Somewhere in the Hebrew lexicon there must be an aphorism which says that old dogs can, after all, be taught new tricks, because Israel's defence aerospace industries have specialised in improving the combat capabilities of such "old dogs" as the McDonnell Douglas F-4 Phantom and, latterly, the Lockheed Martin F-16.
The country's major defence companies, however, are now faced with having to learn some new tricks of their own. Predominantly in the state-held sector, moves are now afoot to place the bulk of these companies in private hands. Numerous internal and external factors are forcing the Israeli Government to privatise the remainder of the state-held sector.
The Middle East "Peace Process" has, despite having appeared to stall, provided the platform for increased regional stability. Consequently, Israel's defence expenditure has continued to decline as a percentage of the country's gross domestic product (GDP). Pegged at 13.5% of the GDP in 1990, it fell to 9.7% in 1996, as the perception of an immediate threat has grown less acute.
Export focus
Some 20 years ago, 80-90% of the output of the Israeli defence sector was intended for internal consumption: the drive for self-reliance was sparked by the French embargo during the Six-Day war. Almost the converse is true today. Between 60-70% of the output of the Israeli defence sector is now destined for the export market, the remaining 30-40% is for the Israeli defence forces.
Israel's defence aerospace manufacturers have had to focus increasingly on the export arena for their financial welfare now that the cushion of a defence-forces captive buyer to support the bulk of defence output has been removed. This, furthermore, is an arena which has become increasingly gladiatorial in recent years as Western and Russian manufacturers have fought to increase market share to bolster flagging national levels of defence spending.
The comparative reduction in defence spending, while still constituting a large element of state expenditure, has inevitably led to structural pressures on the industry. Job losses have been heavy, while privatisation and consolidation have taken precedence on the political and industrial agendas. Senior Government officials appear to be committed to reducing the state's direct holding in the defence sector, one of the largest elements of which remains Israel Aircraft Industries (IAI).
"Generally speaking, we would like to get it into the private sector. We are working to sell parts of the company [IAI]-I don't think in future the defence industries can be under direct military control," says one Government official. This is the kind of sentiment which is echoed by other defence officials and within industry itself. "The privatisation of the defence industries is a priority. Some 50% of these remain state owned, in future most of this will be privatised," says another high-ranking Government official.
The acceptance of privatisation is not universal, however. While it is a "priority", the Government is having to tread carefully in trying to push state-held industries into the private sector. IAI and Rafael, the defence ministry's air-launched weapons-research development and production agency, are being eased toward the private sector, but not without meeting strong resistance.
Unions have blunted attempts to pull together IAI's Malat unmanned air vehicle (UAV) division with Silver Arrow, as well as delaying the Government's plan to establish Rafael as a company, which will initially be state held.
There also remains the question of just how privatisation will be implemented: either with the complete state-owned entities eventually being placed as a whole in the private sector, or the opportunity also being used to restructure at the same time.
Restructuring
This appears to have been part of the rationale behind moves to pull together IAI's Malat UAV unit and Silver Arrow. Israel's experience and capability with regard to UAVs is second to none, and several Israeli UAV designs have been exported. The country, however, cannot realistically justify supporting more than one primary UAV manufacturer.
As well as restructuring the UAV sector, Israel's privately held avionics and electro-optical and electronic warfare specialists - Elbit, El-op and Elisra - are paying close attention to the Government's industrial thinking.
El-op is projecting a turnover of around $300 million in 1997, with more than 70% of its defence sales in the export sector. The company is aiming to more than double its turnover in the next five years, with " mergers or acquisitions", rather than organic growth the route.
"We are looking with interest at the process of how the defence industry in Israel is privatised," says the company. Elements of IAI and Rafael are of particular interest to El-op. The company is under no illusions as to the hurdles which lie ahead within such a restructuring, admitting that: "The process is quite a difficult one, the situation remains fluid."
