Is­rael’s revo­lu­tion­ary de­fense in­dus­try

The ‘Mag­a­zine’ sits down with the CFO of Is­rael’s largest de­fense com­pany to dis­cuss its IMI ac­qui­si­tion and how Is­rael is a lead­ing player in the world de­fense mar­ket

The Jerusalem Post - The Jerusalem Post Magazine - - CONTENTS - • By SETH J. FRANTZMAN

El­bit Sys­tems is Is­rael’s largest de­fense com­pany and fre­quently ranks among the most im­por­tant in the world. In 2018, it was the 27th most im­por­tant com­pany in its de­fense field by rev­enue glob­ally. It is a key part of Is­rael’s hi-tech and ground­break­ing de­fense tech­nol­ogy sec­tor that has made Is­rael the eighth most im­por­tant coun­try in de­fense sup­plies.

In terms of what Is­rael ex­cels at, weapons plat­forms such as air de­fense, im­prov­ing com­mu­ni­ca­tions tech­nol­ogy and un­manned air­craft sys­tems, in­clud­ing elec­tro-op­ti­cal imag­ing, El­bit is in­te­gral to the whole ethos of what makes Is­rael unique.

El­bit de­scribes it­self as an “in­ter­na­tional high tech­nol­ogy com­pany en­gaged in a wide range of de­fense, home­land se­cu­rity and com­mer­cial pro­grams around the world.”

It’s in the news fre­quently, most re­cently for a $30 mil­lion high-pre­ci­sion guided mor­tar sale in Asia, and a new part­ner­ship with DA-Group to pro­duce and mar­ket El­bit Sys­tems’ Im­mune Satel­lite Nav­i­ga­tion Sys­tem (iSNS).

This con­fronts the threat posed by GPS jam­ming, which has af­fected Fin­land and Scan­di­na­vian coun­tries.

Tech­nol­ogy is a key part of war fight­ing to­day. The long-arc of the his­tory of war­fare has gone through sev­eral tech­no­log­i­cal revo­lu­tions, from de­vel­op­ments like radar in the 1930s to the Revo­lu­tion in Mil­i­tary Af­fairs that the­o­rized dom­i­nance based on tech­nol­ogy. To­day’s chal­lenge is even more so­phis­ti­cated, har­ness­ing ev­ery tech­nol­ogy to make weapons more pre­cise and armies more aware.

To un­der­stand how El­bit is chang­ing both the Is­raeli de­fense mar­ket and the world, the Mag­a­zine spoke to Joseph Gas­par, El­bit Sys­tems ex­ec­u­tive vice pres­i­dent and chief fi­nan­cial of­fi­cer.

THE DIS­CUS­SION came in the wake of El­bit an­nounc­ing $3.68b. in rev­enues for 2018. It also comes in the wake of a long and im­por­tant ac­qui­si­tion El­bit made of IMI Sys­tems.

The world is chang­ing in terms of its needs for mil­i­tary equip­ment. Many coun­tries that suf­fer from an­ti­quated weaponry want the tech­nol­ogy that Is­rael has that helps them up­grade things like bombs to turn those “dumb” mu­ni­tions into smart bombs that are more pre­cise. High-level de­fense equip­ment is so ex­pen­sive, like the US F-35, that coun­tries want to be able to im­prove what they al­ready have.

There are also ten­sions be­tween Rus­sia and NATO that drive de­fense spend­ing, and the US pres­sure for NATO coun­tries to in­crease their sup­port for the al­liance.

The de­cline of ISIS hasn’t meant the end of the war on ter­ror. In­stead, the ISIS threat has spread through­out the Sa­hel in Africa and to south Asia, with the at­tack in Sri Lanka and other net­works. Iran is also on the march and rais­ing ten­sions in the Mid­dle East.

In ev­ery case it is tech­nol­ogy of the kind Is­rael ex­cels at, that is of­ten needed to help check th­ese ad­ver­saries.

Com­pa­nies like El­bit want to bal­ance their in­creas­ing im­por­tance in the US de­fense mar­ket, the largest de­fense spender in the world, with the rest of the world. For in­stance, the Stock­holm In­ter­na­tional Peace Re­search In­sti­tute re­vealed in late April that global de­fense spend­ing in­creased to $1.8 tril­lion in 2018, 2.6% more than in 2017.

The US and China are among the largest spenders, but In­dia, Saudi Ara­bia, France, Rus­sia, the UK and Ger­many are in the top 10 as well.

