The affair in which Agriculture Minister Uri Ariel gifted a drone helicopter to Russian Prime Minister Dmitry Medvedev two weeks ago brought back into the spotlight the problems Israeli startups face as they try to stake a place in the burgeoning global market that Israel itself pioneered.
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In recent years the drone industry has blossomed all over the world, and dozens of startups based directly or indirectly on drone technology have sprouted in Israel, too. Some of these startups develop software, cameras or even entire drones for civilian purposes, including photography for the entertainment industry, transporting equipment and goods, or agricultural technology. Occams Business Research & Consulting estimates that the global unmanned aerial vehicle-drone market will grow at a compounded annual rate of 20% between now and 2022 to $21.2 billion. Although interest from hobbyists has stumbled, demand remains strong for drone-generated data in business and for counterterrorism.
As with many startups in other sectors, entrepreneurs in the drone business are trying to break out of the constraints of the local market and find customers overseas, but the drone industry has special problems: The unmanned aerial vehicles and their auxiliary equipment, including software, are defined in Israel as “security equipment,” and therefore the strict requirements for defense exports apply. The security constraints have eroded Israel’s competitive advantage in innovation and technology.
The defense exports regulations from 2008 include drones in the weapons category, along with all their auxiliary equipment and parts. It includes the vehicles, whether remotely controlled or autonomous; launchers and ground equipment; controllers; accessories and any other items intended on turning anything that flies into an UAV.
This means a company or individual wanting to export any drone technology must go through the process of receiving approval as a defense exporter, and the product itself must also receive approval from the Defense Ministry’s Defense Exports Control Agency to be sold overseas.
When Ariel spontaneously offered the visiting Russian prime minister a drone on display at the Volcani agricultural institute, he thought it was an innocent gift that would win Medvedev’s favor and smooth the way toward a giant bilateral agricultural technology agreement. As it turns out, Ariel was in serious violation of the law.
Sources in Israel’s civilian drone industry, who asked to remain anonymous, say they must receive a marketing license before meeting with any new customer; and if they make the sale, they then need an export permit. Every stage takes from a few weeks to a few months, they say. In addition, there are no clear criteria for granting these licenses and no fixed schedule for receiving approvals, says the CEO of a startup in the field who asked not be identified.
“Anyone who sets up a startup never knows if in the end they will receive a license to sell the product,” says the CEO. “Even worse, these requirements are unique to Israel and they have to compete with foreign companies who can sell products and make upgrades in them immediately. Each time we have to apply for a new license for an upgrade ... it could mean a death sentence for the business.”
Yuval Sasson, a lawyer who heads the Homeland Security, Cyber, Defense and Aerospace department at the Meitar, Liquornik, Geva, Leshem, Tal law firm, says Israel has not adopted the international defense export control lists specifically, but instead has created its own lists with Israeli additions. Some of the additions were in the area of UAVs, which were defined in 2008 in a very broad fashion, which in retrospect included the entire drone industry, even though this was not the original intention, he says.
Regulators are aware of the problem and as far as he knows are trying to fix it, says Sasson. But it is moving too slowly and the existing regulations have not kept up with the changes in the industry and technology, which is strangling the Israeli drone industry. An effort was made to change the situation, but it did not pass the Knesset Foreign Affairs and Defense Committee, he says.
Even those who buy a toy drone and take it overseas are in fact violating the law on defense exports, says Sasson. Some companies are moving their businesses out of Israel as a result, even though many business opportunities exist in the civilian market without any fears of harm to Israel’s security or diplomatic interests, he says.
Yaniv Golan, a partner in the venture capital firm Lool Ventures, has invested in a company in the drone industry. In a post to his Facebook page, Golan said that Ariel seemingly committed three crimes in presenting Medvedev with the drone, in violation of the defense exports regulations.
Ariel is not the only one violating the rules, says Golan. If you buy a $20 drone from Ali Express, you find something wrong with it and send it back to the manufacturer – then you have committed a crime.
As opposed to everywhere else in the world where such items are considered “dual use” technology exports, which are normally used for civilian purposes but also have possible military applications, in Israel all forms of UAVs are considered military equipment, says Golan. Of course, Israel has a significant competitive advantage compared to other countries in the area of UAVs, and because of that also in drones – after all, Israel was the pioneer in the industry. But this advantage has been erased because of the requirement for every business or individual who wants to export technologies relevant to drones to receive approval from the Defense Ministry, he adds.
How long does it take to receive such approval? No one knows. “It will be okay, the system is aware of the problem,” they tell you. They will be happy to be rid of the matter, they say.
An amendment to the regulations has been waiting in the Knesset for a long time, stuck for some reason or another – it is unclear why, says Golan. “It will certainly be solved in another year or two, a reasonable time in all opinions. The world will certainly wait for us, the competition will wait patiently, and in the meantime, CEOs of companies in the business receive calls from unidentified telephone numbers inviting them for ‘clarification talks,’” says Golan.
Until the problem is solved, the solution is quite simple, he says. “I already know of three companies of Israeli entrepreneurs who live in Israel in the drone sector which were established overseas because of the [Defense Ministry] policies. An easy and simple solution, but not really Zionist.”
The Defense Ministry said in response: “The Israeli UAV industry is considered one of the world leaders because of the Defense Ministry, and not as claimed in [TheMarker’s] questions. The Defense Exports Control Agency acts to make it easier for the exporters, and the content of the order recently presented by the [defense] minister for Knesset Foreign Affairs and Defense Committee approval proposes, among other things, easing regulations in the field of UAVs and drones, in the manner of adopting the language of the international agreements. The Defense Ministry is investing large resources in promoting the Israeli UAV industry, both in research and development and in promoting defense exports around the world.”
The Agriculture and Rural Development Ministry did not respond to this report. In its official response to the affair of the drone given to the Russians, the ministry said: “During the visit of the Russian prime minister an economic agreement leading to a deal in the billions of dollars was signed, which will contribute greatly to Israel’s agriculture and economic growth. During the exhibition in the Agriculture Ministry, Medvedev expressed amazement over the performance of the research drone of the Volcani Center he was shown. Presenting the drone was done with the approval of the professional bodies. The Agriculture Ministry will buy in the near future a new drone for the continuation of the research activities.”