Military Industry

Israel produces a wide range of products from ammunition, small arms and artillery pieces to sophisticated electronic systems and the world's most advanced tank.

Although the Al-Aqsa flood proved the failure of Israel’s arrogant bet on the “deterrence power” provided by advanced surveillance and weapons technologies, investors quickly returned to pumping money into so-called “tested weapons,” and it seems clear that the executives of defense industry companies are the only victors in the Gaza war. According to an investigation by Sophia Goodfriend from the Hebrew website “Siha Mekumet,” entitled “Gaza is a weapons market even when the war is not over.”

It was only five weeks after the attack on October 7, 2023, that a rising Israeli security company called Smart Shooter posted a promotional photo on Facebook, showing Israeli special forces aiming assault rifles developed by the company at a reinforced concrete building somewhere in Gaza. A month later, the company's CEO, Michael Moe, told the Yedioth Ahronoth newspaper that the Gaza war - in which 30,000 Palestinians were killed - was an opportunity to increase sales, and that it was the golden hour that the defense industries were waiting for.

Therefore, it does not seem strange that the Israeli technology industries have returned to their previous arrogance, despite their miserable failure to predict the Al-Aqsa flood, so that a discourse that has been promoted for years has once again prevailed, saying that Israel will enhance its security by investing in more advanced weapons and surveillance technologies.

The deep questions raised by the attack within the military establishment about the feasibility of excessive reliance on technology quickly subsided, and the army began to promote itself again as the army of breakthrough technologies, equipped with automatic weapons that had been tested on the battlefields, and investors began to pump more money into emerging defense industry companies.

Military technology industries in Israel have flourished under the influence of the Palestinian Intifada and the so-called War on Terror, and have rebounded further in recent years after the outbreak of the Russian-Ukrainian war , and the increasing military use of technical surveillance systems in the time of Corona (and the accompanying protests against the economic crisis). It seemed that the interests of the military establishment and the economy were intertwined, according to Sophia Goodfriend, as the former needed new weapon systems (with the complexity of the battle against the Palestinians), and the latter needed the development of a promotion strategy to return foreign investors to Israel.

Having to fight five major wars in its first four decades, Israel built a comprehensive standing army - the Israel Defense Forces (IDF) - and furnished it with an arsenal of highly advanced military hardware. The government, which owns three major defense firms, also encouraged the formation of private companies to equip the IDF. The development of a sophisticated defense industry inevitably led to exports, which today account for a majority of its revenues and allows the country's defense industry to compete against some of the largest companies in the world for foreign contracts, in addition to producing many of the arms needed for Israel's own defense.

Faced with a shrinking market for military hardware over the last decade and a half, Israeli defense concerns have made a concerted effort to employ their research and development teams in devising products for non-military markets and, more frequently, in adapting defense technology for civilian applications. Indeed, many of the most innovative products developed by Israel's civilian high tech industry, especially in the field of telecommunications, trace their origins to military technology.

The modern defense industry in Israel was set in motion in the early 1920s. Faced by an increasingly hostile Arab population, the Jewish community began to manufacture homemade hand grenades and explosives. In the early 1930s, members of the Haganah (the pre-state Jewish underground defense organization) set up clandestine small arms factories, which became the Israel Military Industries (IMI) in 1948. In the first two decades after independence, IMI produced many of the basic weapons used by the IDF, including the Uzi sub-machine gun. The more costly aircraft and other advanced weapons were procured from foreign suppliers, principally France.

The major catalyst for Israel's metamorphosis from a small-arms manufacturer to a producer of sophisticated military systems came after the 1967 Six-Day War. During the war, France imposed an embargo on arms sales to Israel, including the Mirage planes already on order from the Dassault aircraft factory. When the United States became the primary supplier of combat aircraft, Israel began to develop its own production capability. The government-owned Israel Aircraft Industries (IAI), founded as a maintenance facility in 1953, soon began developing and assembling a variety of its own aircraft, including the Kfir - a replacement for the Mirage - as well as the Arava and Nesher planes. At the same time, IAI's contacts with US suppliers advanced from subcontracting jobs to joint ventures with Boeing and Lockheed-Martin. As a result, employment at IAI grew rapidly from 4,000 to a peak of 14,000 in the late 1980s.

