Four Big Defense Companies Are Too Many for Israel

The global financial crisis? Cutbacks in acquisition budgets? Yossi Ackerman, the General Manager of Elbit Systems, sees these developments in 2011 as opportunities. In an exclusive interview with IsraelDefense, he discusses the future of the defense industries in Israel and around the world
(Photo: Meir Azulay) (Photo: Meir Azulay)

There is something to what the small and mid-size defense companies say about Elbit Systems’ strength within the defense establishment,” admits Elbit CEO, Yossi Ackerman. Yet, in the same breath, he rejects the accusations that Elbit tramples over its competitors.

“We don’t ride roughshod over anyone, and I’m very sensitive about this,” responds Ackerman passionately. “The big companies have more options, so the defense ministry finds it convenient to contact us rather than the small companies. However, the large companies must give the smaller ones more work as subcontractors, and this trend needs to grow every year. I personally instructed all of Elbit’s department heads to expand the scope of subcontractor work with the smaller companies,” says Ackerman.

Ackerman is a unique figure among senior managers in the Israeli economy. He lives far from the in-crowd on a moshav (farming settlement) in the north, and makes sure to start each day with agriculture work on his own small farm. Then he makes a sharp switch to the fast pace at Elbit’s offices in Haifa or at the Azrieli Towers overlooking the Kirya in the heart of Tel Aviv.

Ackerman is in charge of Elbit’s 13,000 workers and forty worldwide subsidiaries. An article in Defense News ranked the company 33rd among the largest defense companies in the world. According to data published in the Tel Aviv Stock Exchange based on Elbit’s third quarter report, the company’s orders last year reached $5.7 billion with 75% coming from overseas clients. Nevertheless, the report also shows that company sales rose only moderately in 2011, despite Elbit’s acquisition spree in Israel and abroad in 2010. 

We asked Yossi Ackerman if Elbit intends to continue acquiring companies for mergers?

“It’s a process we see everywhere, and not only in the defense industry. When demand goes down, there’s a parallel trend toward merging. This is very natural. Essentially, it means that you have to become more efficient. How do you become more efficient? By using fewer directorates and combining R&D divisions. Thus, in every defense budget crisis, you see mergers. This is what happened in the US and Europe. Even industrial giants merged.

“You have to understand that high level merging is a very complex process. It means changing work cultures, combining factories, and employing fewer managers. Where does the energy come from that drives people to make such a demanding move and merge?

“The answer is simple; it is economic necessity. In Israel economic constraints have generated quite a number of mergers in the private sector. For example, Soltam, Tadiran, and El-Op merged with Elbit. However, when the government is the owner of a company, there are different considerations. It has more worker unions and needs to make political election considerations. It shies away from difficult moves it isn’t good at implementing. The government is not good at business management, so that is why there are not many mergers in the government. 

“Throughout the world, government holdings in industry are very low. Look at the US. That government does not have holdings in defense companies. They are all private. In socialist Europe, the governments hold only 11% of industry. In Israel, on the other hand, more than 50% of defense industries are government-owned in terms of sales.

“Today, Elbit holds one-third of Israel’s defense industries. Israel’s three other major companies that are all government-owned—Israel Military Industries (IMI), Israel Aerospace Industries (IAI), and Rafael—control about 50% of the market. Besides the big companies, there are a few small ones that also contribute to part of the market, so it’s good they will always be there,” says Ackerman.

“Four big companies in Israel – Elbit, Rafael, IAI, and IMI – are too many. Israel needs only two major defense companies (some say even one company is more than enough). However, I don’t agree with this. Someone ordered a research that shows that the moment two companies are cut, approximately 10% in cost will be saved. This is one way of solving problems, but not at the expense of the workers.”

So we won’t see significant mergers in Israel?

“Oh, it will happen, but unfortunately, only after an economic crisis.”

What about the privatization of IMI that was re-announced by the state, yet finds it too difficult to implement?

“If IMI were privately owned, it would have already gone through good changes. Instead, it is not privately owned. In my opinion, the government should concentrate on health, education, and security—not industry.”

Will you acquire IMI if there is a genuine proposition?

“This has been mentioned often. I prefer not to answer a hypothetical question. Let them come to us, and we’ll talk.”

They haven’t approached you regarding IMI’s privatization?