From the viewpoint of a coherent industrial policy it is difficult to argue that Israel's UAV manufacturing base be pulled together - union fears over the job losses that will inevitably accompany such a re-alignment, however, have delayed this process.
The unions' position is not difficult to understand, as job losses within the defence aerospace manufacturing sector have already been considerable. From its peak in the late 1970s and early 1980s, employee numbers at IAI have fallen from 24,000 to 14,000 people, while at TASS (Israel Military Industries) numbers have been slashed from 15,000 to 4,000. The bulk of these cuts were implemented following its transition into a state owned company in 1991. Five years later, in 1996, it returned a profit, but at the expense of having shed much of its workforce.
It is exactly the spectre of this kind of brutal restructuring which the unions at IAI and Rafael want to avoid, or if they are unavoidable, then to ensure that those affected receive adequate financial recompense.
While the Government appears committed to the long-term restructuring of the major elements of those defence aerospace assets which remain in the state sector - there are several factors which will determine when, and how such a policy is implemented.
The "Peace Process" has brought the prospect of a lasting settlement in the Middle East that much closer, but, as defence analysts now emphasise, the stress must remain for now on the "process" rather than on any "peace".
Coupled with this is a shift in the threat. The Israeli state came into being surrounded by nations implacably hostile to its existence on every border. Its traditional threat, and therefore the one which its defence aerospace industries have always addressed, was a conventional war along one or more of its borders.
The last of the conflicts which Israel has been involved in which fully conformed to this model was the Yom Kippur War of 1973. Throughout the 1980s, the repeat of such a conflict appeared a possibility, with the Bekka Valley battles with Syria providing the basis for escalation.
The settlements with Egypt and Jordan, followed by the negotiations with the Palestinians, has changed the region's strategic outlook, and with it the outlook of Israel's defence aerospace industries. It also poses many questions, both of a military and an industrial nature.
In part, the issue for the Israeli Government, and its defence aerospace manufacturers is one of balance. Israeli defence analysts point out to a changed, as much as a reduced threat, in addressing the country's security concerns.
One of the critical benefits provided by Israel's defence-aerospace sector has been that the defence forces' weaponry has benefited from a qualitative edge over the traditionally predominantly Soviet-sourced equipment of the states with which it has been in conflict.
Not only has this equipment been superior to Soviet equipment, arguably it has also on occasional proved superior to the equivalent Western or US-sourced kit. During the Bekka Valley operation, for instance, the Rafael Python 3 infra-red guided air-to-air missile's performance was considered superior to the equivalent model of AIM-9 Sidewinder also in service with the Israeli Air Force. The Python 3 was attributed with more air-to-air kills during the air battles with the Syrian air force.
Those within the Israeli defence sector at a political and industry level stress the importance of maintaining such a qualitative edge to offset a perceived numerical disadvantage. The route to maintaining this edge, say Israeli defence sources, is in selling today's technology to provide the research and development (R&D) funds for the armoury of tomorrow.
The widely sold Python 3 air-combat missile, for instance, has been superseded by the recently unclassified Python 4. The perceived advantage given to the Israeli air force by this weapon meant that the air force was initially loathe to confirm its existence, let alone detail its entry into service and its performance.
The watershed in how to maintain the qualititive edge can now be seen, with the beneÌt of hindsight, to have been the US-inspired decision by the then Government to cancel the Lavi Ìghter project. The focus of the defence- aerospace industry moved from producing combat aircraft, to customising US-sourced platforms to meet regional requirements, and improve their combat capabilities. These platforms would be provided as part of the near-$2 billion received annually from the USA in defence aid
Despite the relative reduction in defence expenditure, comparative to the growth in GDP, Government sources now point to the sustenance of the research-and-development budget as a key plank in its policy of maintaining a technological edge over its regional rivals.
Security aims
Whether it is a fortuitous spin-off, or perhaps more calculated, the subsystems approach has also been able to place the Israeli defence-aerospace industry in the van of defence-export nations - it is one of the few which has successfully bid to upgrade the combat aircraft of third-party nations.