The growing sophistication of Israel's defense industry gave it the confidence to develop an all-Israeli military aircraft, the Lavi. Over the first half of the 1980s, IAI developed avionics, electronics and weapons systems for the aircraft, and by 1986 the first prototype had taken to the air. However, the government concluded that it was unable to finance such an ambitious undertaking, and the project was canceled a year later. Shorn of the Lavi, IAI began to develop a variety of products in the military and civilian spheres - such as advanced radar systems, precision weapon systems, unmanned air vehicles (UAVs) and commercial and military aircraft conversion - many of which were based on the technology developed during the Lavi project.

The Israeli government has introduced mandatory offsets for all defense transactions exceeding US$5 million. As Israel is intent on forging long-term relations between domestic firms and foreign investors, no penalties or clause for liquidated damages are imposed on defaulters. Indeed, one of the most important principles underlying the offset policies is that the activities pursued by domestic and foreign firms should be beneficial to both parties.

The military aid Israel has received from the US through government-to-government agreements has significantly supported the development the Israeli defense industry, and as a result, a significant portion of the equipment used by the Israel Defense Forces (IDF) is of US origin, which provides US defense manufacturers with opportunities to enter the Israeli defense industry. For example, The Boeing Company, Bell Textron, Lockheed Martin, Raytheon, Sikorsky Aircraft Corporation, and Hughes are all US defense firms that have entered the Israeli defense market through extensive military sales programs. Israel also stocks US military hardware such as armored vehicles and artillery shells, which can be used in the case of an emergency.

Israel has developed a largely self-sufficient domestic defense industry, which satisfies the majority of its defense requirements; however, the nation continues to rely on external technologies to fulfill its more advanced requirements, such as aircraft, air defense systems, and submarines. As a result, the majority of foreign OEMs keen to enter the Israeli defense industry form an alliance with Israeli defense firms to jointly develop and market defense equipment in the international market, which is also beneficial to foreign companies as many are able to capitalize on Israeli expertise in unmanned aerial vehicles, missile defense systems, and defense electronics.

The partnership between General Dynamics and Aeronautics Defense Systems, formed in 2004, is an example of market entry through such an alliance; the two companies established a joint venture to develop and manufacture defense and homeland security products, unmanned multi-application systems (UMAS) in particular. These products are sold in the US and other international defense markets.

Although the Israeli economy encourages foreign investment in other industries, investment into its defense sector continues to be prohibited; Israeli government officials cite national security as the reason for this prohibition.

There are approximately 150 defense firms in Israel, with combined revenues of an estimated $3.5 billion. The three largest entities are the government-owned IAI, IMI and the Rafael Arms Development Authority, all of which produce a wide range of conventional arms and advanced defense electronics. The medium-sized privately owned companies include Elbit Systems and the Tadiran Group, which focus mainly on defense electronics. The smaller firms produce a narrower range of products. In all, the industry employs close to 50,000 people, all of whom share a commitment to high levels of research and development and the ability to make use of the IDF's combat experience.

Despite their far-reaching client base, even the biggest local firms are relatively small players in the global defense market. With increasing competition from the major world aerospace players, Israeli companies tend to specialize in niche markets, or have sought to combine forces through mergers or joint marketing efforts. In addition, declining global defense spending after the Cold War provided them with new opportunities as foreign governments seek to upgrade their existing arsenal rather than buy new equipment. This policy is typified by the Phantom 2000, a sweeping modernization of the F-4 aircraft that Israel acquired from the US in the early 1970s.

In the wake of the Lavi's cancellation, IAI diversified and expanded with funding from the United States, developing the Amos and Ofeq satellites and the world's first operational anti-missile missile system, the Arrow. IAI's unmanned air vehicles (UAV or pilotless aircraft) systems, including the Hunter, have now become standard for military establishments in many countries around world. The company is also engaged in the repair and maintenance of aircraft and helicopters, and in upgrading aircraft with state-of-the-art avionics. It also designs, develops and manufacturers naval and ground systems, electronic warfare and radar equipment and missiles. Company sales in 2000 amounted to $2.18 billion, of which exports accounted for $1.7 billion. In the same year, IAI signed some 1,600 new contracts worth approximately $2.6 billion.

Israel Military Industries (IMI) was founded in 1933, as a secret small-arms plant. After the establishment of the State in 1948, it was operated by the Ministry of Defense, developing and manufacturing assault weapons - from the classic Uzi sub-machine gun to the Tavor assault rifle - heavy ammunition, aircraft and rocket systems, armored vehicles like the Merkava tank, and integrated security systems. In 1990, IMI was converted into a government-owned company. Altogether IMI manufactures some 350 products and employs over 4,000 people. In addition to Israel and the US, IMI has distributors in a number of countries, including Norway, Belgium, the Philippines and Greece. Some 60% of its revenues, worth approximately $550 million, come from exports.