Is­rael doesn’t sell to all of th­ese coun­tries, but it sells to many im­por­tant coun­tries and de­vel­op­ing coun­tries.

Af­ter an­nounc­ing $3.68 bil­lion in rev­enues in 2018, can you de­scribe a bit about El­bit’s ac­qui­si­tion of IMI in terms of how it will im­pact the com­pany’s ap­proach go­ing for­ward?

“I would say that it was a long process [ac­quir­ing IMI]. We were in ne­go­ti­a­tions with the [Is­raeli] gov­ern­ment for over two years and fi­nally it hap­pened in Novem­ber last year [2018]. We have a ba­sic strat­egy of grow­ing the busi­ness or­gan­i­cally and look­ing for ac­qui­si­tions – which we did quite a lot over the years in Is­rael and abroad. IMI is one more ac­qui­si­tion in Is­rael that we did to com­ply with what we think is very strate­gic for the com­pany, which is growth of our port­fo­lio of tech­nol­ogy, prod­ucts and solutions to of­fer to cus­tomers in Is­rael and in­ter­na­tion­ally.

“Our strat­egy in ac­qui­si­tion is to en­large the port­fo­lio and ac­quire strate­gic po­si­tions in coun­tries and get bet­ter ac­cess to cus­tomers. IMI was cat­e­go­rized in the first part of that. IMI was a gov­ern­ment-owned op­er­a­tion with $500m. rev­enues, give or take, and it was a los­ing op­er­a­tion. The gov­ern­ment was sub­si­diz­ing them and help­ing them in many ways, but they were not prof­itable. We started at the low level and had to bring them all the way up to the level of prof­itabil­ity of El­bit. We have done that in the past.

“One ex­am­ple was ELISRA, an elec­tron­ics war­fare com­pany from Bnei Brak. They had $350m. in rev­enues and were los­ing money when we ac­quired them in 2007. To­day, we have built a lot of syn­ergy, and ELISRA is at the prof­itabil­ity rate of the whole or­ga­ni­za­tion. It took us sev­eral years, but we are there.

“We have three ma­jor prod­uct lines at IMI: pre­ci­sion mu­ni­tions; short-to-medium and long-range rock­ets; and de­fense sys­tems for ar­mored ve­hi­cles. All of them are prod­uct ar­eas that El­bit did not have of­fer­ings in prior to IMI. The ac­qui­si­tion puts us in a new and stronger po­si­tion in the var­i­ous mar­kets where we are sell­ing our solutions.

“We see quite a lot of syn­ergy po­ten­tial with the IMI ca­pa­bil­i­ties that we will be able to of­fer our cus­tomers: in­te­grated solutions for ground-based ar­mored ve­hi­cles, and in­te­grated ar­tillery solutions that in­clude guns, mor­tars, rock­ets and com­mand and con­trol cen­ters. In the past, we were not re­ally able to of­fer to our cus­tomers a wholly in­te­grated one-project so­lu­tion, but with th­ese ca­pa­bil­i­ties from IMI we are able to of­fer that one-stop shop for up­grade pro­grams for ar­mored ve­hi­cles, in­clud­ing the guns and the pro­tec­tion sys­tems for tanks and ar­mored ve­hi­cles; ar­tillery solutions; and small 120 mm weaponry, in­clud­ing mor­tars; guns and rock­ets; medium, long range and in­te­grated ar­tillery cen­ters – all of this com­bined to pro­vide in­te­grated ar­tillery de­fense solutions.

“In ad­di­tion, this en­ables us to pro­vide to our cus­tomers with in­te­grated in­tel and re­con sys­tems that we had be­fore, th­ese are usu­ally air­borne on ve­hi­cles and other air­borne plat­forms, but once we have the ca­pa­bil­ity from IMI we have pre­ci­sion guided mu­ni­tions to close the loop quickly once the tar­get is de­tected and iden­ti­fied and can be hit with guided pre­ci­sion mu­ni­tion.

“As we all know the pre­ci­sion mu­ni­tion is im­por­tant in th­ese days in the mod­ern world. We can­not be part of any mu­ni­tion that has col­lat­eral dam­age or civil­ian dam­age ac­cu­racy and the whole world is go­ing to­ward this so­lu­tion in time and lo­ca­tion, this is ex­tremely im­por­tant and IMI’s solutions are very ef­fec­tive.

