Strategic Analysis

Strategic Analysis:
A Monthly Journal of the IDSA

March 2000 (Vol. XXIII No. 12)


Israel’s Arms Industry
By Farah Naaz *


Ever since attaining independence in 1948, arms procurement at constantly higher levels of sophistication remained a principal factor of Israeli military preparedness. Israel launched its military industry on a large scale in the wake of the June 1967 war, under the impetus of the arms embargo declared by France, its major supplier. Within a few years, the nation had developed an advanced arms industry unmatched in the third world in terms of technological sophistication.


History of the Industry

Although Israel did not seriously think about developing its arms industry and sources of supplies until the late 1960s, the arms industry is older than the state itself, tracing its origins back to the days of the Haganah (defense) fighters. The sense of powerlessness felt by the Jews, served as a potent factor in the ideas of the Jewish nationalism and self emancipation. The leaders of the Jewish community did set out to build a local self defence capacity against periodic Arab riots and the harassment of Jewish farm settlements etc. 1 Zionist pioneers worked in small, underground workshops manufacturing and repairing various types of small arms, ammunition, armoured vehicles, and other types of military hardware.

The military workshops (collectively known as Israel Military Industries, (IMI or TA’AS)—Israel’s pioneer defence firm ) were founded around 1933. 2 Subsequently, the defence firm proved to be not only a major agent of Israel’s survival in the war of independence, but the mould and nucleus of the military industry to come.

In the final stage of the struggle for Palestine and for Jewish independence in the years 1946-48, the military strategy continued to be premised upon self-reliance. It was in this context that early efforts were made at improvising a munitions base able to provide the Haganah fighters with desperately needed small arms and explosives. In May 1948, when the British left Palestine, the Haganah fighters came out from underground and began to set up other military factories and workshops.

The principal reason for Israel’s decision to build a domestic military industry was survival. As a state established by force of arms in an alien and hostile environment, its preoccupation was security. A series of wars that Israel was involved in made it natural for it to develop a defence industry of its own.

The 1950s witnessed the expansion of several military related industries. In the early 1950s, these independent and often overlapping workshops were brought under a single management and incorporated into the military concerns that were founded alongside TA’AS. Among these new entities were the Israel Aircraft Industries (IAI) originally known as Bedek or the Institute for the Reconditioning of Planes, and the National Armaments Development Authority (RAFAEL). 3 Hence, during the decade, the effort was concentrated inside the armed forces and in the state owned establishments. (IMI, Rafael,and IAI.) Israel slowly acquired a greater degree of self sufficiency in small arms and mortars and showed an ability to modify and overhaul tanks, aircrafts and even electronic systems.

In the early 1960s attention was directed to building up the electronic industry and by 1965, the country had reached defence production capability not only in small arms but in aircraft and electronics as well. 4 Thus the main emphasis in the first two decades of the new state of Israel was on the establishment of modern military production lines.

Besides the manufacture of arms, mainly ammunition, mortars and small arms, Israel was also assembling French planes and other weapons systems, on a limited basis and was itself producing certain parts for these systems.

Activities upto the 1967 war included maintenance and upgrading of existing platforms, production of Second World War style conventional armaments and the development of some advanced systems. Even though the actual contribution of locally developed equipment to the 1967 war was quite small, there were proponents of a large scale arms industry within the government and by 1966-67 the groundwork for the armament industry had been solidly laid.

The radical orientation of Israel’s arms industry started after 1967 due to the shock of the French arms embargo. Hence special mention must be made of the role played by France. During 1956-67, France ranked as the main external source for Israel’s heavy weapons. French military assistance went far beyond the supply of Mirage, Mystere and super Mystere planes and other major systems and the French arms industry served as a model for national, industrial and economic growth generated by weapons production. The local arms industry of Israel manufactured jet trainers under French licence and Franco-Israeli Scientific Cooperation extended into a number of military areas. 5

French policy towards Israel however changed abruptly in 1967 following the Six Day War. To express his displeasure at Israel’s rejection of advice against starting the fighting, President Charles de Gaulle of France unilaterally imposed an immediate embargo on the further shipment of weapons to Israel. Undelivered orders, even those for which Israel had already paid, were withheld nor were further orders of weapons accepted. 6

As a result, Israel embarked on an all out policy of self-sufficiency trying to develop and produce all its defence needs. This sense of urgency to achieve independence from foreign suppliers led the country into an unprecedented industrial revolution, the main thrust of which was directed towards the manufacture of military equipment.

