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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-\'