The Wars That Make and Break

Israel's defense contractors did fine in the crisis: wars continue worldwide. Too bad they're fighting each other too.

Israel's leading defense exporter is Israel Aerospace Industries, which soared after replacing its management. As of 2006, CEO Itzhak Nissan has been running the show. "The tiger awoke and began to sell everything it could," said chairman Yair Shamir. This led to sales of NIS 13.6 billion in 2008.

When Nissan took over, he cleaned out the stables. He fired almost all the managers under him, and as the economic crisis unfolded, he slashed costs to the bone. Even so, the crisis was terrible for IAI's civilian division, which makes executive jets and satellites, and is responsible for 40% of the company's revenues.

The military division, on the other hand, thrived. This division makes armaments and weapons, electro-optic gear, espionage drones (unmanned miniature planes) and so on. This February, it won a $1.4 billion contract to co-develop missile systems, and industry sources whisper that it's negotiating a major deal in India that could be worth $4 billion.

The second-biggest defense company is Elbit Systems, which operates in the United States through subsidiary ESA. It makes electro-optical systems for air, sea and ground forces; drones; control and monitoring systems; communications systems and much more. It grew chiefly by acquiring other Israeli companies such as El-Op, Tadiran Commercial and Elisra, as well as foreign companies. Recently it invested $18 million in the defense company Mikal.

No. 3 is the Rafael Armament Development Authority, which handles ultra-sensitive R&D for Israel's defense establishment. From 2004 it's been managed by former navy commander Yedidia Yaari.

Together Israel's defense companies racked up $9.8 billion in sales last year, up from $8.1 billion in 2007. Their combined backlog of orders at year-end 2008 was $16.4 billion, up $1 billion from year-end 2007.

The military industries were unscathed by the crisis because the nations of the world, however stricken, didn't cut back their spending on weaponry. They may have to in 2010, though, as they start paying the bill for their massive economy-boosting injections.

The companies don't believe that cutbacks will affect their sales of spy drones, armoring and other intelligence gear. Maybe tanks and mortars will suffer, they figure.

But behind the scenes, there's a problem. The Israeli companies are competing with one another over contracts and are deliberately bidding low, to the point of losses, in order to clinch contracts. It's gotten so bad that the Defense Ministry is setting up a committee to regulate competition between the companies outside Israel.