Cutbacks Put Israeli Defense Industry in a Crisis : $600-Million Reduction, Including Cancellation of Lavi Jet, Has Taken Its Toll

Israel’s defense industry, which became a major exporter in the past decade, now is handing out pink slips instead of raking in greenbacks.

Political shifts, domestic budget cuts and increased competition for a shrinking world market have been blamed for laying off nearly 10,000 of the industry’s 65,000 workers.

Defense Minister Yitzhak Rabin said in an interview that each of the main state-owned arms makers lost tens of millions of dollars in the last year. He said the solution was, “We have to reduce the size of our military industry.”

Symbolic of this scaling down was the Aug. 30 cancellation of a U.S.-backed project to build the Lavi jet fighter in which $1.9 billion was already invested.

$600-Million Reduction

Rabin implemented cuts of $600 million in military spending over the last three years, reducing the size of the armed forces and cutting back on training. He said this meant $300 million to $400 million less in orders for Israeli arms makers.

Several companies face closure.

The cutbacks stirred social unrest. Angry defense workers, demanding government intervention to save their firm, held three executives hostage for 38 hours at one plant. Thousands of Lavi workers staged violent demonstrations when their project was canceled.

Arms production began in pre-state days with homemade hand grenades for underground fighters. Workers at the state-owned Israel Military Industries, or IMI, still remember strolling down to the sea to test fire the first Uzi submachine gun in 1953.

Rapid Growth

Independent arms capability did not become a top national priority until France, Israel’s main supplier, embargoed shipments during the 1967 Six-Day War.

“The military industry is not a consequence of economic policy, but a decision after 1967 to establish a wide ability in military technology,” Ariel Halperin of Hebrew University said in an interview.

Halperin, a military expert and researcher, said exports rose from $100 million in 1971 to more than $1 billion a year in the 1980s, putting Israel about sixth in arms exports behind the United States, the Soviet Union, Britain, France and China.

“Because of the rapid growth, there was a sense that we were raising a chicken that lays golden eggs, and there was a belief that the military industry was a solution to all Israel’s defense problems,” Halperin said.

40% of Industrial Production

Arms exports, which Israeli Economist magazine projected would earn $1.3 billion in 1987, account for 40% of industrial production and rank as one of Israel’s largest foreign currency earners.

“In Israel, it is often a case of how goes the defense industry so fares the economy,” said Aharon Kleiman of Tel Aviv University’s Jaffee Center for Strategic Studies.

Halperin challenged the conventional wisdom expressed by Rabin that the civilian sector benefited from spinoffs from the investment in military technology.

He said the arms industry soaks up about 70% of Israel’s technicians, scientists and skilled workers. He said every dollar invested in military technology brought $2 or $3 in export sales, but every dollar invested in civilian technology brought in $15.

Smaller Market

“A slight edge in performance can determine success or failure in the battlefield, and this in turn creates a tendency to invest heavily in the marginal percentage of performance,” he said.

World sales dropped from about $31.4 billion in 1985 to $30.2 billion last year. The smaller market made competition that much fiercer, especially for conventional hardware.

“The market has become a jungle for all those who try to sell arms,” Rabin said.

Political swings have been a major problem.

Writing in the Israeli Economist, Kleiman cited published reports that annual arms sales to South Africa ranged up to $100 million, which would be as much as 10% of Israel’s arms exports.

Suffered Losses

“This phased disengagement from South Africa cannot help but have a destabilizing effect on the arms industry, too,” he wrote.

Iran’s revolution cost Israel a major customer and U.S. congressional pressure forced the government to ban future sales to South Africa.

The losses were offset somewhat by an unconfirmed, but seemingly expanding arms relationship with China. According to foreign reports, Israel used its extensive knowledge of captured Soviet weapons to upgrade China’s Soviet-made tanks.

Avner Avkin, deputy director of exports for IMI, said Israel’s battlefield experience was its main selling point.

600 Products

He said in an interview that the quality was high because Israeli arms makers had to use the weapons they made--”I’m a reserve officer. So are the workers. We produce for ourselves, and that’s why we can compete with the giants.”

IMI markets 600 products that bring in $300 million to $400 million a year in overseas sales, about 60% from Europe and 20% from the United States. But the work force was cut from 15,000 to 12,500 because of the slump.

With many developing countries saddled with debt or unable to absorb more weapons, Israel is turning to Europe and the U.S. market.

Soltam, a private firm in northern Israel, is trying to sell mortars to the U.S. army, and the government is reportedly hoping to develop the Hetz (Arrow) anti-ballistic missile for the Strategic Defense Initiative, or “Star Wars” program.