Money previously invested in France and other foreign countries was diverted to local Israeli munitions firms. And by the time France declared its second arms embargo in January 1969, Israel was domestically producing most of the items that were withheld. In the first three years after 1967, the military industry quadrupled its output. Research and Development intensified and the independent design and manufacture of major subsystems came to be favoured over licencing or coproduction arrangements involving foreign companies. 7 The period of major investment in the defence industrial sector also took place between 1968 and 1972. The number of persons employed by it rose by about 20,000 during that time. In those years the purchase of weapons system from local industry underwent a real growth of approximately 86 per cent. Metals and electronics were the chief beneficiaries and they absorbed about 1/3 of industrial investments. Their relative share in the nations industrial export, exclusive of diamonds rose from about 14 per cent in 1967 to approximately 21 per cent in 1968; by 1975 the figure was nearly 31 per cent. 8

Major achievements of Israel included:

It was especially after 1973 that the industry acquired a high degree of sophistication, enabling it to produce advanced military equipment ranging from tanks and jet aircrafts to precision guided smart weapons, micro electronics, and rocket propelled engines for sea-to-sea and air-to-air missiles. In the 1973 Arab-Israeli war, the main impact of local equipment was in naval warfare: Gabriel anti-ship missiles supported by a variety of electronic warfare systems led to a decisive Israeli victory at sea. In the 1982 Lebanon war, Israeli equipment played a far bigger role. To cite just a few examples: reactive armour for main battle tanks, the debut of the Merkava tank on the battlefield, reconnaisance by unmanned aerial vehicles and last but not least, the destruction of the Syrian ground to air missile batteries in the Bak’a valley, which was accomplished by a complex combination of various systems. At the time the crowning achievement of this policy appeared to be the development of the Lavi aircraft which began in the 1970s. The project was later financed largely by American aid. 10

By 1981, Israel had unlimited potential in the military, industrial and security fields and was able to produce everything it needed to protect itself. Israeli employment statistics provided, showed that prior to 1967 less than 10 per cent of the Israeli work force was involved in the military sector. By 1980 approximately one-fourth of the total labour force and one half of the industrial labour force worked in the military sector, including the armed forces. The growth of Israel’s two largest military industries during this period reflected the same trend. The work force of the Israel Aircraft Industries grew from 4461 in 1966 to 22,500 in 1980. During this period, Israel Military Industries grew from 4521 to 14,500 employees. 11


Reasons for the development of the Arms Industry

(a)Unreliability of the Suppliers: Israel’s desire for the development of its own defence industry was reinforced by the arms embargoes imposed by the supplier states from time to time. Some of the important embargoes were: United States , Great Britain and several other countries imposed arms embargo on both the combatants during the first Arab-Israeli war in 1948; France imposed arms embargo on Israel on the eve of the Six Day War in 1967. As Israel relied almost exclusively on France both for fighter jets and heavy arms, the embargo had a tremendous psychological impact. At the same time the US too imposed an embargo on Israel. Two years after France’s 1967 arms embargo, President de Gaulle imposed another embargo in retaliation for Israel’s destruction of thirteen Lebanese commercial airliners stationed at the Beirut airport. In 1970, at the height of the “War of Attrition" with Egypt, the US held in abeyance an urgent Israeli request for arms. In July 1971, following the breakdown of negotiations conducted under the supervision of the United Nations emissary, Gunnar Jarring, the US imposed another embargo on a shipment of Phantom and Skyhawk planes that had been ordered by Israel and approved by Congress earlier that year. With the eruption of the fourth Arab Israeli war, Great Britain imposed an arms embargo on the region and refused to ship tank and tanks engines to Israel under previously signed contracts. Again in March 1975, when the US was unable to persuade Israel to pull back from the Sinai passes , the Ford Administration restricted the flow of arms and economic aid to Israel. Likewise, Israel faced similar problems in 1976, 1978, 1981 and 1983. 12

