C HAPTER 3
3.9 Lessons for India
Israel adopted a dual-policy approach to defence procurement. It brought most weapons from abroad and concurrently invested heavily in establishing
Indigenisation: Key to Self-Sufficiency and Strategic Capability 46
a sophisticated defence industry, that would tailor weapons systems to its requirements and also develop only those new ones, not available elsewhere, by creating advanced defence oriented R&D facilities. Consequently, initially Israel allocated resources to defence R&D over housing and infrastructure, to establish an independent military industrial base. For this, a comprehensive knowledge base was established in universities and government laboratories through the global network and by applying reverse engineering, industrial espionage and smuggling of specialists and equipment through covert operations. For example, the Kfir fighter plane was based on plans of the French Mirage III, acquired clandestinely through a Swiss source in the 1960’s28.
Factors that facilitated the development of Israel’s arms industry included a population which is highly educated and can work in the technology sector;
weapon development activity undertaken in close cooperation with the IDF, irrespective of its commitment to purchasing the equipment; continuous government support to military R&D funding—approximately 7.5 per cent of Israel’s military spending is dedicated to R&D; Israel’s cordial relationship with Western Europe and USA encouraging the sharing of technology; US providing significant military aid (FMF)—more than 18 per cent of Israel’s defence budget coming from FMF and 26 per cent of this aid can be used to buy Israel made weapons—This provides the financial capacity for Israel to focus on building domestic arms technology; Frequent rejection of Israel’s requests for weapons and technologies, recurrent arms sanctions and intensified re-armament of Arab nations during the 1960’s convinced Israeli leadership to develop a broadly based indigenous arms production capability29. A liberal export policy coupled with combat proven systems secured Israel’s defence industry’s position in the world markets. Israel offered quick operational solutions with a considerably faster development process30. “The high national priority on defence efforts, the quality of minds involved in the (defence) industry, the fact that the end user was often part of the design and production team, (and) bringing to bear practical experience and specific requirements”, all aided the process. The increase in exports in the 1980’s subsidised R&D costs of new weapons and cut domestic R&D budget.
Israel depends upon a human capital intensive growth strategy and this is evident from its education structure and facilities that provide quality education. Israel’s R&D expenditure is 4.2 per cent of its GDP and is the highest amongst all nations in terms of percentage of GDP31. The importance
47 Israeli Defence Industry and Takeaways for India
Israel places on S&T is exemplified by its high density of scientists and technicians as a proportion of its population. The infrastructural investment is fuelled by foreign aid and investment, and is exceptional. Israel’s defence allocation in real terms has consistently increased over the last decade. This is despite the fact that its military expenditure as a per cent of GDP shows a decline from 9.6 per cent to 6.5 per cent over the last decade32. The decline is more because of a substantial increase in its GDP and even with a reduced military expenditure of 6.5 per cent of GDP, Israel ranks in the top 10 countries of the world. However, since 2008, Israel has stopped receiving bilateral foreign aid, usually called Economic Support Fund (ESF). Given the expansion of the hi-tech sector, supported by US military co-operation and aid, Israel has leapfrogged into the realm of a developed country from its status, for over six decades, as an emerging economy. Israel has also joined the Organisation for Economic Co-operation and Development (OECD) thereby, transiting to the status of a developed economy.
Israel employs an exceptionally creative set of scientists and engineers in the high-tech industries especially in the military production sector, because nearly 75 per cent of the arms are to be exported. Hence, the defence sector has been getting a major impetus towards the creation and development of new technologies in the international arms market. Also, Israel operates a conscription army in which all teenagers at the age of 18 have to join the IDF. The structure of the IDF is unique in the way in which skills learnt during army service are transferable to civilian life and Israel reaps some of the richest rewards.
Defence exports from Israel succeeded after graduating from a modest beginning with small arms and ammunition to more sophisticated systems and equipment’s incorporating advanced technologies; initially by targeting the sub-markets of developing nations and then successfully penetrating markets of industrially advanced countries; in the post-cold war era, many instances of export activity involved making collaborative frameworks that involved industrial cooperation with domestic companies in target countries for upgrading the customers military equipment and finally to improve their position in the overseas markets, Israeli defence companies either got into permanent JVs with foreign defence companies to serve the requirements of the home market of developing/developed countries as also to enable them enhance their sales to third parties world-wide33. Israel’s case study clearly provides an insight into the role that exports can play in balancing out local
Indigenisation: Key to Self-Sufficiency and Strategic Capability 48
demand fluctuations and generate the revenues to sustain the defence industry when the domestic demand recedes.
Israeli defence industry’s faster system development process and the offering of innovative operational solutions were the result of direct contact, continuous communication and close teamwork between IDF end users, developers (engineers and technicians) and the producers.
Israel’s experience shows the possible transitional steps to make SOE’s competitive and included setting up accounting and costing systems besides other organisational adjustments. Comprehensive restructuring included closing plants, laying off workers to make companies leaner, efficient and prepared to compete in the global arms market. Management’s focus shifted to profitability and cash flow considerations which improved their financial situation and consequently allowed diversification and expansion into new areas and products besides increasing partnerships with foreign defence companies. The crisis showed disadvantages of SOE’s to both the companies and the government and the need for early privatisation despite reluctance of labour unions and political pressures. The SOE’s consequently accelerated their growth through internal restructuring and setting up joint ventures while the defence private sector adopted a process of local consolidation through mergers and acquisitions. The consolidation process generated synergetic effects that strengthened industrial capabilities and expanded market opportunities thus allowing rapid industrial growth.
