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Israel's defense exports were only slightly lower in 2010 than in 2009, but the defense establishment is worried about what will happen in the coming years, a senior defense source told TheMarker yesterday.

One option being considered is to ramp up sales to countries that are not slashing defense budgets, such as Poland and other Eastern European countries, nations in South America, southeast Asia and Africa - and, above all, Russia.

The next few years will be very difficult for military exports, he said. The Defense Ministry has yet to receive the final export figures for 2010 from the various defense exporters, but estimates show at most a drop of a few percentage points in sales compared to 2009. Military exports came to $6.75 billion in 2009, the ministry said.

Israeli defense industries have yet to feel the full brunt of the global economic crisis that started in 2008, since most exports to date have been based on multiyear contracts signed before the crisis hit. But the crisis will definitely have an effect on foreign contracts in the coming years, the senior official said.

Defense budgets are shrinking, he explained, particularly in the United States and Western Europe. This leads to smaller contracts for equipment, as countries use up existing inventories instead of ordering supplies.

Also, the smaller sales pie has worsened competition, which has lowered prices, the source said. In particular, the Americans are entering Asian markets where they previously had little activity, but where Israel had a strong foothold - and thus are now competing with Israeli firms.

Changes in the make-up of forces in Iraq and Afghanistan are also affecting Israeli defense exports, and companies such as Plasan, which manufactures armored protection systems for military vehicles and aircraft, see steep drops in orders.