Dozens of small defense companies that rely on procurement financed by US military aid will close down, thousands of workers will be laid off, and Israel is liable to lose unique know-how accumulated over decades. This is the scenario that senior sources involved in small and medium-sized defense companies are warning against, following the new defense aid agreement signed by Israel and the US last week. Under the agreement, Israel will receive $38 billion in US aid over the coming decade - $3.8 billion a year.
The new agreement will take effect in October 2018, and six years later, Israel will no longer be able to convert 26% of the annual US aid money into shekels and invest it in procurement from Israeli companies. "This clause is a catastrophe for small and medium-sized Israel defense companies," a senior industry source involved in the business of these companies warned today, talking to "Globes." "Spending in shekels from the defense budget on procurement of weapons and systems from the local industry is already low, and procurement from small defense companies is made possible to a large extent by conversion into shekels of aid money in dollars. Most of the money is already going to the large companies, such as Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), Rafael Advanced Defense Systems Ltd., Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), and Israel Military Industries Ltd. (IMI), but they have contracts with small and medium-sized companies, which supply them with services and products as subcontractors. This situation is liable to end, because most of the products now purchased from these companies will be bought with the aid money - from US companies. This is a hard blow to the large companies, but in any case, they export a large proportion of what they produce. For the small companies, most of which do not export, it is a death blow."
"Respectable amounts"
Appearing today at a conference of accountants, Minister of Finance Moshe Kahlon commented on the aid agreement signed last Wednesday in Washington following almost a year of negotiations. "The Ministries of Finance and Defense were part of the agreement, and the amounts we got were fine and respectable," Kahlon declared. "I won't get into internal politics or politics of Republicans and Democrats. The numbers are fine, and fit in with the IDF's multi-year plan. You can always say we could have done better."
At the same time, former prime minister and minister of defense Ehud Barak is claiming that Israel could have gotten a larger annual defense grant from the US - $4.5 billion, or $45 billion over the decade - following the nuclear agreement with Iran signed by the major powers. Associates of another defense source made similar comments at the end of last week, telling "Globes," "Israel missed a window of opportunity of good will by the US to get $45 billion in a decade, $7 billion more than what it will actually get under the agreement signed last week. Anyone who says otherwise isn't telling the truth. Even had the US insisted then that some of the aid would not be convertible into shekels, we would still have more US money, which also buys many more military capabilities. The US was willing to increase the annual base grant from $3.1 billion to $3.8 billion, and to add $700 million more a year for development of Israel's anti-missile defensive capabilities and for investment in development of systems for locating and neutralizing tunnels."
Commenting on the vigorous debate about the defense aid agreement, a source involved in the defense industries said, "The solution to the currently emerging threat to the small and medium-sized defense industries is for the Ministry of Finance to increase the Ministry of Defense's shekel budget. That will enable the IDF and the Ministry of Defense to continue procurement and maintain these industries."
The defense budget for the next five years is NIS 59 billion, according to an agreement signed by former Minister of Defense Moshe Ya'alon and Kahlon. Among other things, the IDF multi-year Gideon plan is based on this agreement.
"70-80 small enterprises around Israel are liable to close down," Manufacturers Association of Israel Merkava tank industries forum chairman Avraham Bar David said. The forum he heads includes 212 small and medium-sized enterprises, many of which are located in outlying areas. He added, "Enterprises producing small components as subcontractors of the large companies will be the first to suffer. Once Israeli procurement is done in the US, these companies will either switch to other fields or close down. Not only will the country lose many jobs, it will also lose priceless know-how accumulated here over many years. A few years after these companies close down and the state needs new development, it is liable to find itself in a hopeless plight. If the state wants to retain this know-how and enable it to continue developing the most up-to-date and best products for its defense needs, it will have to find alternative sources for the billions of shekels that will not be available because of this agreement."
The prevailing opinion in the large and more established defense industries is that they will learn in the coming years how to prepare for the elimination of the conversion of dollars into shekels, while expanding their business in the US market through cooperation with local companies, or by opening subsidiaries registered in the US. At the same time, in recent days, sources close to these companies have pointed to the need for the state to introduce a series of regulatory concessions - mainly to the government defense companies - in order to substantially shorten the approval processes for business activities, such as cooperative efforts and the establishment of overseas subsidiaries. "Today, in order to obtain such approval, a government defense company has to run the gauntlet," one source says. "The state has to provide the government defense companies with a basket of tools that will enable them to adjust to the new situation. Furthermore, where employment is concerned, some of these companies are already suffering from a shortage, because they are being forced to move production lines to countries where the weapons are being sold; these countries are insisting that all or some of the manufacturing should take place in their territory, such as India, and they aren't the only ones. The state also has to consider concessions in granting licenses to market and export systems, in order to enable these companies to be rapid and relevant competitors in the global market, which is very competitive and dynamic."
Published by Globes [online], Israel business news - www.globes-online.com - on September 19, 2016
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