Israel Aerospace Industries Plans to Move Most of Its Production Overseas

State-owned defense firm hopes to increase profit margins while satisfying terms of contracts with India, other countries requiring local manufacturing

Employees at work in an Israel Aerospace Industries hangar, October 26, 2017.
IAI

In a broad restructuring program, Israel Aerospace Industries is set to move most of its manufacturing abroad. The move is in part a response to the demands of several large customers, especially India and its military, to fulfill major IAI contracts through local production.

Harel Locker, who began as IAI chairman in September, is determined to revolutionize the company and bring its profit margins into the range of 8% to 9%, from 2% to 3% at present. His plan involves offshoring manufacturing to lower-wage countries and carrying out reorganization that will involve worker layoffs.

As a government-owned firm IAI is not eligible for benefits under the Encouragement of Capital Investments Law, which increases its costs compared to major competitors such as Elbit Systems.

IAI will reduce its administrative staffing levels, combine certain units and positions and synchronize products among divisions. While the company says layoffs are not necessarily coming, industry sources say hundreds are expected to leave the company. IAI has hidden unemployment, with 600 to 700 unnecessary workers, they say. The layoffs will come after the mergers between the firm’s divisions reveal how many managers and low-level employees do the same jobs.

IAI also is expected to centralize its management functions as well as its oversight over the various business units. The process has already begun, and Locker has instructed division managers not to buy any small companies any longer without approval from the company’s vice president of development.

A number of senior executives have begun leaving already, in addition to a number of directors. CEO Joseph Weiss announced last week that he will be stepping down. The CEO of its Elta subsidiary, Nissim Hadas, is also leaving. Weiss’ successor has not been named, and he will retire only after he completes an appropriate transition period. The official explanation for Weiss’ leaving is that he will reach retirement age in August, but it is likely that Locker wants a more assertive CEO whose management strategy breaks with IAI’s traditional style.

IAI has 14,500 employees and 20 facilities in Israel. Its civilian operations are mostly in the construction, maintenance and conversion of airplanes. Its defense business is mostly the development and manufacture of advanced aviation, space, missile and robotics systems.

One of the main reasons IAI will have to move production overseas is the demands of some of its largest customers for local manufacturing of part of the large contracts they sign, particularly in India and the United States, but also in Europe.

The company has an order backlog of $11 billion, from both Israeli and overseas customers, including a few billion for India. The problem is the Indian government and military has become its largest overseas customer, accounting for over 50% of the company’s exports, which means IAI desperately needs to expand its customer base, and quickly.

Other challenges facing IAI are how to convert military products and technology for the civilian market, such as in robotics and remotely piloted aerial vehicles. It is also examining cooperation with civilian firms, such as with Volvo in robotic vehicles. Other areas are remote vision systems or automated logistical centers, in which it is working with Walmart.

Among the changes are making each of the six divisions its profit center. Often one division, has large amounts of unused inventory while another is buying the same equipment. Not only are the defense divisions not coordinated with each other, they sometimes compete with each other over customers, or which division will lead a specific project.

IAI’s very strong trade union has prevented structural reform in the past, even though the firm has been on the verge of financial collapse a number of times. The company’s legendary former union boss, Haim Katz, is now the minister of labor, social affairs and social services.