Analysis: US defense deal good for IDF, bad for defense industries

As part of the deal's terms, Israeli defense industries will largely be left out in the cold.

September 15, 2016 06:50
2 minute read.

Rice: Military aid deal, a memorandum of understanding, is win-win for US, Israel

Rice: Military aid deal, a memorandum of understanding, is win-win for US, Israel


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The new Memorandum of Understanding reached with the US is a highly generous and strategically vital defense assistance package, which will greatly boost Israeli security in the coming decade – a decade set to be marked by regional chaos and a wide variety of security threats from multiple directions.

Yet the MoU also carries bad news for Israeli defense industries, which will largely be left out in the cold.

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The Defense Ministry and the IDF will gain hugely from the annual $3.8 billion they will receive in American aid – up from $3.1b. under the current 10-year agreement, which ends in 2017. So too will the joint Israeli-US missile defense programs, which will receive $400 million of funding in the package.

In contrast, local defense production will suffer, due to a new clause that cancels the authorization Israel had to spend 26.3% of the assistance on domestic companies.

All acquisitions using US money will henceforth have to be made from American firms.

One local defense industry source told The Jerusalem Post on Wednesday that production lines in Israel are now under threat, and that some will have to be moved to the US. The largest Israeli defense companies have coping mechanisms to soften the blow, such as setting up subsidiaries on US soil, and acting as subcontractors in defense tenders that Israel will grant American companies.

The larger firms will still take a severe blow to their production lines in Israel.

The medium-size and small defense companies will likely face real trouble, the source said, adding that they have received a “critical blow.”

MK Shelly Yacimovich, a member of the Knesset Foreign Affairs and Defense Committee, aired these concerns in recent days, saying that defense industries will face a “certain decrease” in orders, and predicting “mass layoffs” as well as a “severe blow to growth.” Yacimovich blamed Prime Minister Benjamin Netanyahu’s speech to the joint session of Congress in March 2015 – in which he publicly opposed the Obama administration’s then-pending nuclear agreement with Iran – for the new spending restriction, though pressure from American defense companies seems to be a more likely cause of the change. Netanyahu also agreed to end Israel’s use of 13% of the US money on military fuel purchases, officials said.

The IDF and the Defense Ministry, for their part, have been working closely with American defense companies for many years, with examples including the air force’s close relationship with Lockheed Martin, producer of the F-35A fifth generation stealth fighter jet, due to join the IAF in December.

The defense establishment will now have to prepare to expand ties with the US defense manufacturing sector even further.

Reuters contributed to this report.

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