What Israelis Can Learn from European Defense Firms
By Erik Schechter on July 18, 2011 - 10:41am
I recently had a chat with an executive of a major Israeli defense company about his business strategy for the U.S. He told me that, given the reality of American protectionism, he didn’t see the value of PR.
His company preferred instead to partner quietly with U.S. primes on defense programs, and these primes already knew of his firm and its capabilities, so there was no need to spend money on capturing headlines.
When I pointed out that BAE Systems seemed to have no problem being loud and proud, he said that the British company enjoyed a privileged position in the U.S. because London is a key ally of the Americans. The same could not be said for tiny Israel.
And the Israeli executive was right — to a point. BAE did have a privileged position in the U.S, and on the whole, Europeans firms have not conquered the American market.
Nevertheless, there have been successes with EADS, Thales and others. Here are a few quick lessons gleaned from the European experience:
1) Go Large
In order to compete with much larger American defense firms, the Europeans have pooled their resources, often crossing national boundaries to do so.
The Italian company Finmeccanica, for example, purchased a number of smaller companies in the early 1990s and a few years later, merged its helicopter division with that of a British counterpart, forming AgustaWestland. Finmeccanica then took over the joint venture in 2004.
Worth €18.695 billion in 2010, Finmeccanica has also partnered with EADS, the Dutch aircraft giant, and BAE Systems to create the pan-European missile manufacturer MBDA.
Now, big companies do not necessarily make better products, but it does help to pack on the pounds when sparring with American heavyweights like Boeing.
Of course, the Middle East is not placid, borderless Europe. So for the foreseeable future, there will be no Israeli defense execs rubbing elbows with Iranian and Syria counterparts.
However, Israel Aerospace Industries and Elbit Systems — both large local companies — have recently formed a joint venture to manufacture trainer aircraft, while Rafael Advanced Defense Systems has been looking to snap up Israel Military Industries.
We shall see if that helps.
2) Enter Smart
When entering the U.S. market, European companies (like the Israelis) have often sought to partner up with a well-connected local, as Finmeccanica has done so on many occasions with Lockheed Martin.
This arrangement offers a foreign company some American cover, though this approach has not always worked, especially when the stakes are very high.
So, for example, when the EADS-Northrop Grumman joint venture originally won the competition for the Air Force’s KC-X tanker in 2008, many in Congress were apoplectic. The big-ticket tanker contract was then rebid and heavily weighted in Boeing’s favored.
A better way into the American market is— if you have the money — to purchase American companies. Finmeccanica went this route in 2008 when it bought DRS Technologies.
Likewise, BAE Systems has spent billions picking up Armor Holding, United Defense Industries and DigitalNet Holdings Inc. This gave the British company access to different sub-markets in the U.S., from information security to MRAPs.
The Israelis clearly do not have the kind of capital available to BAE. Even mighty Elbit’s revenue comes out to a little under $2.9 billion. So the Israelis will have to focus on buying small American companies.
And this may actually be advantageous because, by noshing on companies valued at $100 million or less, the Israelis can fly in under the political radar screen.
3) Insulate Yourself
Going back to my conversation with the Israeli defense contractor, BAE clearly enjoys an advantage in the U.S. because of the critical relationship shared by the American and British defense establishments. That is something an Israeli company will never have, despite the much-vaunted “special relationship” between Washington and Jerusalem.
Still, the British company has done a good job on its own of alleviating any fears of technological secrets leaving the U.S.
Publically owned and comparatively free from European government control, BAE has staffed its American subsidiary with locals and insulated it from the company’s headquarters in Farnborough, Hampshire.
In a similar vein, Israeli companies will find that if they take concrete steps to assure Washington that sensitive information won’t leak back to the defense establishment in Tel Aviv, it will pay off in terms of image and profits.
A former defense tech and security affairs journalist, Schechter is an account supervisor at Spector & Associates. Previous experience includes time spent at the White House, Center for Strategic and International Studies, IDF Armored Corps and Carnegie Council for Ethics in International Affairs. He can be reached at Erik@SpectorPR.com