In Tense Times, Israeli Arms Biz Booms

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Robust Growth for Top Suppliers

The growing global demand for its UAVs and sophisticated "command and control" computer intelligence equipment led to a doubling in 2006 of Elbit's net income, to $72.2 million, on revenues of $1.45 billion, up 42%. Earlier this month, investment bank UBS (UBS) predicted company revenues would reach $1.9 billion in 2007 with continued improvement in its bottom line. The company's stock price has nearly doubled in the past year.

Israel's largest defense company, IAI, also has seen a big upswing. Defense industry experts attribute the results to its new CEO, Yitzhak Nissan, who took over in February, 2006. He has instituted a sharp cost-cutting campaign and boosted marketing. The company, which for years was only marginally profitable, reported a record $115 million net profit on sales of $2 billion in the first nine months of 2006—and booked more than $4 billion in new contracts.

The upturn is due in large part to demand for IAI's larger UAV, called the Heron, which has been a big hit with the U.S. and India, and has been used in the Iraq war. It has also gained business from missiles, sophisticated electronic warfare equipment, and upgrade work on existing military planes owned by clients around the world. Earlier this month Northrop Grumman (NOC) announced that it was teaming up with IAI to build and launch small reconnaissance satellites based on the Israeli company's technology. The estimated cost of each satellite is put at $200 million. "This has huge potential for us in the American and other markets," says a senior IAI official.

Another state-owned company, Rafael Armament Development Authority, also has seen a sharp increase in business. The once top-secret weapons development agency was converted into a standalone company several years ago to let it compete better in world markets. The developer of air, naval, and land-based rocket and weapons systems reported a net profit of $26 million on sales of just over $1 billion.

IMI Loses Out with Small Arms

The only Israeli company that has not joined in the boom is IMI, a maker of mostly small arms, including the Uzi submachine gun, grenades, and artillery and mortar ammunition. According to government sources, the company had 2006 sales of around $410 million, much of it in exports, but it is in such deep financial trouble that it hasn't issued financial statements in two years. The problem? Many countries are now producing their own ammunition, making it far more difficult for companies like IMI to survive.

Last year the Israeli government decided to sell IMI in an attempt to keep it afloat, but so far the privatization process has met with little success. To rescue IMI, former senior defense industry official Avner Raz was appointed to be the company's new CEO on May 16.

Increased demand from the Israeli Defense Forces following last summer's war in Lebanon is expected to help IMI out somewhat. But unless the financially strapped company transforms itself into a high-tech player like the other local defense giants, its chances of benefiting from the current export boom seem slim.

Sandler is a correspondent for BusinessWeek in Jerusalem.