Israel's defense exports zoomed 40% to an all-time high of $9.2 billion in 2017, according to figures published today by SIBAT - The Foreign Defense Assistance and Defense Export Organization in the Ministry of Defense.
The dramatic rise in defense exports is attributable to a series of huge deals last year by Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) in India, headed by the $2.5 billion deal to supply Barak 8 missile defense systems. These deals took many years of preparation and joint development with the Indian defense authorities. At the same time, the Ministry of Defense said today that in addition to this huge deal, other substantial defense deals also contributed to the steep rise in defense exports in 2017, and this trend is projected to continue in 2018.
IAI is currently showing obvious satisfaction with Israel's export results, a large proportion of which resulted from deals led by the company last year. IAI CEO Joseph Weiss told "Globes," "We're working on a lot of deals, some of them with a substantial volume, and I assume that some of them will materialize this year. The forecast for 2018 appears quite positive. He explained, "The effect of success in the Barak 8 missiles deals in India will continue for a few years, and will also be reflected in the company's profit margins."
The Ministry of Defense's figures indicate that the bulk of defense exports, 80%. consists of missile and air defense systems, followed by deals involving exports of radar and electronic warfare systems and upgrading of weapons platforms and avionics.
Most of the major deals were by the four main defense companies: IAI, Rafael Advanced Defense Systems Ltd., IMI Systems Ltd. (IMI), and Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT). Elbit Systems, the only one of the four that is not a government company, is in advanced proceedings to acquire IMI from the state. Defense companies employ 150,000 workers in Israel.
NATO countries are in a military buildup
SIBAT head Brig. Gen. (res.) Michel Ben-Baruch attributed the increase in exports by defense companies to a rise in defense spending by NATO members, with an emphasis on procurement of home front defense and border protection systems as a result of the waves of immigration in recent years and the challenge posed to defense agencies by the growing terrorist threats.
Over 20% of Israel's defense exports last year went to European countries, but a large majority went to Asia, the main target market for Israeli defense companies. "Asia is a target for all the defense companies in the world. Although there is intense competition against major powers, Israel enjoys a great deal of prestige because of the quality of its products and the reputation of its industries. This enables us to complete in those markets against large global companies," Ben-Baruch told "Globes."
In addition to IAI's large-scale missile deals in India, another prominent defense deal in recent months led by the Ministry of Defense involving Elbit Systems and IAI was with Croatia. Israel will sell Croatia 12 outdated F-16s upgraded by IAI and Elbit Systems in a deal estimated at $500 million.
The F-16s that Israel is selling in the deal were grounded in recent years as part of an internal IDF streamlining measure, due to their age and high maintenance costs. Ben-Baruch said, "In this deal, we went up against huge European companies and triumphed in the competition within Europe. That wasn't easy. The deal was important, because it paves the way to future investments and cooperative efforts between the two countries, including in non-military areas."
The Ministry of Defense's figures show that only 2% of all exports by defense companies last year consisted of unmanned aerial vehicles (UAVs), even though this sector has been associated with IAI and Elbit Systems for many years.
Defense sources pointed out that other players from around the globe have entered the UAV market in recent years, including Chinese companies offering substantially cheaper products than those offered by Israel. These companies are aiming mainly at developing countries.
In addition to the intensified competition in strategic UAVs between Israeli and US companies, especially during the past year, which was reflected in the UAV tender in Germany, a similar tender in Australia, and recently also in Belgium. "Israel was a pioneer in this for many years. The world is changing and developing, there is competition in this area, and we're coping with it fairly well," Ben-Baruch said.
US company General Atomics has clearly been motivated in recent months to expand its marketing of aircraft in markets where Israeli companies have hitherto enjoyed a significant advantage, following removal of former President Obama's restrictions on US exports of certain types of UAVs. These restrictions were reconsidered by current US President Donald Trump, who decided to remove them. "There is no doubt that we're up against very tough competition that is becoming more and more difficult every year, a defense source said.