(b)Economic factors: Economic factors too acted as a catalyst in the development of its arms industry. Israel’s defence requirements placed a tremendous burden on Israel’s economy. From 1966 to 1972, Israel’s military imports grew from 116 million dollars to $800 million dollars per year. According to Moshe Kashti, director general of Israel’s Defence Industry, the arms build-up following the 1967 war accounted for half the country’s trade deficit in 1968. Also, following the Six Day War, the use of foreign assets to purchase military equipment tripled in one year. 13

Hence expanded domestic arms production could alleviate many of these problems. Four arguments have been put forward in order to justify Israel’s arms policy. First, domestic production would reduce the quantity of military imports and thus narrow, or lessen the increase of, the expanding trade gap. This import substitution would not only save foreign currency, it would also save domestic funds since local products would be less costly than foreign ones. Second, employment opportunities, not only for the labour force but also for highly skilled professionals, would be created, helping to stem the brain drain and attract skilled immigrants. Third, research and development activities would have a spill-over or spin-off effect in the non-military sector, spurring the technological advancement of sophisticated industry. Fourth, the profits from foreign sales, would earn foreign currency above and beyond the saving through import substitution. As a result, the burden of military imports on Israel’s trade deficit declined from an average of 42.8 per cent in 1968-72 to a low of 13.4 per cent in 1976-80, encouraging the country to expand the arms industry further. 14


The Crisis in Industry

Uptil the mid 1980s, the Israeli defence and aerospace industries rapidly grew to meet the expanding needs of the Israeli Defence Forces (IDF). During the early part of the decade Israel faced a severe economic crisis. Its main symptoms were: First, rampant inflation, approaching 1000 per cent in 1985. Second was halt in economic growth. In 1982, the Central Bureau of Statistics had released figures which showed that for the first time since the early 1950s the Gross National Product had not increased at all; whereas during 1981, the total output of goods and services had risen by some 5 per cent. Third, Israel’s balance of payments and balance of trade position worsened. Imports of goods and services by a consumer oriented society exceeded exports by some $4.9 billion in 1982. In 1984, the foreign reserves fell to $2 billion—well beneath the $3 billion mark which the Israeli economists and the government regard as the safe minimum. 15

In contrast to this declining national economy was the image of Israel as a vibrant centre of manufacturing and technological research. Rapid industrial expansion and continued industrial development geared to foreign trade were acknowledged by economic experts as one of the keys, along with cutting government expenditures and reducing the defence budget, to stemming Israel’s economic decline and resuming economic growth. Admittedly the defence budget and defence needs were a drain on the nation’s resources. A heavy armament programme, imposed upon a narrow and shrinking economic base, tended to divert funds to socially unproductive investments.

The severe inflation in the early 1980s forced the government to embark on an emergency economic programme and drastically cut the defence budget from 13.2 per cent of the GNP in 1982 to 8.2 per cent in 1992. Purchases from the local defence industry decreased by almost 50 per cent from 1985 to 1992 and the number of employees were reduced by 35 per cent to 49,000 workers in 1992, leading to an increase in productivity of over 50 per cent. 16

Barely had the industry recovered from this economic crisis, when the state of a large part of the industry again took a dramatic turn for the worse and the country was again hit by the economic crisis in the early 1990s. This crisis principally affected the state owned and quasi-government owned sector. Additional Israeli defence budget cuts for 1993 and the dramatic decline in the worldwide demand for military ammunition fuelled an intensifying economic crisis with profound political and security overtones. In an effort to mitigate the effects on industry, the Defence Ministry intervened, and this led to reductions being made in other defence budget items, including IDF wagecuts. 17


The Worst Hit

Public Sector: The worst hit have been the larger and almost exclusively military product oriented state-owned firms , TAAS (better known as IMI) , the Rafael Armament development Authority and Israel Aircraft Industries.

The first to be hit was TAAS (IMI) which for many years, until the early 1980s, was the greatest moneymaker. In December 1992, the Israeli government approved the transfer of US $100 million to TAAS in an effort to cushion part of the expected blow. With its exports sales falling by about 40 per cent and shrinking backlog of orders, TAAS undertook a major restructuring and streamlining programme. Soon TAAS management was involved in laying off its employees, the closing of at least five operations, the merging of various production lines and the halting of virtually all its civilian diversification endeavours, which had proved ill-fated. 18

Rafael, Israel’s Armament Development Authority under the direct control of the Ministry of Defence also experiencd a crisis, triggered by the declining indigenous Research and Development funds and falling domestic and foreign orders. Rafael lost close to US $40 million in 1992 on sales of about US $500 million , prematurely retired about 1000 workers in the past two years, and slowed down some of its most prominent new R&D projects. 19

