Israeli defence company Elbit is buoyed by increased defence spending because of unsettled outlook
In relaxed, dressed-down Tel Aviv, Bezhalel (“Butzi”) Machlis stands out. He is wearing a dark suit and tie on a Sunday, the first day of the Israeli working week, despite the sweltering heat of summer.
The formal business attire is apt for a man about to deliver bad news. Mr Machlis uses the word “unfortunately” twice in an interview to describe why Elbit Systems — his listed, vertically integrated defence company — has such a strong order list: worth $6.8bn at the end of March.
Elbit is profiting because of troubling trends around the world, from uncontrolled refugee flows to jihadi terrorism and the military expansionism of Vladimir Putin’s Russia, all of which have prompted the US and many European countries to review military budgets.
“There is a decision to increase defence spending,” Mr Machlis says. “We are well positioned for that: we have operational systems which are available immediately, because, unfortunately, we face a similar situation in Israel.”
At a time when many industrial companies are wary because of global uncertainties, including the Brexit vote in the UK and the rise of populist politicians such as Donald Trump, the Israeli group is looking to expand. It is looking to make acquisitions, including in Britain, and Mr Machlis tells the Financial Times that the group is ready to spend “hundreds of millions of dollars”. He says the UK remains “strategically important” for Elbit, and that the vote to leave the EU will not deter it from investing there.
Many larger defence groups focus on just one niche. But Elbit, because of Israel’s small size (8.5m people) and the demands of the Israel Defense Forces, offers a full range of security products, from drones to intelligence and surveillance systems. It bought into the latter when it acquired the cyber division of Israel’s Nice Systems last year for $158m.
Like many of Israel’s successful exporters — most notably a clutch of cyber security start-ups that arose out of military intelligence units — Elbit is parlaying products developed for the country’s security apparatus into internationally competitive products. Much of what it sells is trialled by the IDF before being tailored to the needs of armies and law enforcement agencies worldwide.
Using what Mr Machlis calls a “multidomestic” strategy, Elbit works via a network of local companies around the world, from the US and Brazil to Australia and the UK, where it makes Watchkeeper drones in a joint venture with Thales of France.
Its customers range from Latin American governments fighting guerrillas and trafficking to Germany’s air force, which last year contracted to buy, through local supplier Diehl Defence, a system mounted on aircraft that can deflect “manpads”, or shoulder-fired missiles, which are proliferating among militant groups
in the Arab world.
Elbit is supplying the system to El-Al and other Israeli airlines, and in December it announced a contract for sales to an unnamed Asia-Pacific country. “Unfortunately, the potential for such systems is huge,” Mr Machlis says. “We have many customers for them, not only military.”
“They are ahead of the trend, ahead of the market,” says Ella Fried, of Bank Leumi, in Israel. “They bring combat experience and are not afraid to bring pioneering products ahead of the market and then improve them in co-operation with their clients on the go.
“The IDF serves as a pilot for them — like a war room with new technology.”
In the US, Elbit last year signed a $145m contract with the US Department of Homeland Security. It will guard the Arizona-Mexican border using a high-tech “smart fence”, which uses sensors and command control centres to form a picture of the border zone that alerts rangers to people trying to cross the border illegally.
Some of the group’s solutions fuse military hardware with information technology, including a helmet for military pilots that it developed with Rockwell Collins of the US. This displays “head up” information on its visor that, when a pilot launches a missile, lines up with his line of sight as it locks on to a target. The US military has adopted the helmet for most of its fixed-wing aircraft.
Israel has few multinationals and, correspondingly, relatively few executives with experience in managing large and complex businesses, not least one with more than 12,000 employees, about 10,000 of whom are in Israel.
In a country known for its start-up companies, Israeli executives are better overall at innovating and thinking on their feet than they are at steering big, complex businesses over long planning cycles.
The unassuming, technocratic Mr Machlis took the job in 2013, filling a post vacated by the charismatic Joseph Ackerman, who was a favourite of investors because of his strong presentation style and dedication to the company over 16 years as CEO.
Mr Machlis, 53, was seen as a changing of the guard to a younger generation of managers, and he has a low-key style that one Israeli analyst likens to that of a “good general”. (Like many Israeli CEOs, he was formerly a senior officer in the IDF.)
Analysts say the chief executive’s cautious style is in keeping with a company which has a shareholder base that is mostly Israeli and likes to keep the focus on its products. “Guidance is almost non-existent,” says Gilad Alper, an analyst with Excellence Nessuah, an Israeli investment house. “They simply present the products; they don’t give the same kind of information you get from normal public companies.”
One change that is not on the cards is a big cross-border merger, given Elbit’s dominant position in the sensitive defence market in Israel and controversy overseas over the country’s 49-year occupation of Palestinian lands. Like other big Israeli companies, and foreign ones that do business in the occupied territories, like G4S of Britain, Elbit is a target for pro-Palestinian campaigners. Protesters have on a few occasions disrupted work at some of its five British factories.
In UK government and establishment circles, however, Elbit is anything but a pariah. Michael (Mickey) Federmann, the company’s chairman and dominant shareholder, was awarded a CBE in 2014 “in recognition of the key role he played in promoting business co-operation between the UK and Israel”.
The push for acquisitions will prove a further test for the CEO’s qualities. In Israel, it is no secret that Elbit is the sole remaining bidder for Israel Military Industries, the state-owned defence group whose best-known product is the Uzi submachine gun.
Overseas, the market will have to wait to see where Elbit alights. When pressed on where he might buy companies, Mr Machlis is typically cagey: “Mainly Europe and the US.” In keeping with its house style of operating below the radar, Elbit’s news, when it comes, will be likely to take markets by surprise.
Elbit is one of the three big producers in Israel’s defence industry, of which state-owned Israel Aerospace Industries is the largest by sales. Elbit is the only one that is publicly traded.
IAI is best known for its drones, such as the Heron, but it is active in areas from satellites and space systems to cyber security and robotics.
Rafael Advanced Defence Systems, based in Haifa, is 100 per cent Israeli state owned.
Its best-known product is Iron Dome,
According to the Israeli ministry of defence, the country exported products worth $5.7bn in 2015, a slight increase on 2014.
The industry said it had been a “challenging year” because of low oil prices and other factors that led to less spending on defence in key markets.
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