The New Engine: The Securityists Behind the Thriving Industry - Walla! money

2023-09-21T11:45:44.757Z

Highlights: Israel's defense exports broke an all-time record, reaching $12.5 billion in 2022. Defense industries are a growing market, rich in knowledge and cash. Defense industry employees cause less problems for the government than the high-tech companies that flood the streets. The Israeli pavilion at DSEI, one of the most important defense exhibitions in the world, was a pilgrimage site for visitors. It attracted 20,000 visitors from all over the world over the course of three days.

With all due respect to the military industries, in order to conquer the world, they must be in close contact with the Ministry of Defense. Also as a regulator, but mainly as a partner that accompanies them from the concept stage to its development

From right: Hodi Lahav, VP Marketing at IAI, together with Yair Kolas, Head of SIBAT, and Dr. Danny Gold, Head of MAFAT/Spokesperson and Public Relations Division, Ministry of Defense

Our locomotive broke down. At first, they put him in the garage for treatment and thought everything would be fine, but after even a serious jumpsuit failed to restore the engine's power, and the special spare parts from abroad got stuck, Prime Minister Benjamin Netanyahu announced the replacement of the locomotive that powers the Israeli economy with a new model.

No longer high-tech, which went through a global crisis and suffered a local germination blow, with the legal legislation that drove investments away, but a new model, the 2023 model, straight out of the nylon, that of the defense industries: a growing market, rich in knowledge and cash, and because it is close to the government's table, whether owned or granted export permits, its employees cause less problems for the government than the high-tech companies that flood the streets.

The official announcement came at the end of July, immediately after the publication of Moody's special report, which warned of the consequences of the legal reform and the "disengagement of high-tech from the global trend." Netanyahu and Finance Minister Bezalel Smotrich issued a statement in response announcing that "the defense industries are bursting with orders" and turned high-tech into a lame duck and the local arms industries into a new white hope.

This statement was not made in a vacuum. Israel's defense exports broke an all-time record, reaching $12.5 billion in 2022 and the outlook for the current year is higher. But the contribution of Smotrich, Netanyahu and the current government to phenomenal growth is pretty much zero.

They should send the flowers to Russian President Vladimir Putin, who went to the Ukraine war and turned the armament of peaceful European countries into a crazy race, from which Israel is raking in a fortune, even former US President Donald Trump, who a little earlier cut aid to NATO membership, deserves at least one flower from this bouquet - and if there is another petal left, it can be sent to the president of China, Xi Jinping has imperialist ambitions in the China Sea, the kind that have managed to put countries in the region under pressure, from Japan to Australia.

Brig. Gen. (res.) Yair Kolas, Head of SIBAT in the Ministry of Defense/Spokesperson and Public Relations Division in the Ministry of Defense

Flanking game

Two divisions in the Ministry of Defense are directly responsible for defense exports: SIBAT, the Defense Export Division, which promotes Israel's defense industries around the world, while understanding the needs of the IDF, countries and armies, and familiarity with technological solutions in Israel, and MAFAT, the Directorate for Research, Development of Weapons and Technological Infrastructure, which is responsible for research and development of weapons and the defense technological infrastructure in the defense establishment and serves as a center for military technology. Simply put: SIBAT is the marketing arm and MAFAT, the military R&D.

Last week, Brig. Gen. (res.) Yair Koles, head of SIBAT and Brig. Gen. (res.) Dr. Danny Gold, head of DFAT, flew to London, where they inaugurated the Israeli pavilion at DSEI, one of the most important defense exhibitions in the world, in which 35 defense industries participated and presented seven startups developed at the Defense Ministry's Mapat Innovation Center. The pavilion aroused enormous interest and became a pilgrimage site. The new locomotive of the Israeli economy is racing forward.

Coles spoke to me from London excitedly. "What is unique about this exhibition, which is closed to the general public, is the scope of the fields it touches: sea, air, land and space, and the number of visitors who stand at 20,000 from all over the world, defense ministries, armies, procurement, cyber, a huge variety, as opposed to niche exhibitions such as the air show. We came here very strong. Out of the 35 companies, there are 15 small companies that we emphasize and present themselves to the world.

