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t began with a meeting in mid-
March at the office of Koor
Chairman Benny Gaon. The
heads of Israel's defense in-
dustries straggled in. There was
Israel Aircraft Industries Direc-
tor-General Moshe Keret, Rafael
Armament Authority Director
Yitzhak Gat, Elbit Chairman
Emanuel Gil, Tadiran Director
Yisrael Zamir and his deputy,
Benny Meidan.
Organized by Israel Aircraft
Industries (IAI) Chairman Avig-
dor Ben-Gal, the session was no
celebratory event.
Instead, as Yosef Rein, the de-
fense consultant invited to ad-
dress the meeting, described the
state of the industry and his fore-
cast for the years ahead, the at-
mosphere became increasingly
gloomy.
Within three to five years, he
told them, Israel's defense in-
dustry faces collapse as larger,
more efficient and far richer con-
tractors from the United States
and Europe lure Israel's cus-
tomers away with cheaper prices
and superior systems.
"In another five years, our
technology will be old and we
won't have the money to invest
in research," cautioned Mr. Rein.
The warning comes as a sig-
nificant dispute brews between
Israeli defense contractors and
the Israel Defense Ministry,
which oversees the industry.
Contractors say reorganiza-
tion is vital, that duplication in
production must be eliminated,
government companies such as
IAI must be privatized and union
power reduced.
Defense Ministry officials say
the industry is rebounding from
a slump and that the years ahead
look rosy.
Their vision is that of robust
production lines around the coun-
try, expanding markets in Asia
and Europe, and a slow process of
attrition that will gradually elim-
inate excess manpower in the gov-
ernment-owned industries.
They say the figures are the
proof. In 1996, Israeli defense ex-
ports were $1.6 billion. Defense
Ministry Director-General Ilan
Biran expects that figure to grow
to $1.7 billion in 1997 and hopes
for an additional boost to $2 bil-
lion.
The losers in the arms slump
were the manufacturers of ma-
jor weapons systems such as
planes, ships and tanks. Israel's
strength has been in providing
the subsystems for these
weapons and improving their
quality.
Both sides do agree on one
thing: that the good times being
enjoyed by the industry could be
short-lived unless Israeli con-
tractors respond quickly to the
market and become efficient
enough to offer prices that can
beat the Americans or Euro-
peans. That, officials and exec-
utives say, requires a lean
corporate structure and ample fi-
nancing.
They also believe, however,
that these are the very elements
that today's industry lacks. The
flagship of the sector is clearly
IA' which, with 13,000 workers,
is by far the largest defense com-
pany. Despite recording revenues
of $1.47 billion in 1996, it still lost
$40 million.
Why? Because most of the
money was spent paying salaries,
including up to 2,000 workers
whom IAI sources say are un-
deremployed.
Executives cite union regula-
tions drafted 25 years ago that
prevent management from dis-
missing workers or cutting
salaries during slumps. The re-
sult is a loss of efficiency.
A reflection of this can be seen
in productivity statistics. In Is-
rael, each worker has a produc-
tivity rate of $111,000, over
$30,000 less than the $140,000-
$150,000 rate of workers in Unit-
ed States or western European
industry.
The latter figure is also ex-
pected to rise as a rash of recent
mergers and proposed mergers
go through. These include Lock-
heed Martin and Loral; McDon-
nell Douglas and Boeing;
Thomson SA in Paris with the
Lagardere Group.
How do you keep excess work-
ers busy? Simple, say the execu-
tives, just keep the assembly lines
operating at virtually any price.
As a result, they say, IAI mar-
keting executives often agree to
deals they know will have little or
no profit just to prevent idle as-
sembly lines and aimless work-
ers.
--\
At the March meeting, the ex-
ecutives concluded that the in-
dustry must be privatized as well
as reorganized.
Mr. Rein, a government con-
sultant at Corporate Strategic
Consulting, presented a study he
submitted to the Defense Min-
istry in 1995 calling for a reor-
ganization of the defense
industry — both state- and pri-
vately-owned contractors — to
improve efficiency and eliminate
duplication.
"The problem is not just the
i-\'