In the coming months, IDF Chief of Staff Lieut. Gen. Aviv Kochavi will face one of the most important decisions the Israeli defense establishment has ever made: how to spend $11 billion on buying dozens of new top-of-the-line aircraft that the Israel Air Force will use for many decades into the future from the US arms industry.
The arms procurement plan, one of Israel's largest ever, will tie up almost one quarter of US defense aid money in the coming decade. It includes a new squadron of attack planes, 5-7 cutting-edge aircraft for airborne refueling, and transportation helicopters to replace the Yasur (Sea Stallion) helicopters used by the air force for four decades. All of these will be accompanied by additional investment in new systems to be installed on the aircraft, development of special equipment, operating and maintenance infrastructure, etc.
The most important Israeli decision involves a choice between two attack planes: the F-35 Adir (stealth fighter) manufactured by Lockheed Martin and the new F-15 manufactured by Boeing. Lockheed Martin is offering Israel a third squadron of F-35s, plus new transportation helicopters and airborne refueling planes made by European company Airbus under a strategic cooperation agreement between the two companies. Boeing is offering Israel a no less attractive package: a squadron of 25 new F-15s, plus airborne refueling planes developed for the US Air Force and advanced transportation helicopters.
Israel has made three purchases of the F-35 in the past decade, 50 planes altogether, at $100-110 million per plane. Israel will have two squadrons of these planes by 2024. Lockheed Martin has supplied the air force with 14 of the places so far, and the planned rate of supply in the future is six planes per year.
The IDF and the Ministry of Defense estimate that the final decision will be made this summer. At the same time, defense sources say that they already detect signs that the general tendency is in favor of Boeing's offer, with the key work being mix: Israel needs both Lockheed Martin's stealth fighters and Boeing's bombers. If there were no budget constraints, the air force would probably choose both options.
What are the arguments on each side? The air force is satisfied with the operational capabilities demonstrated by the stealth fighter it is using and integrating into its system. At the same time, the ability of the F-35 to carry large quantities of munitions is more limited than that of Boeing's F-15. Expanding the F-35's munitions payload means foregoing its stealth capabilities.
Boeing is offering the F-15 IA, which will be specially developed for the Israeli air force's demanding operational needs. It will not have stealth capability, but it can do at least some other things better than the F-35. For example, it can carry double the quantity of various types of munitions.
Defense companies: Where is the reciprocal procurement?
Boeing and Lockheed Martin are jumping through hoops to win the huge deal with Israel. They both have deep roots in business activity in Israel, they both have offices headed by former senior Israeli air force officers. Lieut. Gen. (res.) David Ivri, who commanded the Israeli air force at the time of the attack on the Iraqi nuclear reactor, represents Boeing in Israel. Brig. Gen. (res.) Joshua Shani, who led the Hercules planes to Entebbe in the mission to rescue the Israeli hostages, represents Lockheed Martin.
Both US companies have a great interest in getting the Israeli order, and not just because of the money. The IDF, which carries out many operations of many different kinds, is a good weapons shop window. IDF procurement of a weapons system amounts to a seal of approval making it easier to market the system to other armies.
The Israeli defense industries have noticed the eagerness of the US defense giants for the multi-billion-dollar deal with Israel, and are trying to take advantage of the situation. They are demanding that the Ministry of Defense should choose one of the offers on the basis of the size of the reciprocal procurement commitment in Israel that the company is willing to make.
The deal will be funded by US aid money, so that Israel cannot demand reciprocal procurement for it, as it did with German company Thyssenkrupp in the submarines deal and Italian company Leonardo in the training aircraft deal. Nevertheless, the Ministry of Defense believes that in order to obtain the order from Israel, the US companies will be willing to voluntarily offer attractive reciprocal procurement from local companies.
In the talks on the emerging deal between the Israeli defense companies and the Ministry of Defense, the small and medium-sized companies are especially prominent. They are demanding that a specific proportion of the reciprocal procurement should be reserved for small and medium-sized companies. They have learned their lesson from previous deals, in which most of Lockheed Martin's reciprocal procurement in Israel over the past decade in the stealth fighter deals was from Israel Aerospace Industries (IAI) and Elbit Systems (Nasdaq: ESLT; TASE: ESLT).
Lockheed Martin ordered over 800 sets of wings for the F-35 from IAI, and pilot helmets, which are built-in to the aircraft package, from Elbit Systems' US subsidiary. The agreement between Lockheed Martin and Elbit Systems amounted to $1.12 billion by 2018, while IAI's share was $311 million. Cyclone, owned by Elbit Systems, supplies body parts for the stealth program for tens of millions of dollars more. Other Israeli companies supplying components for the stealth fighter include SimiGon (AIM: SIM), Cabiran, Tadiran, and Gilboa.
Small companies: They leave us the crumbs
The small and medium-sized industries demand for a piece of the future reciprocal procurement action was also raised in the framework of the discussions in the inter-ministerial committee headed by Ministry of Economy and Industry director general Shay Rinsky. The committee is considering ways in which Israeli companies can cope with the important changes in the US defense aid agreement. Taking part in the discussions were representatives of the companies, the Ministry of Finance, the Ministry of Defense, the Israel Investment Center, and the Israel Tax Authority.
One of the changes that disturbs the large companies, but much more the small and medium-sized companies, is the clause in the aid agreement stating that by 2025, Israel will no longer be able to convert US aid money from dollars to shekels. This will greatly shrink the Ministry of Defense's shekel budget, and make it difficult for it to order products from Israeli companies. Israel will have to spend its entire $3.8 billion in US military aid in the US.
In response to the change, the large companies, such as IAI, Rafael Advanced Defense Systems, and Elbit Systems, are trying to step up their activity in the US market, so that they will be able to get future orders based on US aid money, just like any US company.
The way to do this is to acquire companies, establish subsidiaries, or reach industrial cooperation agreements with local companies. This costs a great deal of money, however, and the small and medium-sized companies do not have the deep pockets necessary to establish proper infrastructure in preparation for the dark days ahead.
"The aid agreement will gradually constrict the ability to convert dollars to shekels, and Israeli defense manufacturing will face a crisis," Wipro Givon VP marketing and development Goni Letzter told "Globes." "A large part of this manufacturing is paid for by aid money. The companies providing services to the large companies as a subcontractor will have a really tough time." Wipro Givon manufactures metal parts for the global aviation industry, and one of its major customers is Boeing. Wipro Givon is controlled by Indian corporation Wipro, which acquired it from FIMI Investment Fund two and a half years ago for NIS 300 million. The Israeli subsidiary has 300 employees, of whom 250 are in the Tsur Shalom industrial zone in Kiryat Bialik.
Letzter fears that as in the reciprocal agreement with Lockheed Martin a decade ago, most of the money will go to the large companies. Like other representatives of the small and medium-sized companies, he complains that his opportunities and those of his colleagues to benefit from the reciprocal procurement pie are being repeatedly trampled. He says, "For years, a practice has developed whereby the main contractors in industrial cooperation in aircraft are the companies owned by IAI or Elbit Systems. Companies not part of these two groups receive at best the status of a second-class subcontractor, meaning only the crumbs. IAI and Elbit Systems in any case enjoy a variety of government budgets as part of their connections with the Ministry of Defense or contracts as sole supplier. It will be only fair if new orders are channeled to other companies in order to reduce the critical damage they will suffer as a result of the new format in the US aid agreement."
Published by Globes, Israel business news - en.globes.co.il - on March 4, 2019
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