Commenting on global competition in the UAV market, Weiss said, "We introduced the first UAV to the world 30 years ago. Strong competition has since emerged, both in Israel and abroad. It's not easy, but we still have good reasons to believe that next year and in the subsequent years, deals in this sector will improve."
Huge deal in India still stalled
The Ministry of Defense agrees with Weiss that additional important deals will go through in the coming year, with export figures in 2018 being similar to those in 2017.
Due to the nature of these deals, concluding them sometimes takes many years. One such deal is Rafael's Spike missile deal, which is projected to amount to $500 million. This deal has seen ups and downs; its implementation has already been delayed for a long time by internal disputes in India between research and development agencies and the Indian army.
In addition to Rafael's stalled missile deal, delays were recently reported in a large radar deal by IAI subsidiary Elta Systems, in which the company is to supply the Czech army with advanced radar systems. The reason for the delay is the difficult in connecting the Israeli radar to NATO systems.
Despite the impressive increase in Israeli defense exports in 2017, the Ministry of Defense is describing the coming years as "challenging" for Israeli companies, due to the increasing number of competitors in the market; demands by customers for production of products in their territory, including the transfer of technologies and know-how; and the US military aid agreement, which includes the elimination of Israel's current option of converting a quarter of US aid from dollars to shekels, starting several years from now. Cancelation of the dollar-shekel conversion clause will have a significant effect on the Ministry of Defense's ability to direct procurement budgets to Israeli industries, because all US military aid money will have to be spent on procurement from US companies.
In preparation for the new situation dictated by the US aid agreement, more and more Israeli companies have already begun establishing activity in the US, concluding cooperation agreements with local companies, or founding US subsidiaries. IAI is currently searching for a VP to manage its US business, so that future procurement by Israel based on US aid money will be made from IAI subsidiaries incorporated in the US, among other things.
Ben-Baruch says that in view of the growing trend towards moving production to other countries and transferring know-how and technology, in addition to the sale of these systems to third parties, the Ministry of Defense has established a control mechanism to ensure that products originating in Israeli know-how do not leak to hostile countries, including insistence on a tough system of confidentiality and usage restriction agreements. At the same time, although these restrictions are designed to safeguard the state's security interests and those of Israeli companies, which are expanding their global sales, the Israeli economy is liable to lose jobs in Israel. In the past, defense sources explained that in view of the trend that began in India with the "make in India" policy declared by Indian Prime Minister Narendra Modi, which is spreading around the world, companies wishing to survive have no choice other than to comply with this trend.
The Ministry of Finance emphasized that in general, it takes care to maintain the IDF's qualitative and technological advantage, while preserving unique know-how and advanced versions of systems. "We're not selling everything. Every important deal is discussed thoroughly in serious forums in the Ministry of Defense in which levels of secrecy are set for every product, and the likelihood that know-how will leak to other countries is also taken into consideration," Ben-Baruch declared.
At the same time, Ben-Baruch addressed allegations that Israeli weapons reaching countries that violate human rights, saying "We are careful to maintain human rights, operate in full coordination with the Ministry of Foreign Affairs, and consider all aspects, while employing supervision and enforcement systems."
The Ministry of Defense did not comment today on affairs featuring Israel defense companies that made negative headlines in recent months, including the Aeronautics affair, in which a court has imposed a gag order.
Commenting today on the defense export figures, Minister of Defense Avigdor Liberman said, "In two years, we have increased defense exports substantially. This is a superb achievement by any standard, which is attributable to hard work by SIBAT and the defense industries, as well as a series of agreements with countries having confidence in the capabilities and creativity of the Ministry of Defense. This achievement will enable us to increase the research and development budget, create new jobs, and especially to ensure the IDF's supremacy in the coming years."
Published by Globes [online], Israel business news - www.globes-online.com - on May 2, 2018
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