“We see sig­nif­i­cant po­ten­tial from our mar­ket pres­ence. El­bit de­rives 20% of our rev­enues from the Is­raeli mar­ket and 80% from in­ter­na­tional mar­kets. IMI is the other way around: 17% from in­ter­na­tional mar­kets and over 80% from the Is­raeli mar­ket. So we iden­tify a po­ten­tial to ex­pand that busi­ness to the in­ter­na­tional mar­ket, lever­ag­ing our world­wide pres­ence and good re­la­tion­ship with cus­tomers in­ter­na­tion­ally. We ex­pect the IMI port­fo­lio do de­rive 60% of its rev­enues in­ter­na­tion­ally within sev­eral years, with­out re­duc­ing its po­si­tion in Is­rael.

“With the ac­qui­si­tion of IMI, we be­lieve we are in a dif­fer­ent cat­e­gory of de­fense com­pa­nies. We are now in the $4-5b. rev­enues range with a 10b. back­log of or­ders, which is higher than be­fore. With IMI, we will have a third of our busi­ness in Is­rael for the com­ing years and about a quar­ter in Europe, US and Asia-Pa­cific each. So we have a di­ver­si­fied port­fo­lio and nicely bal­anced cus­tomer base, which min­i­mizes busi­ness risk, as de­fense bud­gets may de­cline or grow in some ar­eas in world, but world­wide there is growth. Also, our broad port­fo­lio of prod­ucts and solutions gives us a solid po­si­tion. If I com­pare us to our peers in the US, who are on av­er­age 80% US-based and 20% in­ter­na­tional, we see a lower risk sit­u­a­tion for El­bit .

“WE RE­STRUC­TURED the com­pany af­ter the ac­qui­si­tion to five busi­ness units in ad­di­tion to our US op­er­a­tions.

“We split the land and C4I division into two. The Land Division, which in­cludes IMI, will be fo­cused on land solutions that in­clude ar­mored ve­hi­cles, ar­tillery and am­mu­ni­tion. The C4 and Cy­ber division is fo­cused on com­mand, con­trol, com­mu­ni­ca­tions, com­put­ers, ra­dio and cy­ber busi­ness.

“In ad­di­tion, we have the iSTAR Division, in­clud­ing the UAV and elec­tro-op­tic busi­ness and the air­borne and the EW busi­ness (ELISRA). In each busi­ness division, we are well fo­cused and con­sider our­selves as one of the three lead­ing com­pa­nies in the area from the point of view of prod­ucts, tech­nol­ogy and cus­tomer base

“From the op­er­a­tions point of view, IMI is very ad­vanced tech­no­log­i­cally. They had very good peo­ple in some ar­eas, but they were los­ing money. So what we did – and we are only three months in the game – we sig­nif­i­cantly re­duced the head count of the op­er­a­tions, by sev­eral hun­dred peo­ple, many of them close to re­tire­ment. We ac­cel­er­ated that process a bit and we re­struc­tured the IMI busi­ness into strate­gic units along the lines above, such as de­fense for ar­mored ve­hi­cles, rock­ets and pre­ci­sion mu­ni­tions.

“We will build a new and mod­ern production fa­cil­ity in the Negev that will be es­sen­tially funded by Is­raeli gov­ern­ment, this will help us re­duce production costs and in­crease prof­itabil­ity. We are also plan­ning to in­te­grate IMI into our ERP (en­ter­prise re­source plan­ning) sys­tem. That will help re­duce in­ven­tory, im­prove cash flow and im­prove the op­er­at­ing as­pect of the busi­ness in production and en­gi­neer­ing.

“We plan to strengthen in­ter­na­tional mar­ket­ing within IMI and help it with El­bit’s in­ter­na­tional world­wide mar­ket­ing net­works to en­hance its po­si­tion in­ter­na­tion­ally and come close to our 80% to 20% ra­tios in El­bit. We pro­vided fi­nan­cial sup­port to IMI, which for years was in a bad po­si­tion fi­nan­cially with credit lines

that hurt them in de­liv­er­ing the goods and ser­vices.

“We will in­te­grate them in our over­all cor­po­rate pro­cure­ment or­ga­ni­za­tion so they can take ad­van­tage of the scale of El­bit in the pur­chas­ing process.

“All of that has started to hap­pen. It will take a bit of time un­til we see re­sults, but we plan to bring IMI to prof­itabil­ity al­ready in 2019. Try­ing to bring them to the av­er­age level of El­bit is not a tar­get we will be able to achieve in months – it could take a cou­ple of years – but it will grow and we will reach it. The growth from the in­ter­na­tional mar­ket busi­ness will help im­prove prof­itabil­ity.”

