months with a menacing graph in their pockets entitled "Israeli Industry Growing Outwards" and have been showing it with sour faces to anyone willing to listen for two minutes.

According to the industrialists, only eight new plants with more than 20 employees opened in Israel in 2016, compared with 56 new plants in 2005. According to this graph, only 16% of Israeli industrial firms had overseas production activity in 2005, while this figure jumped to 28% in 2016.

"The very fact that Elbit Systems is setting up a plant in Georgia is alarming," a leading industry figure says. "We recognize the prevailing trend in the sector - moving production to a foreign country as a condition for getting arms deals, laws requiring reciprocal procurement, and so forth. This is logical if the US or India is involved, but in Georgia? Elbit Systems chose to build a plant in Georgia, not Israel, and that means that something is not right."

There has been open tension between the Manufacturers Association and Cohen concerning the analysis of Israeli industry and the description of its state. The differences are significant. Manufacturers Association president Shraga Brosh complains about burdensome regulation, economic uncertainty, high production costs, a shortage of skilled employees, and continual distress caused by current exchange rates making exports less profitable. He says these elements are pushing more and more industrialists out of Israel.

Cohen points to economic growth, the historical low in unemployment, and hundreds of millions in investments in industrial development.

Cohen does not understand why an Israeli company opening a plant overseas is so bad, as long as it is not at the expense of its activity in Israel. US company Intel is also investing billions in Israel and employing thousands of workers. He disparagingly dismisses the industrialists' menacing graph. For the professional staff in his ministry, over 90 plants were opened in Israel over the past year and eight were opened in just Dimona over the past two years.

"The Ministry of Economy and Industry counts the expansion of existing plants, or every meter built by an enterprise that received any kind of assistance from the Israel Investment Authority, but no new plans are coming here, because new plants means ones built from scratch," an industrial source says in explaining the differences between the two sides. "What Elbit Systems opened in Tbilisi is a high-tech plant for all intents and purposes. Why should we be glad about this and why should Israel's minister of economy and industry be there?"

Economic sources told "Globes" that the opening of the plan in Tbilisi is likely to benefit Cyclone's business in Israel. The new plant will focus on the production of simple components, while the production floor in Israel will expand in a way designed to accommodate a focus on advanced production, while increasing the number of employees in Karmiel.

Elbit Systems says, "Opening the plant is an important part of the policy we have been pursuing in recent years of increasing capacity and expanding technological production lines for export at the company site in Karmiel. This policy, which has been accompanied to date by the investment of millions of dollars in additional technological infrastructure at the Karmiel site, is already bearing fruit; it has enabled Cyclone to win more large projects that are expanding production taking place in Karmiel. Measures of this type are part of the company's strategy for continuous development of knowledge-intensive production capacity in outlying communities. They also strengthen Elbit Systems' ability to continue being an Israeli high-tech company, 80% of whose employees live in Israel and 80% of whose revenue comes from exports."

Addressing the complaints, Cohen said, "Expanding overseas activity by Israeli companies fits in with the desire to grow on the international front. In a large proportion of cases, it does not come at the expense of the local industry; it even supports it, as in the case of the plant in Georgia, which is not being opened at the expense of activity in Israel. International expansion by companies is legitimate, and fortunately, the growth of industrial activity in Israel is evident in the low point reached in unemployment and a steep rise in exports. It is confronting us with the shortage of personnel, given the demand in Israel. I see no problem in international expansion that is not at our expense."

Published by Globes [online], Israel business news - www.globes-online.com - on May 31, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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