The special relationship with the US gave Israel many distinct advantages.
There were buybacks by American arms manufacturers selling military equipment to Israel and JVs of Israeli and American defence companies for development, production and marketing of new weapon systems. “There were various models of co-operation: division of labour in development and production; co-opting US firms into production of military systems developed in Israel, joint marketing to third parties and others34.
Israeli experience shows export is essential for defence industry to keep its critical mass because the local market is too small to support it.
NOTES
1. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.67 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed April 24, 2015).
2. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2014 p.25.
3. Lifshitz Yaakov “Defence Industries in Israel” The Global Arms Trade: A Handbook Edited
49 Israeli Defence Industry and Takeaways for India
by Andrew T H Tan p.266 available at http://www.gbv.de/dms/zbw/59370763X.pdf (Accessed April 26, 2015).
4. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2014 p.25.
5. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2014 p.25.
6. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.71 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed April 28, 2015).
7. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.72 available athttp://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed April 30, 2015).
8. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.69 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed May 01, 2015).
9. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.16.
10. Broude Mark, Deger Saadet and Sen Somnath “Defence, innovation and development: the case of Israel” p.41. Journal of Innovation Economics and Management 2013/2 Edited by De Boeck Supérieur available at http://www.cairn.info/revue-journal-of-innovation- economics-2013-2-page-37.htm (Accessed May 05, 2015).
11. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.16.
12. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.16.
13. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.16 14. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.18.
15. “The Israeli arms industry” SIPRI Yearbook 2011 Armaments, Disarmaments and International Security p.239 available at http://www.sipri.org/yearbook/2011/files/
SIPRIYB11summary.pdf. (Accessed May 09, 2015).
16. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.18.
17. Broude Mark, Deger Saadet and Sen Somnath “Defence, innovation and development: the case of Israel” Journal of Innovation Economics and Management 2013/2 p.42. edited by De Boeck Supérieur available at http://www.cairn.info/revue-journal-of-innovation-economics- 2013-2-page-37.htm (Accessed May 11, 2015).
18. Broude Mark, Deger Saadet and Sen Somnath “Defence, innovation and development: the case of Israel” Journal of Innovation Economics and Management 2013/2 p.43. edited byDe Boeck Supérieur available at http://www.cairn.info/revue-journal-of-innovation-economics- 2013-2-page-37.htm (Accessed May 15, 2015).
19. Broude Mark, Deger Saadet and Sen Somnath “Defence, innovation and development: the case of Israel” Journal of Innovation Economics and Management 2013/2 p.49. edited by De Boeck Supérieur available at http://www.cairn.info/revue-journal-of-innovation-economics- 2013-2-page-37.htm (Accessed May 19, 2015).
20. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.16.
21. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.17.
22. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.17
23. Becker Sam “10 Countries That Export the Most Weapons” available at http://
www.cheatsheet.com/business/the-worlds-10-largest-arms-exporters.html/?a=viewall (Accessed May 20, 2015).
24. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.17 25. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.17 26. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2013 p.18 27. “Israel – Defence Industry” IHS Jane’s World Defence Industry 2014 p.24.
Indigenisation: Key to Self-Sufficiency and Strategic Capability 50
28. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.73 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed May 21, 2015).
29. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.65 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed May 23, 2015).
30. “The Israeli arms industry” SIPRI Yearbook 2011 Armaments, Disarmaments and International Security pp.236-237 available at http://www.sipri.org/yearbook/2011/files/
SIPRIYB11summary.pdf. (Accessed May 23, 2015).
31. Sadeh Sharon “Israel’s Beleaguered Defence Industry” Journal of Middle East Review of International Affairs 5(1) p.66 available at http://www.rubincenter.org/2001/03/sadeh-2001- 03-05/ (Accessed May 25, 2015).
32. “2014 R&D MagazineGlobal Funding Forecast”Dec 2013 available at http://www.battelle.org/
docs/tpp/2014_global_ rd_ funding_forecast.pdf , (Accessed May 27, 2015).
33. Broude Mark, Deger Saadet and Sen Somnath “Defence, innovation and development: the case of Israel” Journal of Innovation Economics & Management 2013/2 p.40 edited byDe Boeck Supérieur available at http://www.cairn.info/revue-journal-of-innovation-economics- 2013-2-page-37.htm (Accessed May 29, 2015).
34. Lifshitz Yaakov, “Defence Industries in Israel” The Global Arms Trade: A Handbook Editor Andrew T H Tan p.269 available at http://www.gbv.de/dms/zbw/59370763X.pdf (Accessed May 29, 2015).
35. Lifshitz Yaakov “Defence Industries in Israel” The Global Arms Trade: A Handbook Editor Andrew T H Tan p.274 available at http://www.gbv.de/dms/zbw/59370763X.pdf (Accessed June 01, 2015).