Published On: Wed, Aug 20th, 2014

Israeli Defense Industry Battle Tested and Ready to Cash In Big Time on Gaza War

Israeli armored vehicle in Gaza operation

Even if the 2015 defense budget is not dramatically increased, billions will still flow into IDF headquarters to cover the cost of this summer’s fighting in the Gaza Strip. It is reasonable to assume that the defense establishment will wield a bulging wallet, and will not return from its procurement visits to the defense industries with an empty shopping basket. Its shopping list is lengthening in direct proportion to the prolonging of the fighting in the south.

The fighting in and near southern Israel have been timely for defense companies in Israel. Some CEOs and CFOs have already gotten used to blaming poor performances and lower revenue on the slump in the global defense market, the strengthening of the shekel against the dollar, intense competition for every tender, changing priorities in the traditional markets leading to deep cuts in weapons procurement budgets and a recession in the sector. The competition for every weapons deal has turned cutthroat, with many companies competing in each tender, including huge companies. The result has been evident in the financial statements of some Israel defense companies. “It’s hard to figure out whether the current campaign in the south will be good for the industry in the short term, but in the medium and long term, the operation in Gaza is highlighting the capabilities developed here. The transition from the laboratory to the battlefield will do these companies good, ” a senior source at a large defense company said.

The IDF’s first move after the war will be to replenish its inventory. At the beginning of the campaign in the south, the emergency stores were opened, inventories were depleted, and the demand for missiles, shells, light weapons ammunition, etc. skyrocketed. That, however, is small change. In the months following the fighting, the IDF and the Ministry of Defense will analyze every battle during the campaign in an attempt to draw conclusions and close gaps. Such a closing of gaps is likely to come to billions. It is already clear that large amounts of money will be spent in the near future on the search for a solution to the assault tunnels discovered in the course of the current campaign. The defense establishment, together with one of the major defense companies, will soon conduct a significant trial of a system designed to detect such tunnels. If it is successful, its deployment in the field will cost over $571 million, not counting deployment of the system on the Lebanese border.

 

From bust to boom

The Ministry of Defense will also have to close gaps in armoring its APCs. Even though the threat to APCs has been clear for many years, procurement of adequately armored vehicles was not complete. The battle by the Golani Brigade in the Sajiyah neighborhood at the beginning of the land campaign in Gaza, in which an outdated M-113 APC lacking suitable armor was hit and seven soldiers were killed, highlighted the need to expand the use of heavily armored vehicles. The IDF has hundreds of these outdated APCs however, due to relatively limited procurement of the more advanced and heavily armored Namer APC. In the past, the Ministry of Defense refrained from implementing a plan for armoring its vehicles to improve their survivability against a range of battlefield threats because of budgetary constraints. There is also an Israeli defense company capable of doing this work. It will be interesting to examine the defense establishment’s policy on this matter in preparation for the IDF’s next conflict.

“History proves that everything here goes from one extreme to the other, ” a senior source in one of the companies told “Globes”. “From a situation in which the faucet is almost completely closed for procuring systems, they will now almost certainly switch to a situation of spending billions on purchases. Until recent weeks, the Ministry of Defense owed hundreds of millions of shekels to the defense companies. The trend was to invest more in education and welfare, and less in defense. It appears that reality is proving that all of these are necessary investments.”

A senior source in a different company admits, “The defense companies will be the big beneficiaries from the operation in Gaza. Without exception, the entire defense industry will benefit from revenue resulting from new development. Eventually, however, this rejuvenation will trickle down to the other industries in Israel. A very reasonable assumption is that a new defense concept will be born in Gaza, mainly due to the tunnels threat. The IDF will obviously need tunnel detection systems, but new above ground systems will also be needed along the border. If previous campaigns, especially the Second Lebanon War, were a factor expediting the development of the Trophy protection system for tanks and APCs the campaign in Gaza will be a factor expediting the development of technologies not yet seen on any battlefield in the world. These technologies are making a lot of money for the companies, especially when they are sold all over the world.”

 

War as a test field

There is big money in the world, and when the IDF procures systems or a new weapon, it is also the best promotion of the product. If Israel Military Industries Ltd. (IMI) in recent years developed a precision tank shell that was used extensively in Operation Pillar of Defense, it will be easier to sell it globally, because it has been proven in battle. “We live in a test field, ” says a senior source in a defense company. “Our systems are constantly being assessed on the battlefield, and the world is watching: countries coping with a threat similar to the one against Israel come here to learn new concepts, to be exposed to weapons, and later also to buy. There isn’t much money in the market today, and companies are in no hurry to invest capital on research and development. They prefer to buy from us, or to do a project together with an Israeli company as a sub-contractor. What starts as a limited engagement in Gaza ends in handsome deals on the global market.”

It is clear that the defense industries are unimpressed by the condemnations of Israel made by some countries following the fighting in Gaza. Such statements were also made in previous rounds of fighting. In recent days, for example, two incidents occurred in which pro-Palestinian demonstrators penetrated factories belonging to Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) in the UK and Australia. The factories were put out of action for a few hours in both cases. No damage was caused, the demonstrators got the photo-ops they wanted, put them on Twitter, and left.

When unique know-how originating in Israel is involved, even countries ostensibly hostile to Israel are in no hurry to burn their bridges. “There’s a paradox here, ” says a senior source in one of the companies. “There are countries that loudly condemn us in public, but clandestinely cooperate with us in weapons, and not because they love us or believe in the Jewish state. They need exactly those systems that the IDF is using in Gaza.”

 

Published by Globes [online], Israel business news – www.globes-online.com

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