Israeli policymakers and defense industry people are holding a series of brainstorming sessions ahead of Prime Minister Benjamin Netanyahu’s visit to India next month to devise ways of coping with New Delhi’s growing demands for arms deals to include more and more local content.
India has emerged in recent years as one of Israel’s biggest customers for defense equipment, with exports by Israel’s big four defense contractors estimated to amount to about $1.5 billion annually.
That accounts for almost a fifth of the four companies’ total exports and as much as 15% of their total sales.
Last year, on the eve of Indian Prime Minister Narendra Modi’s visit to Israel, Israel Aerospace Industries signed a $1.6 billion deal to sell India its Barak 8 air defense system
But since last year India has begun stiffening its requirements for local content in defense contractors as a way of giving a boost to its arms industry. The local procurement requirements can mean either subcontracting out work to Indian companies or moving final production to India.
Israeli defense industry sources say demands for local procurement have grown from about 30% of a contract’s total value to 50% and sometimes even 60%. India’s local procurement requirements could move $750 million worth of work out of Israel and into India.
India last month scrapped a $500 million anti-tank missile from Israel’s Rafael, saying it would buy locally instead.
While the big four – which beside IAI and Rafael include Elbit Systems and Israel Military Industries – can usually cope with the demands, Indian local procurement rules will land hard on hundreds of medium-sized and smaller firms that do some 75% of their business as subcontractors to the big four.
Israel counts between 60 and 70 small and medium-sized defense makers that do about $2 billion worth of business annually. In addition, there are 200 firms that provide services to the industry, some of them quite large, and have sales of 200 million shekels ($57 million).
In an effort to solve the problem, the Economy and Industry Ministry has invited representatives from 20 defense contractors to a brainstorming session that will be coordinated by the consulting firm BDO.
Meanwhile, the ministry is weighing ideas of its own, among them an appeal to New Delhi to broaden local procurement to include non-defense industries like agriculture and cybersecurity to alleviate the burden on the defense industry.
While India poses the most serious and immediate challenge to Israel’s defense industry, its demands are part of a worldwide phenomenon by governments seeking to boost local employment or strengthen their own industries. Israel faces the extra problem that its labor costs are high.
Under the terms of the new U.S. aid package to Israel reached last year, Israel will eventually no longer be able to spent 26% of the money it gets – equal to some $800 million a year – to buy locally made arms. The new rules don’t roll into place until after 2026, so the industry has a few years to adjust to the change.
“Israel has no chance of continuing to produce. Costs are too high and the world wants to produce at home. So most of the manufacturing now done in Israel will gradually move overseas in the coming years,” said one defense industry source, who asked not to be named. “Israel has to be the world’s [defense] technology incubator – that’s our added value.”
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