The selection of a new CEO for Israel Aerospace Industries last Thursday was a noisy affair.
After failing to get a court order to block the appointments process, union leaders gathered outside the boardroom of the state-owned defense company, demanding that their representatives on the board be allowed to witness the selection process in violation of governance rules for state-owned companies.
A shouting match quickly erupted between board members and union leaders and even among board members themselves. In the end a compromise was reached to let union reps offer the opinion after the vote was taken – an offer they ended up ignoring.
IAI’s powerful union, headed by Yair Katz, the son of Labor and Welfare Minister Haim Katz, didn’t get the man they wanted. The new CEO is Nimrod Sheffer, a career air force officer and for the unions a dangerously unknown quantity compared to the other two candidates that had been under consideration.
Sheffer is also an unknown quantity as far as his business skills are concerned.
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A fighter pilot, he rose through the ranks of the Israel Air Force to become an F-16 squadron leader and commander of the Ramon Air Force Base. He was widely regarded to be in line for the job of air force commander, and when he didn’t get it he unexpectedly left the service in 2015.
Sheffer only joined IAI in February, in the role of vice president of strategy and research and development. That job was widely regarded as a waystation while he waited for the CEO’s job to open up.
Although Sheffer served as head of planning at IAF, a job that involved managing the air force’s resources, budget issues and implementing efficiency measures, he comes with little business experience.
Indeed, he may have found his way to IAI thanks to Johanan Locker, a fellow career IAF officer, and brother of IAI Chairman Harel Locker.
“He’s a worthy person, but it’s a little scary to choose a person without experience to navigate such a large and important company,” said a senior executive, who asked not to be identified. “It would have been better to find someone with extensive business experience, but [Harel] Locker -- who has become very dominant in the company ever since taking office – pushed for the current CEO, Yossi Weiss, to step down and for the new appointment.”
IAI is a huge company by Israeli standards, employing 15,000 people and with world-renowned products that compete with the likes of Lockheed Martin and Boeing. But IAI also faces huge challenges in the years ahead
IAI has seen its revenue’s fall over the last three years to $3.5 billion last year from $3.7 billion in 2015. Its operating margin in the last two years has been a wafer-thin 3%.
Meanwhile, the global defense market is expected to grow more competitive now that U.S. President Donald Trump has committed to stepping up U.S. arms exports.
Under the new, 10-year aid agreement with the U.S., after 2023 Israel will no longer be able to use American money to buy weapons at home as it has done in the past. That will deprive Israeli defense companies like IAI of some $800 million a year in orders.
How IAI responds to these challenges could decide whether it ends up turning to the government for money as happened to IMI Systems, its fellow state-owned arms maker, formerly known as Israel Military Industries, or becomes a thriving competitive business.
One way Sheffer may influence its fate is by succeeding in issuing shares to the public and undertaking mergers and acquisitions to develop new markets.
Another is to deal with IAI’s weakest units, which are its Bedek aircraft maintenance division and its civilian aircraft operations. While IAI’s military businesses have operating margins of 10%, these divisions are chronic money losers.
Any attempt to divest or streamline the business will run up against union opposition. Six months ago, IAI’s board approved merging the two units as well as the engineering and development division, which together account for half of the company’s payroll, into a single unit. However, the move calls for cutting 1,000 employees in the process and the unions will fight it, especially as its leadership mostly comes from these divisions.
“We’re talking about a company that, if it doesn’t change direction and become much more efficient, will find itself within the next few years in a situation like IMI,” said the executive.