"There are two ways to do defense business, between government and government and between companies and government. When private companies do deals, I'm not a regulator, but I help them as much as I can. I am the one who leads the deals with the governments and signs the deals with the army's procurement manager opposite me.

"If the Defense Ministry is interested, for example, in air defense, I will show it the capabilities of IAI's Iron Dome or Rafael's Spyder, and when I don't give preference to government industry, all companies get an equal opportunity to compete, private or governmental, small or large.

If a government wants to close the deal with a private company, we make a back-to-back agreement with it down to the last detail, and then supervise it. Defense ministries around the world like to work with governments, because then there is a quick procurement procedure, exemption from tenders. If a country urgently needs tanks, with a government it will take up to six months."

You said that the Ministry of Defense is not a restrictive regulator, but it is the one that gives the defense industries permission to sell abroad. There are technologies or products that you prohibit from exporting.
"We do that and a lot. If a company wants to export, it needs to get approval from a number of security agencies. If there is an aspect that can affect penetration into the system, a ban is imposed. But if you get the license, then go do business."

The problem is that not only the Defense Ministry gives permits, but also the Americans.
"In some cases, they also give permits. Some of our systems are manufactured together with the Americans, such as the Arrow and Iron Dome, so their approval is necessary. Also the sale of IDF surpluses, planes, tanks, ships, we owe American approval, because engines and other parts were bought with the assistance they give us. In recent years, however, they have been more open to selling."

How do you prevent a sale to a third party that could harm Israel?
"Every marketing license for a product goes through an iron comb, which makes sure that the chances of this happening are small and that what leaks won't endanger it. Fortunately, there were almost no such incidents, except in the Second Lebanon War, during which our weapons were fired at us."

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Brig. Gen. (res.), Dr. Danny Gold/Spokesperson and Public Relations Division, Ministry of Defense

Orders Full

According to the latest reports by the three leading defense companies, Rafael and IAI, the government, and Elbit Systems, the public owned by Mickey Federman, Coles has a lot of work to do. In the second quarter of 2023, Rafael's sales jumped by about 30% compared to the same quarter last year, to NIS 3.14 billion, and its net profit in the second quarter amounted to NIS 111 million, compared with a loss of NIS 159 million in the corresponding quarter of 2022, due to the exceptional tax it paid at the time on trapped profits.

IAI's sales rose 9% to $1.26 billion, and its net profit amounted to $74 million, after jumping 45% compared to the net profit it presented in the corresponding quarter. Elbit Systems showed an 11.5% increase in revenue compared with the corresponding quarter, which amounted to $1.45 billion, an increase in order backlogs that amounted to about $16.1 billion, but its net profit dropped by 23% compared with the corresponding quarter to only about $62 million (about NIS 236 million) against the background of an increase in financing expenses.

The effect of the Russia-Ukraine war and its patterns have catapulted the global arms race, especially in Europe, whether by adapting to new threats such as suicide drones, alongside the rearmament of armies that have helped Ukraine deliver ammunition and weapons.

Israel enters the empty warehouses with all its might, selling IAI's Arrow 3 missiles for NIS 14 billion to Germany, the David's Sling system to Finland for NIS 1.1 billion, Rafael's David's Sling system to Finland for over NIS 1 billion, and Elbit's rockets, launch systems and artillery to Denmark for NIS 260 million. Tensions in the South China Sea are creating demand for Elbit submarine detection systems, and the Abraham Accords have opened new markets.

"For me, war is a tragedy," Coles explains, "but in the end, this war created a global system. All over the world, adjustments are being made to what is happening on the battlefield. I can get a phone call from Latin America, which is interested in drone protection, because this threat suddenly arises."

Selling defense systems is easier ethically and emotionally. Selling offensive systems is more difficult.
"Therefore, not every country will receive an attack system, and therefore the approval also includes the security-political division in the Ministry of Defense and the Foreign Ministry, in order to examine the international influences and ensure that it does not end up in the hands of shadowy regimes."

