Failed U.S. Expansion Behind Resignation of Israel Aerospace Industries' CEO

IAI hired expensive local talent for its North American unit, but two months ago decided to shutter it

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A view of the IAI (Israel Aerospace Industries) booth at the Singapore Airshow in Singapore,  February 11, 2020.
A view of the IAI (Israel Aerospace Industries) booth at the Singapore Airshow in Singapore, February 11, 2020. Credit: REUTERS/Edgar Su/File Photo
Hagai Amit
Hagai Amit

The resignation of Israel Aerospace Industries’ CEO Nimrod Sheffer last week came as a surprise to many. His tenure lasted only two years, during which the state-owned company saw its profits rise from an operating loss in 2018 to a 6% operating margin in the first quarter of this year.

More than that, Sheffer and his team had signaled over the last two years that they were embarking on a long-term plan for the company, Israel’s largest aerospace and defense maker. They were also preparing for privatization through an initial public offering on the Tel Aviv Stock Exchange.

Sources at the company linked Sheffer’s untimely resignation to the failure of IAI’s drive to expand its North American sales by $1 billion via a greatly expanded IAI North America subsidiary.

IAI had high hopes for the U.S. market. Two years ago, just before Sheffer was named CEO, it hired Swami Iyer as CEO of IAI North America. Iyer had previously been a vice president for defense and space at Honeywell Aerospace and prior to that had been a lieutenant colonel in the U.S. Air Force.

IAI CEO Nimrod Shaffer, August 8, 2018.Credit: Kfir Ziv

Iyer was given responsibility for IAI’s existing North American businesses, including Stark Aerospace and Elta North America. Big new office space was leased in Herndon, Virginia, outside Washington DC and scores of new employees – mostly from the U.S. Air Force and Honeywell – were hired.

IAI’s chairman, Harel Locker, said that inside IAI there were differences of opinion over how to target the U.S. But Locker said he accepted the recommendations of the Boston Consulting Group, which was retained to advise it how to invest hundreds of millions of dollars in North America, and which recommended that the American subsidiary should be staffed by Americans.

The result was that IAI’s Israeli executives in technology and marketing were constantly flying back and forth between Tel Aviv and Washington to bring the new hires up to speed on the company’s technology and products and to familiarize them with its operations and strategy.

IAI North America had 185 employees in marketing and production, at a cost of $200 million, according to the parent company’s 2019 annual report. Iyer himself was IAI’s best paid executive, earning $511,000 that year.

The annual report doesn’t show it because IAI North America is a wholly owned subsidiary and its results are broken out. However, the reports prove that the unit lost $9 million in 2018 and $10 million in 2019. They are expected to widen more this year due to the costs of shutting down the subsidiary. While IAI’s North America’s 2019 sales were $930 million, none of them were due to the unit.

Two months ago, Sheffer decided to close down IAI North America and Iyer announced his resignation. North American sales and marketing is going back to the individual IAI divisions.

No one at the top of IAI has been prepared to take responsibility for the failure, which only made the problematic relations between Sheffer and Locker even worse.

Sources couldn’t point to any difference between the two on substantive policy issues. But, they said, Sheffer often clashed with Locker, a dominant figure who sees his role as chairman as broader than supervising management. The had clashed, for instance, over whether to keep Yossi Melamed, general manager of IAI’s aviation group, on another year beyond his formal retirement date. Locker wanted to, Sheffer didn’t, but Locker had the final word.

A drone assembly line at the offices of state-owned Israel Aerospace Industries (IAI), the country's biggest defense contractor, Israel, February 27, 2017.Credit: REUTERS/Baz Ratner/File Photo

At the same time that Sheffer announced he was quitting on Wednesday, IAI’s board instructed management to cut 900 jobs from the aviation division. The division encompasses IAI’s aircraft maintenance and upgrade operations and its executive jet business, all of which is expected to shrink as the coronavirus lockdown depresses global air travel.

The company’s powerful union responded by declaring a labor dispute, a precursor to a strike. In any case,it’s unlikely the downsizing will result in 900 layoffs – management spoke of that number as a basis for negotiations.

IAI’s new CEO, whoever it will be, has no shortage of work ahead of him or her. The company’s defense business is highly profitable and had enjoyed strong growth in recent years. It is relatively immune to the impact of the coronavirus, but that has been due to contracts it won at least five years ago. IAI’s new boss will have to ensure the company wins new ones.

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