A comprehensive analysis by the Ministry of Defense of the effect of the new US aid agreement on Israel's defense industries conculdes it will cause 22,000 layoffs and cost Israel NIS 7 billion in GDP. Israel and the US signed the agreement in 2016 towards the end of former President Barack Obama's term in office.
The new agreement increases US military aid to Israel from $34.4 billion in 2009-2018 to $38 billion in 2019-2028. The new agreement, however, includes a clause that gradually eliminates Israel's option of converting 25% of the aid from dollars to shekels, and which currently gives the Ministry of Defense budget room for procurement amounting to hundreds of millions of shekels annually from Israeli defense companies.
This means that although the defense procurement budget from aid will increase by $500 million a year, towards the middle of the next decade, the Ministry of Defense will be unable to convert 25% for procurement from domestic companies, and will have to spend the entire amount in buying weapons, systems, defense equipment, etc. solely from US companies.
Billions of shekels will then be unavailable for procurement from companies in Israel. The defense industry fears that hundreds of companies will close down, tens of thousands of workers will be laid off, R&D by companies for making new products will be affected, and production will be moved overseas. "If only half of this scenario materializes, it will be a disaster," a senior economic figure told "Globes."
"This is a national problem, not just a defense one," a senior defense industry figure who saw the report told "Globes. The report was completed at the Ministry of Defense in the past few days, and its main points were presented to Minister of Defense Avigdor Liberman and Ministry of Defense director general Major General (res.) Udi Adam.
The analysis was conducted by the Ministry of Defense chief economist, and was presented yesterday to senior officeholders in a number of defense industries and Manufacturers Association of Israel president Shraga Brosh.
Brosh said, "These figures are terrifying. Hundreds of industrial companies, mainly small and medium-sized, and hundreds of companies in the outlying areas will simply not survive these years if the state does not intervene, give them effective aid tools, and find alternatives."
According to the report, the main damage will be felt at 600 companies, mainly in the metal and electronics industries: about 180 companies in the metal sector and 160 more companies in the electronics sector that depend to a large extent on the Ministry of Defenses ability to convert a quarter of the US aid money for making orders from these companies. Some of them are subcontractors of the major defense companies that receive orders from the Ministry of Defense.
In addition to these companies, there are dozens of companies in services, materials, optics, machinery, and software. "There are hundreds of companies providing subcontracting services for billions of shekels a year, mainly for the major defense companies, such as Elbit Systems, Israel Military Industries,, Rafael Advanced Defense Systems, and Israel Aerospace Industries. If the Ministry of Defense cuts back on its procurement, the small ones will wither and close down," a senior source warned.
"The new situation will be felt starting in four years, and in order to cope with it wisely, the state has to prepare for it now," says a senior source exposed to the Ministry of Defense figures. "We and the Ministry of Defense see eye-to-eye in this, and there is no doubt that action is needed to limit the damage," a senior defense industry source told "Globes." "The Ministry of the Economy and Industry and the Ministry of Finance should realize the emerging threat to the Israeli industries. We got the impression that the Ministry of Defense understands the problem; now the other government ministries also have to understand it."
Preparation: Founding companies overseas
The large defense companies have clearly been preparing for the past year for the new agreement, and are taking measures to expand their business in the US market through cooperation agreements that they are contracting with defense companies in the US, or are founding subsidiaries that will operate for them in this market. At those companies, they expect that through subsidiaries registered in the US or industrial cooperation with local companies, the Ministry of Defense will be able to direct procurement to them using US aid money, so that the volume of their sales will not be significantly affected by the inability to convert US aid dollars to shekels. "The large companies will always get along, and even if their profit line is a little smaller, it will not threaten their existence. The problem is with the small ones, which are being throttled, and some of which exist solely through regular orders from the Ministry of Defense," a senior defense industry officeholder says.
Industrial sources told "Globes" that the trend towards moving production from Israel to the US will make IDF and Ministry of Defense projects and procurement programs more expensive, lengthen timetables in every project, damage the ability of companies to export and the independence of use by the end consumer of the product - the IDF, detract from the development capabilities of the Israeli industries, and reduce the volume of exports by Israeli defense industries at a time when those industries' target markets already feature growing competition from their counterparts around the world.
One of the solutions proposed by various parties is an appeal to the Ministry of Finance. Brosh says, "We will ask the Ministry of Finance to increase the shekel defense budget in order to preserve the current volume of defense procurement from Israeli companies. There is no alternative to providing such focused aid."
The crisis has been arousing concern for a long time among governmental and economic concerns, leading to efforts by the system to amend the aid agreement between Israel and the US. A senior source told "Globes," "Consideration was given to asking the US to change the defense aid agreement in order to make things easier for the Israeli industries, or even to cancel the clause preventing conversion of dollars to shekels. The agreement was signed with the Obama administration, whose attitude featured great tension with the Israeli government's policy. The current occupant of the White House is Israel's great friend, Donald Trump, and he might be amenable to a change."
This solution, however, is also difficult. The same source reminds us, "This is the same Trump who announced an America First policy. He imposed high customs duties in order to protect local industries in the US, plus in general, he is not the most predictable person. An attempt by us to ask for a change in an agreement is liable to confront us with a new situation, in which we will have to deal with an agreement on far poorer terms. We must not forget one thing - whether the agreement is better or worse, it still involves billions of dollars that the US administration is giving Israel each year as a gift."
New agreement: Israel cannot get more money for procurement
Other than the military aid, which amounted to over $34 billion over the past decade, the US administration has provided generous aid to Israel for development of its defense capabilities against missiles and rockets - in other words, in addition to the money in the agreement between the two countries. In 2007-2010, US aid for these purposes totaled $5.5 billion.
Every year for the past decade, US aid for Israel procurement of rocket interception systems like Iron Dome and for development and procurement of interception systems like David's Sling, Arrow 2, and Arrow 3 has totaled $400-500 million.
The aid that Israel will receive for these things in 2018 is likely to be more - $705 million. This amount includes a special $200 million allocation to finance a series of tests of the Arrow 3 system scheduled for next year in Alaska.
As of now, however, it is unclear what will happen with this money. When the agreement with the Obama administration setting the amount of US military aid was signed in September 2016, Israel undertook not to ask the US Congress for allocations beyond the agreed amount of aid money.
From the report: The effect of the agreement on industry
* Loss of operational flexibility in large companies
* Damage to exports and a decline in investment in R&D
* Closing of hundreds of small and medium-sized enterprises and mass layoffs
From the report: The effect of the agreement on the Ministry of Defense
* Loss of capabilities to develop advanced systems
* Usage restrictions imposed on products and weapons systems purchased in the US
* Damage to independence and weapons manufacturing capabilities in an emergency
Published by Globes [online], Israel Business News - www.globes-online.com - on March 21, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018