Faring a little better, was IAI, Israel’s leading defence and aerospace company and largest national employer with a workforce of 17,000, which also suffered. An order expected from Taiwan for 40 indigenously produced Kfir fighter aircraft and other equipment was lost at the end of 1992 to Mirage 2000 manufacturer Dassault, at a reported contract value of US$3.5 billion. In addition, the sales potential of the company’s technologically superior unmanned aerial vehicles (UAV) had not yet been fully realised. The IAI President , Moshe Keret initiated a major corporate restructuring programme which was expected to include a layoff of close to 700 workers and a receipt of about US $60 million in the way of government subsidies to ease the companies transitional hardships. 20

Private sector gains: In comparison with public sector defence contractors , the much more efficient private Israeli defence firms were basically thriving. Elbit was leading, with sales of US $410 million in 1991, with profits of US $35.5 million. In 1992, the sales amounted to US $483 million. Another profitable Israeli defence company was Tadiran, a major international supplier of defence equipments, particularly military communications systems. Similarly successful was, El- Op, which specialised in electro-optics and made systems for military use only. 21


Structural Changes after the Crisis

The recent crisis plaguing the Israeli defence industry, mainly larger state-owned companies, was expected to provide golden opportunities to implement long awaited structural changes, according to the Ministry of Defence officials. In order to cope with the global reduction in defence budgets and the shrinking of some of the traditional Israeli defence export markets, the industry had been making cuts in manpower, and had been restructuring its marketing orientation, while the government had been providing massive bridging assistance, probably more than US $1 billion in grants and loans spread over three to four years. 22 IAI, Rafael and TAAS, all state-owned, started implementing recovery programmes that included streamlining, closing of some production lines and massive lay-offs.

IDF faces greatest reform: During the transition period, massive investments in Israel’s defence were likely to be made to make up for the territorial concessions and as a deterrrent to Arab foes of the peace process, as well as to provide confidence building measures for the Israeli public. As a result, the IDF was expected to undergo the greatest structural changes, as a direct result of the Middle East Peace Process and was expected to become much smaller and sleeker. Further IDF would be based on long range strike capability, real time intelligence capabilities and smarter weaponry.

The IDF has embarked on a radical restructuring programme that would respond to the new threats recognised in the country’s renovated defence doctrine. The defence doctrine that was set in 1950s, required modification because now Israel’s enemies are arming themselves with ballistic missiles tipped with deadly, non conventional warheads and are seeking nuclear capability. And for the first time, existential threats from countries such as Iran and Iraq, which have no common borders with Israel are becoming permanent fixtures. One of the major changes of the doctrine was the realisation that Israel had to rethink its concept of how to subjugate an enemy. And for that, the new strategic doctrine involved preventing adversaries from acquiring weapons of mass destruction (WMD); deterrence; early warning; passive defence; active defence and a long arm of response. 23 Another step taken was the establishment of National Security Council (NSC) . The NSC broke the monopoly of strategic thinking held by the military defence establishment and provided the Prime Minister with independent strategic advice. 24

The restructuring programme would also lead to the creation of greater levels of defence, different from those used by Israel in the past. The development of the Arrow ATBM system, Ofeq spy satellites and long range air power were all aimed at meeting the changing threats to the small country. 25

The IDF also planned to cut back on its bloated ranks of service providers, direct more of its conscripts to combat roles, and invest heavily in intelligence, space and unmanned aerial vehicles. The reorganisation was aimed at correcting the aging equipment. Its modernisation plans included more indigenous Merkava Mk3 tanks and advanced Gil antitank rockets. Israel was also geared to decide on its warplanes of the future. Describing the IDF’s long term planning, Deputy Chief of General Staff, Major General Uzi Dayan said ,that the IDF needed to increase its readiness for war. And that it would continue to rely on its reserve forces, but its long range planning was aimed at strengthening its small standing army’s sustained fighting capability. He further added that, since 1994, IDF investments in research and development had doubled. According to top Israeli defence officials, about $640 million, or 8 per cent of the defence budget was invested in research and development in 1998 and a greater need for more intelligence gathering systems was required. 26



Defence firms in Israel have carved out a technological niche in weapon system upgrades for which they are gaining worldwide renown. For a fraction of the cost of new platforms, Israeli firms would take any aging system and give it more reach. Israeli defence firms are also delivering essential subsystems for some of the world’s most advanced platforms including German tanks, US Army armed reconnaissance helicopters and Dutch artillery command and control systems.