IAI and Elbit offer F-5 and Mikoyan MiG-21 upgrade programmes. IAI is also looking at a Lockheed Martin F-16 upgrade package, drawn in part from its modification work on air force aircraft and, in part, on avionics, radar and weapons subsystems originally being developed for the Lavi.
As well as the obvious business benefit of using export sales to offset against development costs, Israel has also used, and continues to use, defence export policy as an inherent element of its security aims. While this is hardly surprising (most arms-exporting nations argue that defence sales provide an advantage in building a long-term relationship with a customer state), Israel's political situation is unusual.
With its avowed intent of shifting the bulk of IAI, and probably Rafael, into the private sector, this link will become more delicate to handle. While IAI and Rafael remained state owned, and in the latter's case a large part of the defence ministry's R&D capability, the policy link of using defence export sales as potential leverage on the recipient country's attitude toward Middle Eastern security issues was relatively straightforward. The companies' existence in the commercial sector will make this less easy as commercial and political interests could clash.
The most sensitive of all Israel defence-technology ties, its policy of selling today's kit to fund tomorrow's, is with China. IAI is involved in Chinese projects covering fighter and airborne early warning technology, while TASS is claimed to be involved in providing cruise-missile-applicable technologies. Israel, however, is no stranger to courting international opprobrium over defence sales, a position to which its long-standing relationship with the apartheid South African regime attests.
Israeli technical assistance for the Chinese air force's Chengdu F-10 fighter programme has attracted interest from both the US State Department and the US Navy's naval intelligence office. The latter has made it plain that it believes that US technology provided for the Lavi programme has been passed on by Israel for China's F-10. The design of the F-10 draws heavily on the Lavi, and there are indications that IAI's radar unit, Elta, has already provided a multi-mode radar in association with the project. The Israeli Government and IAI will not discuss the F-10, nor the US claims. Sources, however, say that no US technology originally from the Lavi is being made available to China.
The most interesting question for the USA surrounding Israeli-China co-operation is: what underpins the link? China has previously provided Iran and Saudi Arabia with weaponry. In the case of Saudi Arabia, China has provided the CSS-2 intermediate-range ballistic missiles, while the Chinese F-8IIM upgrade project is widely considered to be intended for Iran.
Given such sales in the Middle East, Israel's rationale for becoming, alongside Russia, the main conduit for the Chinese air force to acquire advanced-weapons technology is worthy of consideration. The attractions of the Chinese market can not be overlooked. Rafael, for instance has sold many Python 3s to China, and an aircraft such as the F-10, if successful, would be produced in significant numbers.
More important, perhaps, although considerably less tangible than an actual return on sales, is the potential influence which Israel-China defence-industrial ties might have on China's policy in the Middle East.
A similar tack is being taken in Turkey, where IAI is implementing a $600 million upgrade on the Turkish air force's McDonnell Douglas F-4 Phantoms to the Phantom 2000 standard. Discussions on such an upgrade were begun almost a decade ago, although the contract was not concluded until 1996.
Turkish upgrades
In parallel to the defence-industry collaboration, Turkey's Tusas will upgrade around half of the aircraft in-country, and increasing defence ties have seen the provision of Turkish airspace for Israeli air force training purposes. It is also noteworthy that Turkey has a long border with Syria, the state which Israel continues to view as one of its main potential regional threats.
Israeli sources admit that its relationships with China and Turkey are effectively calculated risks - in the case of China, technology could potentially leak back to states in the Middle East, while Turkish state secularism in under pressure from Islamic fundamentalism.
For the Israeli defence-aerospace sector, however, such relationships will inevitably play an increasingly important element in their performance as they are moved toward the private sector. What is more, there is a political will to see its defence aerospace companies forge additional collaborative links - and these may not always be with US or European companies.
Source: Flight International