Can we dis­cuss how this im­pacts the US mar­ket?

“We con­sider the US mar­ket our se­cond do­mes­tic mar­ket due to vol­ume and im­por­tance. When we are suc­cess­ful in US, we can be suc­cess­ful world­wide. We have ap­prox­i­mately 1,700 em­ploy­ees in sev­eral lo­ca­tions there; the largest is in Fort Worth, Texas. We also have production and en­gi­neer­ing ca­pa­bil­i­ties in New Hampshire and other places.

“We op­er­ate there un­der an SSA (spe­cial se­cu­rity agree­ment with the US Depart­ment of De­fense), so we are con­sid­ered as any other US op­er­a­tion or com­pany that can take upon it­self clas­si­fied pro­grams. This is where we are. IMI was not very ac­tive in the US prior to the ac­qui­si­tion, although they had some busi­ness there.

“Re­cently, IMI was suc­cess­ful with the US army, to adopt to their Bradley plat­form the ar­mored ve­hi­cle de­fense sys­tem of IMI (IRON FIST). This is the first ma­jor pro­gram. We ex­pect in the next few months to get a con­tract and be able to sup­ply sys­tems for eval­u­a­tions. Hope­fully, they will per­form well and that opens a path for the fu­ture for IMI in the US.

“In 2018, we con­tin­ued to sup­ply hel­mets for pi­lots of the F-35 and other fighter air­crafts. We won a new po­si­tion on the F-35, the cen­tral dis­play unit in the cock­pit. Lock­heed Martin se­lected us and that is a sig­nif­i­cant win for fu­ture F-35 production. We are in­volved in other things that we can’t re­lease in­for­ma­tion about, but in the next sev­eral months we will be able to de­liver that to the mar­ket. Our prod­ucts are in the cock­pits of fight­ers and he­li­copters, in­clud­ing mis­sion com­put­ers, dis­plays, maps and a lot of equip­ment that goes on the ma­jor fight­ing air­craft and plat­forms.

“We are well po­si­tioned on the F-16 and F-18 for the US Air Force and Navy and we have po­si­tions on the F-15, the V-22, the Apache, Black Hawks and Bradley’s. So we feel very com­fort­able in the US; busi­ness is good and grow­ing there. We are also the prime con­trac­tor on the IFT, the elec­tronic wall be­tween Ari­zona and Mex­ico, we are the prime con­trac­tor pro­vid­ing tow­ers along the bor­der and on those tow­ers a lot of sen­sors, radar, night vi­sion, day vi­sion and th­ese are cou­pled to com­mand and con­trol cen­ters. So when they de­tect an in­tru­sion they an­a­lyze it and give guid­ance to the forces to check it and do what they do. We are a prime con­trac­tor. It costs sev­eral hun­dreds of mil­lions [of dol­lars] to set it up. The cus­tomer is happy; we are wait­ing for fur­ther de­ci­sions on this ac­tive is­sue.”

What is next in other mar­kets, such as Europe and Asia?

“In the Euro­pean mar­ket, we see growth in de­fense bud­gets, driven by sev­eral fac­tors, such as the per­ceived chal­lenge from the east or immigratio­n from Africa and the Mid­dle East, which cre­ates chal­lenges to in­ter­nal se­cu­rity. All of this cre­ates a good busi­ness en­vi­ron­ment for solutions that we have in de­fense elec­tron­ics, bor­der con­trol and up­grades for sys­tems, in­clud­ing re­con and in­tel sys­tems, cy­ber solutions, and so on. They are ap­pre­ci­ated by many of the Euro­pean coun­tries.

“We are well-po­si­tioned in the UK; El­bit op­er­ates five sub­sidiaries em­ploy­ing hun­dreds of peo­ple, act­ing lo­cally and doing in­ter­est­ing work. That is a big mar­ket for us. We have cus­tomers in Italy, Belgium, Austria, Ro­ma­nia, Ger­many and Switzer­land, plus some Scan­di­na­vian coun­tries as well. One of big­gest UAS pro­grams is with Switzer­land and one we had in the past was [with] the WatchKeepe­r and the fol­low­ing in the UK. That mar­ket has grown to 2223% of our rev­enues.

