There was a time when Israel’s Startup Nation and its defense sector were two separate industries. Both were world renowned, but one was made up of hundreds of small companies focused on research and development and quick exits, while the other was comprised of big businesses bashing metal and competing for government contracts.
The division was never entirely true and today less so than ever as the two industries converge. Israeli arms makers have long had a technology focus, but the trend is strengthening.
As it does, the industry’s leaders – Elbit Systems and state-owned Israel Aerospace Industries and Rafael Advanced Defense Systems – are developing news ways to tap Israel’s startup sector and change the way they operate.
Industry executives say they’ve made a lot more progress than many people think.
“We’re still coping with an image problem,” said Shuki Yehuda, R&D chief at Elbit. “When you say high-tech you mean two things – the first is the technology itself – performance, price, business model. The second is what you think of high-tech in terms of high salaries, flying abroad and a particular organizational and cultural style.
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“As for the first part, the technology, and make no mistake, the entire defense industry, is at the cutting edge of global technology. Regarding the second part, it’s more conservative, but we’re making organizational changes to enable innovation, to open up to international initiatives, of course, with limitations.”
Israel’s defense industry is big and its bet on adapting high-tech ways could have a big impact on the economy. While Intel is conventionally regarded as Israel’s biggest tech employer, IAI is bigger – 15,000 people versus 13,000 for Intel and its Mobileye unit in Israel. Elbit employs 12,000 people, 9,600 in Israel, and Rafael 7,500, plus the 600 it’s taking on with its acquisition of drone maker Aeronautics.
Last year Israel was the world’s eighth largest arms exporter, according to the annual arms transfer report released Monday by the Stockholm International Peace Research Institute. Over the past decade, Israeli arms exports increased 60%, far faster than the world’s No. 1 and No. 2 arms makers, the United States and Russia, according to the Stockholm-based institute.
For a long time, the technology flow went from the defense industry to the civilian world. Not only were Israeli arms makers a source of engineering talent, they often developed technology that eventually made its way to civilian applications.
The camera in a capsule developed by Given Imaging to diagnose digestive ailments was based on guided-missile technology. Given Imaging was spun out of Rafael’s RDC venture capital fund and was eventually sold for $1 billion to Ireland’s Covidien.
Nowadays, however, the tables have turned and it’s the defense industry that’s trying to tap the ideas and talent of the startup world, industry executives say.
Adopting high-tech culture is a challenge for arms makers, which are conservative businesses to begin with and have the added burden of working in an industry characterized by secrecy.
“The question we ask ourselves is if we’re succeeding in adopting the new pace – new customers, new sources of knowledge, a new organizational culture,” said Nimrod Sheffer at a conference sponsored by TheMarker last May. Back then he was still Israel Aerospace Industries’ vice president for strategy and R&D, now he’s chief executive.
“If there was a time that when you wanted to develop a drone you needed a massive industrial base, today drone development is being done by groups of young people with no industry behind them at all – just a good head and strong capabilities. Innovation is the essence of IAI, but if we rely forever on the fact that we invented the Arrow missile, we’ll be making a mistake.”
Sheffer said the industry was more open to partnerships but he wasn’t sure that IAI and others had quite found a system that works. Each of the big three is taking a different approach.
At Elbit, the company set up the tech incubator Incubit under the aegis of the government’s Israel Innovation Authority. The company is home to a host of infant startups engaged in “deep tech” with few direct applications to defense; instead, the specialties include the internet of things and energy.
“The idea behind Incubit is dual use – technologies that could benefit the civilian market, and maybe in a big way, but have significant promise for the defense market,” Yehuda said. “These are untried technologies in their early stage that we’re trying to bring to a prototype via our incubator.”
Among Incubit’s startups is NewRocket, which is developing a gel-based rocket fuel, and EchoCare, whose sensors monitor institutionalized seniors for falls and other accidents
Rafael, meanwhile, has been tapping the tech world through RDC, a joint venture with the privately owned Elron Electronic Industries. Since RDC – Rafael Development Corporation – was formed in 1993, it has invested $45 million.
RDC both commercializes Rafael technology and invests in startups focused on cybersecurity and information technology. It’s now weighing entry into sectors like precision agriculture and Industry 4.0 – automation and data exchange in manufacturing.
“We realized that the innovation taking place outside was in no way inferior to what we were doing and was often even better,” said David Vaish, an RDC director and a Rafael vice president.
At IAI, management realized that its strategy of developing its cybersecurity business would require it to work with other companies, so it formed the Israel Cyber Companies Consortium, or IC3. Its other members include Check Point Software and startups like CyberX and SafeBreach.
In aerospace, IAI formed a partnership last September with Effective Space, an Israeli startup developing a satellite servicing system. IAI is providing technical and financial support and serving as the prime contractor for Effective Space’s Space Drone servicing vehicle, which is designed to provide satellite life extension services.
Israel’s arms makers have also learned that they have to be in contact with startups all the time or risk losing out on a promising idea. Sharon said Elbit looks at about 140 ideas every year, talks with the people behind about 40 of them, and invests in or acquires about nine.
“We've always been on the hunt for technology, but now it’s happening at least once a day – a startup comes to us, meets with me or someone else from the team and proposes a solution,” said Amira Sharon, vice president for technology and R&D at Israel Aerospace Industries. “It’s easy because we’re in Israel – everyone is meeting, everyone is friends, everyone has an idea. And if he doesn’t have one, his sister does.”
The other big challenge for Israeli defense companies is hiring – although not as big as it may seem. Arms makers have to contend with their image as old-line companies and the fact that the many multinationals operating R&D centers in Israel pay much higher salaries.
Worse, engineering jobs are fungible. Many specializations, like optics, chemicals and electronics, can be used in the military and civilian sectors alike. When a defense company is developing a new drone, it needs the same kinds of skills – like machine vision and image processing – as nonmilitary employers do.
Still, about 55% of Israeli defense-industry employees, some 20,000 people, have tech jobs of one kind or another. Sagit Sela, senior vice president for human resources at Rafael, said the defense industry has its attractions for hires.
Rafael offers day care and kindergartens, and helps employers earn advanced degrees. It also offers better job security than a startup and a more comfortable environment for older workers, who often find themselves out in the cold in the startup sector as they reach age 40. In the defense industry, the average age is about 44 to 47.
“We hire more than 600 people a year. The first thing we offer them is a balance between work and home life,” she said. “It’s a pleasure to be able to go home and have a real life after hours of work.”