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Israel is a significant player in the global defence market, with a thriving defence industry ranked among the world’s top ten defence exporters. Israel is widely recognized as a global leader in defence innovation, with a thriving defence industry and a history of developing cutting-edge defence technologies.

Facing constant threats from regional powers and terrorist organisations since gaining independence in 1948, Israel focused most of the country’s investments on security and defence. Its small size and limited resources led it to be innovative and efficient. Seventy-five years ago, Israel begged Jewish supporters worldwide to help finance weapons for its defence. Today, Israel is a healthy economy that allocates almost USD 19 Bn for defence expenditure, while its defence exports are more than half that amount, at USD 11.3 Bn in 2021. With the high demand for Israeli-made defence systems and the good reputation of its proven systems, expectations are that this record will be broken this year as Israel’s defence exports continue to soar.

State support from the Israeli Ministry of Defence (IMOD) in various forms has helped to nurture Israel’s defence-industrial ecosystem.
Credit: Israeli MoD

What makes a small country become such a dominant military power? Israel is indeed a small country that maintains a large army, and to do that economically, Israel must be innovative in how it manages defence acquisition. Several factors contribute to Israel’s defence leadership position – the first is US military aid. Israel relied on US military support for decades to maintain its armed forces and defence preparedness. The USD 3.3 Bn annual military assistance to Israel has been designed to maintain Israel’s “Qualitative Military Edge” (QME) in the region. In the past, Israel could invest part of this amount in locally-developed systems. Since Israeli companies could not produce the platforms, they spent their resources trying to augment, complement, and upgrade the US weapon systems Israel acquired, extend their capabilities, and ensure overmatch over similar weapons obtained by any adversary, which aligned with the QME goal. However, this ability has been diminished under the current agreement as the US agreed to increase the amount of aid but waived Israel’s ability to spend part of the funding locally.

To compensate for these lost resources, Israel’s MOD (IMOD) which previously funnelled US aid money to local industry, became more aggressive in pursuing defence sales to foreign countries under government-to-government sales (G2G). Promoting such deals, the IMOD helps encourages cooperation and alleviate competition between Israeli defence contractors. G2G deals are often larger in scale than the sales signed by the individual companies themselves. Moreover, the terms negotiated at the ministerial level enable both sides to reach agreements faster and at lower costs than tender processes. The scope of these programs is broad, from personal equipment and weapons to complete training solutions, air- and missile defence systems, all based on the experience and know-how gained by the fielding of similar systems by the IMOD and IDF.

Another growth vector is the development of exceptional capabilities, including strategic systems that meet the unique needs of the IDF, capabilities that Israel either cannot, or does not want to obtain elsewhere. Examples are developing and fielding Israel’s spy satellites, multi-layered air and missile defence systems, unmanned and autonomous systems, loitering munitions, and special mission aircraft. The Directorate of Defence Research & Development (DDR&D) at Israel’s Ministry of Defence is responsible for seeding, funding, and nurturing Israel’s defence innovations. With a budget of several hundred million dollars, DDR&D manages programmes worth billions, incorporating investments from industry and foreign partners.

The third vector is the provision of systems or services that are more affordable than those delivered by the US, thus competing on the programmes that may become more attractive for domestic spending. When matured, such programs become highly competitive in foreign markets.

Until the 1990s, Israel’s industrial defence operations were dominated by government-owned enterprises such as IAI, Rafael, IMI, and Israel Shipyards. At that time, the role of the private sector was small. Since then, the landscape has changed, and the publicly-traded Elbit Systems has become Israel’s largest defence contractor. Unlike the government-owned companies that relied on a constant share of the business allocated by IMOD, private companies had to fight for every contract. They gained business through successful mergers and acquisitions that began in Israel and expanded overseas to acquire companies such as communications specialist Tadiran and artillery specialists Soltam, continuing the establishment of subsidiaries in key markets in Asia, Oceania, Latin America, Europe, and North America. Privatising some defence companies has also encouraged private investors to step in. The largest was the privatisation of IMI, which contributed to the formation of IWI by the SK group and the expansion of Elbit Systems’ Land System Division.

The Directorate of Defence Research & Development (DDR&D) had been an important source of state support for various national projects, such as the Arrow 3 pictured here. Credit: Israeli MoD

Today, Elbit Systems is Israel’s largest defence company, followed by IAI, Rafael, and Tomer as government-owned entities. These companies have acquired majority holdings in new or privately owned companies, such as IAI buying 50% equity in BlueBird. Rafael made similar investments in Aeronautics, mPrest, and SightX. The SK Group has also invested in private companies – and now owns IWI, Israel Shipyards, and private companies Meprolight and Camero. Some of the companies have grown through mergers and acquisitions. Others, such as Bird Aerosystems and UVision, have shown impressive expansion in recent years through organic growth. Both companies can attribute their success to specialisation – Bird Aerosystems in aircraft self-protection systems and ISR, and UVision in loitering munitions.

An exciting trend in Israel’s defence industry is establishing an ecosystem of specialist small and medium enterprises (SMEs) focused on defence and security markets. These companies align with the Israeli entrepreneurial startup spirit, backed by funding from innovation labs operated by big corporations, seed money granted by Israel’s innovation authority, and R&D funding for specific projects awarded by DDR&D. Based on this initial support, these seeds often mature into innovative defence capabilities that often find enthusiastic customers abroad.

IMOD also assists SMEs in reaching foreign markets through the defence export directorate (SIBAT), by prospecting opportunities, organising visits to Israel for foreign delegations, and the participation Israeli companies in trade events worldwide. Defence exhibitions provide attractive opportunities for startup companies to introduce themselves – Omnisys, Robotican, Smartshooter, Highlander, Easy Aerial, and D-FEND were among over 40 Israeli defence companies participating in the IDEX 2023 exhibition in Abu Dhabi, seeking new businesses and investments in the UAE. Some have already secured investments in this new market which opened to them only two years ago following the Abraham Accords.

As they mature, these startups become opportunities for acquisition by other Israeli companies and foreign buyers. Some gain market attention through public offerings in Israel and abroad. Miniature payload provider Next-Vision, EO/IR and AI specialist Third Eye, and satellite service provider Imagesat traded on the Tel Aviv exchange. Recently acquired by Leonardo, RADA was sold on NASDAQ in the USA. All told, Israel’s ecosystem of specialists, coupled with state support, has provided the country with a solid foundation on which to expand its defence-industrial capabilities.

Tamir Eshel