As a former pilot in the Israeli air force, Yair Shamir is aware at any given moment where the potential targets are. The chairman of Israel Aerospace Industries says that the US market - which brings about $1 billion to the bank accounts of the largest Israel aerospace company - can grow by not less than 30%.

IAI has made its mark in the US market and plans to stay. Stark is an unmanned air systems company formed in the USA but, according to Shamir, this is only the first step. "We cannot buy American companies due to Israeli law, so we plan to establish another company from scratch," he says.

But the search for the big markets continues and, according to Shamir, will intensify. Brazil has been identified by IAI as another big potential market.

In 2009 EAE, a Brazilian company owned jointly by IAI and the local Synergy corporation, began its operations. The company offers its customers UAS, multi-mission radars, inertial navigation systems, maritime platforms and systems and border and coastal defence systems.

Yair Shamir
 © IAI

"In Brazil also we plan to purchase additional companies. The fact that IAI is developing and manufactures such a variety of systems for air, ground, sea and space gives our operations in Brazil a big advantage," Shamir says.

In recent years, IAI has been busy satisfying India's almost unlimited appetite for advanced defence systems. Is Shamir concerned that the company is concentrating so much effort in one country, especially after what happened in Turkey, which was one of its main clients but subsequently severed defence ties with Israel?

"An aerospace company with one major client is in danger, but in spite of the big business that we do in India, it does not consist of more than 12% of our overall sales. But the fact is that India is a preferred client and as such gets a preferred treatment."

This explains the hundreds of IAI employees that are at any given moment on Indian soil.

Shamir assesses that the Indian defence budget will continue to grow. "The potential for us in that country is endless," he says.

State-owned IAI is the biggest aerospace and defence company in Israel. For years, successive Israeli governments have declared their intention to consolidate the three state-owned companies, IAI, Rafael and Israel Military Industries. But except for talk, nothing concrete was done. The latest effort is to merge IMI into Rafael.

Shamir does not make even the smallest effort to disguise his disappointment. "If the ministers talk about merging two of the three, why not make a bigger effort and merge all the state-owned companies? Such a move would have changed the league in which these companies operate in," he says.

"This business is the game of the big guys and here is a chance to become big and more capable to compete," says Shamir. "There is no sense in keeping the situation as it is now."

A small step made recently can be perceived as one in the right direction in a country where consolidation is a "dirty word". IAI and Elbit Systems have formed "Tor", a joint company that will purchase the advanced trainer that will be selected by the Israeli air force, and sell flight hours to the service.

While Shamir sees the formation of the joint company to be a step in the right direction, he pours a bucket of cold water on the heads of those that see the step as an indication of a new direction.

"History taught us that joint ventures like this, with two big parents, very quickly become orphans."

He explains that in the past in many cases around the world the real interests are those of the "parents" and not of the mutual business entity they formed.

"If any of the parent companies will feel that its benefits from the co-operation is smaller, it will act accordingly," says Shamir. The Israeli anti-trust commissioner has put strict limitations on the joint venture and that also, according to IAI's chairman, is a reason for limiting the enthusiasm some expressed.

As a state-owned company, IAI is operating under a set of limitations that gives the politicians the power to make business decisions. "If we could duplicate the format of the joint company with Elbit in other places that could result in a real positive change," he says.

With the consolidation and privatisation processes stuck, IAI in recent years has twice issued bonds to raise money and with great success. Does Shamir plan more such moves?

"We always have a prospect on the shelf for another bond issue and it is updated continuously," he says.

Shamir still hopes that the government will act seriously to privatise IAI. "The first needed step is to let us buy companies in Israel and abroad. For this we will need to issue more bonds. Currently we have $1.6 billion cash for such acquisitions."

Today IAI has to get a government approval for an acquisition with a value of over $50 million.

IAI has big sales accompanied traditionally with small net profits. In 2010 for example, sales totalled $3.15 billion, but net profit was only $94 million. For the first quarter of 2011, net profit was $46 million, against sales of $855 million. Is such a low profit margin normal?

"There are some reasons for that," says Shamir. "First we invest huge amounts in research and development. In our financial report the R&D is something like 4%, but in fact it is much higher. We get a lot of development funds from clients but then we have to share the profits with them. In fact we invest directly and indirectly something like 20-25%." Shamir explains the low profit margin with another factor - the number of redundant employees that put a heavy burden on the company for years. "In the last five years we released 2,400 employees that were no longer productive and enlisted 4,000 young ones that master the updated technologies."

The IAI chairman also points to the US dollar exchange rate as another reason for the low net profits: "We are paid with dollars but pay in Israeli shekels and with the exchange rate we get much less of these."

Shamir also points to the fact that IAI is a company that manufactures defence and civil systems and is adversely impacted when one of "these legs" is in recession. "We lose from every recession, either in military investments or civil ones," he says.

IAI is still trying to assess the impact of the severance of the defence ties between Israel and Turkey. "Turkey is the regional power not Iran as many think. In spite of what happened we have to find a way to keep our relations with Turkey. I'm sure that this understanding is also on the other side."

IAI is a very advanced developer of space systems, from satellites to launchers and more. But the international market for these systems is very limited when the systems are aimed at a specific user. "We have to add space products that are needed in the civil market. We have to develop micro and mini satellites but we lack the funds to do it," Shamir says.

A plan to go into that market by forming MicroSat - a joint company with Rafael - failed. "This is the problem with such joint ventures," says Shamir. "As I said before, the new joint body becomes an orphan very quickly."

IAI looks with great admiration on the success of the different types of aircraft manufactured by Embraer in Brazil. Why did IAI not go into that business with all the capabilities it has?

"We evaluated this about three years ago, not for the first time, and decided that unless we can bring something new to that saturated market there is no point in entering it, especially when labour in Israel is much more expensive than in Brazil."

Source: Flight Daily News

Topics