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Plain Wrong Mismanagement at Israel Aerospace Industries

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The Israel Aerospace Industries booth at the Singapore Airshow, February 2016.
The Israel Aerospace Industries booth at the Singapore Airshow, February 2016. Credit: SeongJoon Cho/Bloomberg

Dennis Muilenburg is chairman of the board, president and CEO of the Boeing Company – a very successful U.S. aerospace company engaged in the development of civilian and military aircraft, missiles and satellites. He has a bachelor’s and master’s degree in aeronautics, and has reached the top position at Boeing by rising through the ranks. Look at other successful American aerospace companies like Lockheed Martin, Raytheon or Northrop Grumman and you will find their top management positions also filled by men and women with an engineering education who have advanced in these companies over the years.

These are men and women who live and breathe aviation. This kind of management is evidently what it takes to successfully lead companies engaged in a field based on advanced aeronautical technology. Attorneys, financial wizards and “management gurus” may do well enough as top management in many companies, but it takes a love of aviation and an intimate knowledge of the technology that is inherent in aerospace products – and the men and women who develop them – to successfully manage the companies that develop, produce and market these products.

Israel Aerospace Industries is in the same business: aircraft, missiles, satellites. It is staffed by engineers and scientists capable of competing with the world’s best, and has over the years amassed a wealth of technological know-how. But it has the misfortune of being a government company where management appointments – chairman of the board, membership on the board, and sometimes even chief executive officer – are made by politicians. Their knowledge of the aeronautical field is generally superficial at best, and many of their appointments to management positions at the company are based on political considerations and leave much to be desired. The decline of IAI in recent years is the direct result of such appointments.

Since IAI is Israel’s largest defense industry and an important part of Israel’s economy, both Israel’s defense and the economy at large have paid the price for this mismanagement.

IAI’s decline began 30 years ago with the cancellation of the Lavi program – at the time the world’s best fighter aircraft. That was a political decision. Then-Foreign Minister Shimon Peres imposed “party discipline” on all of the Labor Party members in the national unity government and eked out a one-vote majority in favor of cancellation.

But that was only the beginning. Yitzhak Rabin, at the time defense minister, ordered IAI to close its engineering division. As far as he was concerned, it was the engineering division that was coming up with “brilliant” ideas like the Lavi, and he wanted no more of that. At a stroke, he disbanded the group of IAI’s best engineers who had originated most of IAI’s new products. Little did he understand that the engineering division was the core of IAI’s technological competence, and that by disbanding it he was striking a blow at IAI’s ability to compete in the marketplace.

Prototype of Lavi jet, created by Israel but scrapped before manufacture.

For years, IAI limped along without an engineering division. But the absence of an organized group of some of its best engineers, charged with developing new products, could not fail to have an impact on the company’s commercial fortunes.

In recent years, IAI’s engineering division has been partially reconstituted. Now along comes the newly appointed chairman of the board and decides to make the engineering division part of a “civilian product division.” It presumably will be placed under one organizational roof, with the divisions dealing with the manufacture and overhaul and maintenance of civilian aircraft, and will thereby be distanced from the company’s other activities.

It may well spell the end of some of IAI’s traditional product lines. It may look like a step to increase profit margins, but by reducing revenues it will sooner or later impact the company’s balance sheet. Gradually, the potential of this great company is being whittled away.

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