The third government-owned defense firm, the Rafael Arms Development Authority, developed and now manufactures Python and Popeye "smart" airborne missiles, both of which have co-production agreements with major US aerospace companies. In addition, its products include such varied categories as passive armor, naval decoys, observation balloon systems, acoustic torpedo countermeasures, ceramic armor, air-breathing propulsion, and air-to-air, air-to-surface and surface-to-surface missiles.

Elbit Systems, based in Haifa, develops, manufactures and integrates advanced, high-performance defense electronics systems, focusing on upgrade programs for aircraft and armored vehicles. The company also manufactures command, control and communication (C3) systems, and upgrades in weapons platforms and electronic systems and products for both Western and former Eastern bloc countries. In 2000, Elbit Systems merged with another major private-sector defense concern, El-Op Electro-Optics Industries Ltd, and combined sales reached $591 million, up from $436 million the previous year.

The second major private sector defense firm is the Tadiran-Elisra Group, whose subsidiaries specialize in defense electronics. The group's Elisra Electronics offers a range of electronic warfare systems for the military, including radar warning systems, active countermeasure systems, comprehensive self-protection systems, ESM and ELINT systems, and sophisticated communication links complemented by extremely lightweight components and super components. It employs a staff of over 800, two thirds of whom are engineers. Tadiran Electronic Systems designs and produces a wide range of military applications, including intelligence, reconnaissance and electronic warfare and specialized naval communication systems, all tailored to customer specifications. Tadiran Spectralink specializes in pilot-rescue electronic equipment while BVR Systems develops innovative flight simulators for fighter pilots. The group, which is controlled by Koor Industries, announced sales of $284 million in 2000.

In addition to Elbit and Tadiran-Elisra, there are scores of smaller, more specialized defense firms in the private sector, including: Cyclone Aviation, which upgrades helicopters and makes aircraft components; Urdan Industries, which through its Associated Steel Foundries makes many of the components of the Merkava tank; Magal Security Systems, whose products include sensors for security perimeter fences and explosive-detection devices for airports and other public facilities; BVR Technologies, which produces airborne collision-avoidance security systems, trainers for pilots and for the use of "smart" weapons, and a variety of simulators for combat training and pilot debriefing; the Elul Group, a complex of companies which specialize in development and coordination of defense business for Israeli firms abroad, and for international firms in Israel; RSL Electronics, which produces both airborne electronics systems for airplanes and helicopters and muzzle-velocity radar for field artillery; and Soltam, which makes both mortars and heavy artillery pieces as well as Israel's most popular line of stainless steel kitchen equipment.

Since the end of the Cold War, the global defense industry, including the IDF, has had to cope with declining military spending. In response, many private companies have either merged or reduced staff, or diversified into civilian markets, with some companies fully spinning off their civilian activities into separate businesses. Many of the high technology products designed by Israeli companies for such areas as the Internet, medical electronics and robotics, are based on technology originally developed by the IDF or the defense industries. Friendly Robotics is one notable high-tech start-up that traces its origins to the army. Its top executives worked in army technology units and the company's robot lawnmowers are based on advanced missile guidance technology, providing accurate positioning and navigation functions to perform its tasks. Among the few private sector defense firms with civilian activities, Elisra designs, develops and produces electronic and microwave applications for the commercial market.

In 1968, IAI acquired the rights to manufacture the Jet Commander executive aircraft from the US company Rockwell, which eventually evolved into the IAI's Astra. In the 1990s, IAI began producing the Galaxy executive jet in partnership with the Pritzker family of Chicago. In April 2001, the international aerospace firm General Dynamics contracted to purchase the Galaxy firm for approximately $600 million. In addition, in the late 1970s Bedek, a division of IAI specializing in aircraft maintenance, began overhauling and refitting Boeing 707 airliners, and today the upgrade of commercial aircraft has become a major business for IAI. The civilian content of the new contracts signed in 2000 was worth $1.1 billion, or 42% of total new contracts. IMI has fewer civilian businesses but has developed technology for electronic wallets and computerized payment systems.

Rafael develops military technologies for civilian use through its Rafael Development Corp., a joint venture with the private sector Discount Investment Group. One of these projects used miniaturization and guidance techniques to produce a transmitter and camera the size of a vitamin capsule. The capsule is swallowed by a patient and pictures of the gastrointestinal tract are then taken by the camera for use by diagnosticians, substituting for invasive diagnostic procedures. The system, which was developed by Given Imaging, was the brainchild of a missile guidance expert.