Ukraine is not a dark regime and Israel is blocking the export of offensive weapons there.
"The definition is not blocking exports, but rather we do not allow the supply of offensive weapons because of broad considerations and interests, and this is the policy set by the government, out of a reluctance to be involved in a confrontation with Russia, to which we are also unfamiliar."

If Coles is in charge of the sales and marketing of defense exports, the "how will it be sold and to whom", Dr. Danny Gold and MAFAT take care of the development and technology of the products, the "what will be sold". "We are developing technology and systems for the benefit of the defense establishment and the IDF," says Dr. Gold, holder of the Israel Security Prize and Yeshiva University's Global Leadership Award.

"The main axis is working with the defense industries, Elbit, IAI, Rafael and Tomer, as well as medium-sized companies such as Aeronautics, Controp, SCD, Omnisys, Amperst and more. We are looking at the civilian market because of the tremendous development of AI technologies, robotics, autonomous cars, quantum racing, drones, energy for electric cars and virtual reality, a person-user interface that is relevant to us. We scan startups for dual, security and civilian use. In a startup assessment we recently published, we revealed that we work with over 200 startups."

"We arranged the processes at Mapat in order to make it easier for them to receive instructions and orders on green tracks. The engagement is per product. We are not investors, not owned, not equity. We take an existing civilian construction, issue a call for proposals, give money for preliminary proof of feasibility, which, if successful, we proceed to further development in the regular track. We also have internal acceleratorsYam and such, in partnership with a civilian model, give money and take technology, taking care of itself for marketing in the local market.

"We also work in collaboration with three venture capital funds, scan the market and invest together, he puts most of the money and I take care of the technology. I have no problem coming to Elbit or IAI and asking them to develop a drone, but I want to be exposed to the civilian market. That's how I get access to innovation. The whole incident in civilian cooperation begins as unclassified, only what goes to the IDF gets classified, so at some point it can also split up."

High-tech workers (illustration). How do you retain the leading minds when you have to compete with the money of the civilian market?/ShutterStock

Human Capital

When high-tech was at its peak, talent from the defense industries flocked to it, jumped into the ball pools and licked ice cream in dozens of flavors. Now the trend has reversed. The high-tech people are racing in Dr. Gold's direction.

"We have our officers and civilians that we need to preserve, because keeping them in the military framework that is not very rewarding is not simple. They don't stay because of the money, but because of the mission. Every entity rewards differently, there are government companies and there are private ones, but none of them pays like Google or Microsoft.

"There is no doubt that it is easier today to recruit workers from citizenship, because the alternatives are different.
"The defense industries have always been at the core of Israeli high-tech. No startup has developed Iron Dome and projects as heavy and complex as it. That's what we need our capabilities for."

Are there employees who want to leave because of the legal reform? There were demonstrations by your employees against it in front of the David Institute.
"I don't get into these things. The DDR and the Defense Ministry come every morning to work for the State of Israel and for the state, and to defend it."

How much money does the State of Israel invest in security development?
"We won't talk numbers, but we need to double and triple the budget, because what matters is the technological advantage and maintaining our superiority."

You constantly have to work on future bookings, because otherwise you have no right to exist. The pressure is very great.
"There are orders for three or four years ahead, and at the same time we need to develop the next decade. The whole world is going to invest in research and development. We are developing the core in Israel. The Arrow and Magic Wand system was developed together with the United States, with joint money, when development was here and production was there. Iron Dome was fully developed in Israel. The U.S. bought the windbreaker from us, and Finland bought the magic wand."

Now you are deep in laser development.
"We've been working on it for many years. There was a technological breakthrough and we showed the interception of mortars, rockets and drones with lasers. We are combining it with Iron Dome and it will decide, in real terms, whether to issue a missile or launch a laser beam."

The David's Sling system has not shined to this day.
"In the last confrontation, we intercepted David's Sling twice, the first time. We have the first layer of the Iron Dome and the Arrow 2, which intercept ballistic missiles in the atmosphere, the Arrow 3, which intercepts ballistic missiles and nuclear missiles in space, while the laser and other developments that we are working on will enter the layers of air defense, and there is much more in the pipeline."