“No.”

Elbit has done quite a bit of merging in the private market in recent years. Will this trend continue?

“Yes, it’s part of our strategy. Actually, there’s nothing left to buy in Israel—there aren’t any companies left so we are looking for companies in other parts of the world.”

Fighting for the Budget

The future of the defense budget has been at the center of a heated debate involving senior officials in the Ministry of Defense, Ministry of Finance, and the Israeli defense industries in recent months. The government approved a three billion shekel ($750 million) cut from the defense budget in 2012 in response to the widespread social protests last summer that demanded more funds be allocated to welfare. Still, in light of the security situation and the challenges facing Israel, the proposed cut was re-examined at the end of 2011. Ackerman has strong feelings on this issue.

“I think that pitting defense projects against resources designated for welfare is a gross mistake . . . Every shekel that goes to the defense industry brings more money in return to Israel. For every dollar the government allots us, we bring in four. We create work places. Economizing on manpower in the army is all well and good, but when it is done in industry, the government ends up paying more. There is a difference between becoming more efficient by cutting back the number of IDF headquarters, and slashing a project at Rafael, which would be a mistake. The state doesn’t create employment – we do. Ask anyone in the finance ministry, they all agree with me on this.”

Let’s discuss the global market. The US is leaving Iraq with a lot of equipment being flown back. The Western armies’ procurement budgets are being cut. What will the market look like in the coming years?

“With reductions in the defense budget, we ask why customers should buy our products and not somebody else’s,” explains Ackerman.

“The procurement budget is going to be spent on either platforms or electronics. In the past, most of the money went to new platforms such as warships, tanks, and planes. What we’re witnessing now is a 30% drop in the acquisition of platforms, but not in electronics. Electronics are an alternative to platforms. If you buy fewer platforms, then you invest more in systems that upgrade the existing platforms. At Elbit, we’re in the field of electronics and systems.

“Because of the current economic situation, the US decided to bring home all of its equipment from Afghanistan and Iraq and upgrade it, not leaving anything behind like they did at the end of the Vietnam War. This is exactly our market. By the way, when you upgrade a plane, its electronics systems are only three years old, but the technology on the platforms are fifteen years old because their development takes much longer. Therefore, buying electronic systems has enormous advantages, beyond their price.”

UAVs and UGVs (Unmanned Ground Vehicles)

In the field of UAVs, there seems to be a slowdown in the world market, which has affected you. Many countries including Turkey, France, and China have started their own UAV production lines. Is this impression correct?

“There is no UAV production in Europe. For all practical purposes, there are only two countries in the world today that produce UAVs—the US and Israel. In my eyes, this is nothing short of amazing. The US has the knowledge, money, and time; and Israel has the brains and prowess, and an army that is willing to buy systems that are not fully developed. This combination of factors has made Israel a superpower in the field.

“Elbit’s Hermes-450 UAV, for example, has logged 300,000 operational flight hours. There is no other UAV in the world like it. Also amazing is that 80% of the global UAV market is in the US, and the Americans keep Israel out so we are left with only 20% of the market.

“Despite this, Elbit’s achievements are excellent. Between 80% and 85% of the UAVs in the IDF are ours. The major European UAV project is also ours (the Watchkeeper Project in Britain based on the Hermes-450 at an overall cost of $1.5 billion). In addition, at any given moment, we have smaller UAV projects underway in other parts of the world.

“Our situation isn’t bad, but we still have to educate the market on the UAV’s benefits. Take Brazil for example. They already have satellites and planes—we introduced them to UAV capabilities through a partnership with a domestic company. We educate the market no matter how small or big it is. For now, I can’t say that there’s a crisis in the field of UAVs – the market simply hasn’t developed enough. There’s a theory that I subscribe to (and so does the American Congress) that more than half the air missions in the not-too-distant future will be carried out by UAVs. The market is still learning.”

You are partners with IAI in G-Nius, a company that develops UGVs. Is this field not developing like the UAV’s?

“True. Why did unmanned vehicles begin in the air and not on the ground? The number and types of obstacles on the ground make the technological challenge much more difficult. There are rocks, boulders, and sudden twists on the road that make everything more complicated. There are few success stories in this area, and many customers are wary of introducing UGVs on a large scale, especially when a doctrine has not yet been defined. Success will come, but I don’t see it coming anytime soon.”

