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February 18, 2011
Move to end costly rivalries
Israel has plans to merge its state-owned defence makers.
ARIEH O’SULLIVAN THE MEDIA LINE
After years of talk, the government of Israel is finally moving forward with plans to merge to key state-owned defence makers, a move that will not only stem losses but help bring an end to cutthroat competition and costly duplication of research and manufacturing.
Israel’s defence and finance ministries have both long favored either selling or merging troubled Israel Military Industries (IMI), but their efforts have been thwarted by opposition from labor unions and rivalry among other defence companies that would like to get hold of IMI’s technology and other assets.
A special team from the Finance and Defence Ministry recommended on Jan. 20 that IMI be merged with Rafael, another state-owned arms maker. Three weeks ago, the government won critical support from the Histadrut labor federation, whose cooperation will be needed to implement the staff cutbacks necessary to make the tie-up work.
Cloaked equally in legend and secrecy, Israel’s defence industry not only supplies the army with cutting-edge technology, but plays a key role in forming strategic relations with other countries and it acts as a seedbed for civilian technology. It’s developed the Uzi submachine gun and pilotless aircraft, and it makes Israel one of the world’s leading arms exporters.
But how much Israel exports – and often to whom – is subject to much dispute. The U.S. Congressional Research Service (CRS) estimates that Israeli arms exports between 2006 and 2009 amounted to $4.4 billion, but Israel says that in 2006 alone its sales were $4.6 billion. But even by CRS’s low estimates, Israel is the world’s seventh-biggest arms exporter.
However, behind the glitter, IMI has been ailing for a long time. One of the world’s top 100 defence firms, it employs some 3,500 people and makes everything from rocket propulsion systems to training programs in counter-terrorism. But the company has registered nearly a dozen years of consecutive losses and has required billions of shekels of annual bailouts. The Calcalist financial daily reported that IMI, with about $650 million in annual sales, is shouldering some $560 million debt.
“Something has to be done because the IMI isn’t capable of treading water,” said Yaacov Lifshitz, a former chief economist of the Defence Ministry and author of Economics of Producing Defence. “The IMI is a viable entity, and I’m not saying it can’t be turned around, but the government has no strength for this. That is why it either has to be merged or privatized.”
IMI has such valuable assets that when the government contemplated selling the company, 13 possible buyers emerged. Even today, Israel Aerospace Industries, another state-owned defence company and 33rd largest in the world, has been eyeing IMI and is fighting a rearguard battle to undo the merger with Rafael.
IMI’s biggest problem is overstaffing and any merger with Rafael will almost certainly involve layoffs, which is why the Histadrut’s consent is critical. IMI’s wage bill is so out of proportion to its revenues that several times last year, the Finance Ministry was called in to help cover monthly salaries. IMI lacks any big, multiyear contract, like an order that recently was completed to upgrade Turkish tanks. And it is on a blacklist in India for alleged improprieties trying to win contracts. By contrast, Rafael, the world’s 47th largest defence firm, is financially sound and wracked up $1.6 billion in sales in 2009. But while the Treasury hopes it will be spared another bailout, the IMI-Rafael merger could be good for Israel’s defence industry, which is characterized by redundancies that have spawned intense, often self-defeating rivalries as companies compete with each other for orders from the Israel Defence Forces and foreign customers.
Defence Ministry Director General Maj.-Gen. (Res.) Uri Shani has come out strongly against the rivalries and has recently issued directives to Israel’s state-owned defence industries to cease unnecessary competition abroad. Defence officials have threatened to divide the world markets for the Israeli defence firms. They can do that through Sibat, the Defence Export and Cooperation Division, which grants arms-export permits.
Both IMI and Rafael, for instance, develop and manufacture rocket launchers. IMI Givon launchers are used for the Arrow anti-missile project and to put Israel’s Ofek communications satellites into orbit. Rafael’s are used for European satellite launches. The two are competing to win orders for anti-tank missiles from the IDF.
“The decision to engage in business cooperation with IMI is the right way to act, both for national as well as professional considerations. Such a merger would ensure the synergy that exists between the two companies in the fields of rocket propulsion, explosives, warheads, armor protection, etc.,” said Rafael spokesman Amit Zimmer. “Such a move would also reduce redundancy as far as infrastructure, and would consolidate the vast excellence, knowledge and experience that the two companies possess while maintaining the vital interests of Israel.”
Despite all of that, Lifshitz is skeptical the two will make a success of the merger, citing different corporate cultures. He would prefer to see IMI’s operations split up and its parts sold.
“Personally, I don’t think the easy way out of putting IMI under Rafael would succeed. It’s like taking something that scares you and putting it inside a box. It could prove to be a danger for Rafael,” said Lifshitz.
Zimmer cautioned that the company was still reviewing the details that needed to be resolved before it finalized its decision. A detailed proposal for the merger is overdue. Repeated queries to Defence Ministry spokesman Ze’ev Finer weren’t answered. The cabinet must still approve any decision.
Industry sources said that Rafael would need to get rid of 1,500 IMI workers – but that would prove to be costly. However, despite the company’s past difficulties, IMI has an order backlog of more than $1.3 billion, according to the Globes financial daily.
Should the merger between IMI and Rafael fall through, there are private companies waiting in line to acquire all of IMI or its most prized assets. One is Israel’s biggest private sector defence contractor, Elbit Systems.
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