Early efforts of Israel’s defence industry focused on delivering basic weapon systems such as tanks, fighter aircraft, artillery and patrol boats. Now it has shifted its focus from developing new platforms and has honed its expertise in crafting advanced electronic subsystems . For example, rather than concentrating on improved armour and gun size for a tank, Israel has turned to enhance digital electronics to improve the lethality and survivability of its Merkava tank. Thus by focusing on advanced electronic subsystems, Israel’s defence industry has crafted scores of technologically advanced components that give 20 or 30 year old weapon systems new life and a qualitative edge. Israel has cultivated a proficiency for tailoring advanced electronic components to improve the capabilities of fighter aircraft, helicopters , combat vehicles, and command, control, communication, and intelligence systems. This can be seen in a number of programmes, such as the Israeli navy’s acquisition of a fast patrol boat from a US shipbuilder. Israel stripped out all existing electronics from the boat and inserted its own command and control systems, electronic warfare suites and other sophisticated electronic gear. 27

The Israeli defence industry enjoys considerable support from the US government. Of the US’ annual $1.8 billion military aid package, roughly $475 million is earmarked for spending on Israeli’s defence firms. Israel’s military leadership stressed that this funding will continue to be essential into the foreseeable future. 28

Today, Israel’s arms industry which began building in earnest nearly 30 years ago has matured into an increasingly important actor on the global arms stage. A number of recent developments promise to enhance the Israeli position as a supplier of critical components to militaries around the world, in both industrial and developing nations.



*: Associate Fellow, IDSA  Back.

Note 1: Aron Klieman, Israel’s Global Reach: Arms Sales as Diplomacy (USA: Pergamon-Brassey’s International Defence Publishers, 1985) p. 16.  Back.

Note 2: Bishara Bahbah, Israel and Latin America : the Military Connection, (London: the Macmillan Press Limited, 1986), p 27.  Back.

Note 3: Ibid.  Back.

Note 4: Zeev Bonen, (Dr. Zeev Bonen was formerly President of Rafael, Armament Development Authority, Israeli Ministry of Defence) “The Israeli Defence Industries: Past and Future”, RUSI Journal, vol. 139, no. 3, June 1994, p. 56.  Back.

Note 5: Klieman, n.1, p.21.  Back.

Note 6: Ibid.  Back.

Note 7: Ibid., p. 22.  Back.

Note 8: Ibid.  Back.

Note 9: Bahbah, n. 2. p. 21.  Back.

Note 10: Bonen, n. 4, p. 56.  Back.

Note 11: Bahbah, n. 2, p. 30-31.  Back.

Note 12: Ibid., pp 22-25.  Back.

Note 13: Ibid., p. 25.  Back.

Note 14: Ibid., p. 26.  Back.

Note 15: Klieman, n. 1, p.53.  Back.

Note 16: Bonen, n.4, p. 56-57.  Back.

Note 17: R.A. Kaminer, “Shake-up in Israel’s Defence Industry”, International Defence Review, vol. 26, April 1993, p. 302.  Back.

Note 18: Ibid., p. 302-303.  Back.

Note 19: Ibid., p. 303.  Back.

Note 20: Ibid., p. 303.  Back.

Note 21: Ibid., p. 303-304.  Back.

Note 22: David Ivry, (Director General of the Defence Ministry), “Sweeping Changes in Israel’s Defence Structure”, International Defence Review, vol. 27, March 1994, p. 28.  Back.

Note 23: Arieh O’ Sullivan, “Facing Reality”, Armed forces Journal, vol. 136, no. 9 , April 1999, p. 17.  Back.

Note 24: Ibid.  Back.

Note 25: Ivry, n. 23, p. 28.  Back.

Note 26: Sullivan, n. p. 18.  Back.

Note 27: Jason Sherman, “Niche Carving: Subsystem Upgrades Catapult Israeli Defence Industry to New Heights”, Armed Forces Journal, vol. 134, no. 12, July 1997, p. 34.  Back.

Note 28: Ibid., p. 37  Back.