Switching to another subject, do you regret the huge investment Elbit made over the last decade in developing software-based radio?

“No. No one regrets it, certainly not the IDF. After all, if you already have a UAV, you want it to transmit pictures to the battalion commander, and you need a radio that’s integrated into the system. That’s what we did.”

The impression is that Elbit is returning to the development of lethal weapons, is this correct?

“Elbit isn’t interested in regular weapons, but in PGMs (precision-guided munitions). We want to attain a level of accuracy to within one meter of the target. That is the goal. That is the target.

“We’re working on laser-guided PGMs that are compatible with C2 (command and control) systems. Here, we are cooperating with the US and are not competing with other Israeli companies. There are no other systems like it, not in Rafael or in IAI. It is simply one of a kind. We found a niche, and the global demand is slowly developing.

“In the area of fire, following a study of the market, we decided to acquire Soltam who has proven experience in cannons and mortars. There is a demand for these weapons.

According to reports, the defense establishment wants to procure a German artillery system rather than Soltam’s for the IDF’s new self-propelled cannon. Is this true?

“I would be very surprised if it were. These weapons are on two different levels. Soltam has unique capabilities, and there’s a renewed demand for artillery in the global market.”

The world is alarmed to the threat of MANPADs being fired at passenger planes. Will the MUSIC system that El-Op developed to protect aircraft against such missiles be considered a company growth generator?

“It might. Right now the C-MUSIC system is being installed on tanker aircraft and VIP planes around the world, but very soon it will also be mounted on Israeli passenger carriers.”

What other areas at Elbit would you define as growth-generating?

“In general, every project we take on is considered to be growth generating...Our strategy is that if you’re not one of the three leading companies in the world in a certain field, then you should get out. We don’t want customers to choose us because of the price. Our goal is to be the leader in every field we set our sights on.

“For example, in the fields of real-time intelligence, lasers, and UAVs, we are one of the world’s three leading companies, or even one of the two leading companies. We also want to gain the lead in the cyber field.”

The Four Corners of the Globe

Around the world, Elbit is known as a company that works in foreign markets through local companies.

You define yourself as a multi domestic company with diverse activities in many countries. Critics claim that such global dispersion hinders management. Are they right?

“They are. I’d prefer selling only in Israel. The problem is that the defense budget is not large enough. Elbit has to sell outside the country, and the clients want the jobs. They want you to jumpstart an industry for them. This is the equation we realized when we started establishing, acquiring, and managing companies in foreign markets. This is what the clients demanded. Elbit has successful companies in Britain, Brazil, the US, Belgium, and elsewhere. Our exports are based on local production.”

Sales did not go up in the last quarter despite the acquisition of new companies. How do you explain that?

“Sales grew minimally. In times like these, if you want the sales to rise appreciably, you have to cut back on profits, and this does not fit our strategy. We took this into account.

“I’d like to point out that Elbit’s growth has always been internal. We’ve never issued stock. Whether the growth in sales comes from R&D or from the acquisition of another company and its technology, in both cases, it’s a matter of internal growth since the source of the investment is the income from the sales. We didn’t buy any companies in 2011, but not because we didn’t find any good ones on the market. Therefore, sales didn’t go up.”

There’s a definite trend in the Israeli defense establishment toward outsourcing. In everything related to the new trainer for the advanced stages of the IAF flight school, the Air Force finds it difficult to decide on the acquisition, even though an outside company, in partnership with IAI and Elbit, is supposed to procure the plane. What’s going on?

“At first, when the Air Force decided to outsource the replacement of the Piper planes used in the first stage of pilot training, neither us, nor the Air Force, were certain that we’d won the project. Surprisingly, if you go to the Air Force today, they’ll tell you it was an outstanding success. The Air Force learned it costs less money to maintain the flight school’s aircrafts by outsourcing. We profit from this as well.

“Therefore, I think that they’ll also procure an advanced training plane through outsourcing. The model suits this type of plane very well. However, it’s clear the model is not suited for fighter jets. Combat planes will always have to remain in IDF hands.”

**Guardian V6V - the field isn't "rising" (Photo: G-Nius); Hermes 900 UAV (Photo: Elbit Systems); A "smart helmet" (Photo: Elbit Systems)