“De­fense bud­gets are grow­ing in many coun­tries in Asia-Pa­cific as well, in­clud­ing in South Korea. Some coun­tries in the Far East sense chal­lenges with what the Chi­nese are op­er­at­ing and they are buy­ing equip­ment. We have a ma­jor sub­sidiary in Aus­tralia and have pro­vided com­mand and con­trol solutions and night vi­sion equip­ment for ground forces.

“Other grow­ing mar­kets in­clude In­dia, which has a huge de­fense mar­ket with grow­ing needs, with­out ad­dress­ing specifics.

“Gen­er­ally speak­ing, we are fac­ing a pos­i­tive en­vi­ron­ment with an in­creas­ing need for in­ter­nal and ex­ter­nal se­cu­rity. The one con­ti­nent that it is a lit­tle on the low side is Latin Amer­ica. It used to ac­count for over 10% of our rev­enues but now is down to 5-6%. Still, our po­si­tion there is good, in Brazil, for ex­am­ple, and we hope the re­gion will re­turn to growth.

“In Is­rael, our po­si­tion is even stronger with IMI and we get our share of the cake.”

Are there any weapon sys­tems that will be ex­pand­ing?

“The trends are to­ward solutions re­lated to in­te­grated weapon sys­tems – in­te­grated ar­tillery solutions, or ar­mored ve­hi­cle solutions that in­clude not only the fire con­trol or ob­ser­va­tion or sur­veil­lance or mu­ni­tions, but ev­ery­thing clos­ing the loop with com­mand and con­trol and data anal­y­sis. This is a sig­nif­i­cant vec­tor of growth for the fu­ture, ground-based and air­borne. We in­vest a lot in ro­bot­ics so that un­manned sys­tems as they de­vel­oped 20-25 years ago are adapted on ground and at sea i.e. un­manned boats and un­manned ground ve­hi­cles. We con­sider ro­bot­ics and ma­chine learn­ing im­por­tant; they will en­able growth of solutions in de­fense elec­tron­ics.

“An­other area of in­ter­est to us is the ad­vance in com­mer­cial elec­tron­ics. We see re­duced weight and power con­sump­tion for var­i­ous solutions so we can put th­ese solutions at work for in­fantry and so in­fantry can carry th­ese solutions. Each sol­dier is a cen­ter of in­tel­li­gence on one hand with sur­veil­lance and a force that is get­ting info and in­tel from UAVs or cen­tral com­mands or other sources. It could be dis­played on his hel­met or other equip­ment he car­ries, and he car­ries quite a lot of elec­tron­ics. This en­ables him to be more ef­fec­tive in the field. This is def­i­nitely a trend that we see com­ing, and the quan­ti­ties here are sig­nif­i­cant.

“Last year we bought a com­mer­cial avion­ics busi­ness called Univer­sal Avion­ics that pro­vides solutions for pri­vate jets and com­mer­cial air­craft. We see syn­ergy be­tween tech­nol­ogy we de­vel­oped for de­fense and com­mer­cial ap­pli­ca­tions, and good po­ten­tial growth in the US and in­ter­na­tion­ally for com­mer­cial solutions for com­mer­cial airplanes, so that is part of our strat­egy.

“Last but not least is in­tel data that is ac­quired through var­i­ous sen­sors, air­borne and satel­lite-based. The in­tel gath­er­ing part on one hand and the cy­ber on the other hand also are trends that we see a grow­ing de­mand for in the fu­ture. What­ever en­ables you to get data for your de­fense is valu­able. That will be a growth area.”

Com­pa­nies like El­bit want to bal­ance their in­creas­ing im­por­tance in the US de­fense mar­ket, the largest de­fense spender in the world, with the rest of the world

(Pho­tos: El­bit Sys­tems)

A VE­HI­CLE launches an EX­TRA (Ex­tended Range Ar­tillery Rocket Sys­tems) – a pre­cise, low-cost, tac­ti­cal-range 306mm. ar­tillery rocket sys­tem (30 to 150 km. range) in use by sev­eral armies around the world.

EL­BIT SYS­TEMS IronVi­sion land hel­met for tanks and ar­moured fight­ing ve­hi­cles.

EL­BIT SYS­TEMS Her­mes 900 Un­manned Air­craft Sys­tem and (in­set) the Iron Fist ac­tive pro­tec­tion sys­tem, a hard-kill sys­tem de­signed by Is­rael Mil­i­tary In­dus­tries (IMI) that de­fends ar­mored ve­hi­cles.

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