IAI is like an aircraft carrier. Each turn it makes is takes a very long time to complete, but it possesses numerous capabilities and very promising development trends," says Rafi Maor, IAI's Chairman of the Board, in an exclusive and comprehensive interview to Israel Defense.
Maor, 65, brings to this interview decades of experience as a senior executive in the Israeli defense and high-tech industries, since the days he had joined IAI as a young engineer. Since 1975, Maor has served in a series of engineering and executive positions within IAI, including GM of IAI's MALAT division, the unmanned airborne vehicle plant, which established itself as an undisputed world leader in the 1990s.
Following his retirement from IAI, Rafi Maor served in senior positions with high-tech leaders Indigo and HP, and in November 2013 he returned to IAI as Chairman of the Board of Directors. The interview with him provides a rare opportunity to hear about the vision of this government-owned defense industry, regarded as Israel's largest in terms of sales turnover and personnel. Maor described the Company's growth engines, including those aimed at civilian markets, and assigned a great deal of hope to the IPO (Initial Public Offering of shares) expected within the next few years.
Where are you leading this aircraft carrier? What is your vision for IAI?
"To answer this question, we need to ask first what we have on offer. We have a company that specializes in the 'System of Systems' concept. In other words – it is a company that develops many systems, and possesses the expertise of putting these systems together to form a comprehensive solution. For example, the mission aircraft we manufacture are highly complex systems that include Radar systems, electronic warfare systems and even ElInt and ComInt (technology-based intelligence) systems – all on board an executive jet, which is a system in itself.
"Generally, we are involved in fields of activity ranging from outer space to underwater, in the military sector as well as in the civilian sector. We must know where we have a relative advantage, and it all starts with our ability to offer exceptional innovation and inventiveness. This innovation is reflected in the number of patents we register: each year, we register more patents than such a giant drug manufacturer as Teva or the Weizmann Institute of Science. Naturally, this does not include our classified patents, which we cannot register. So, in 2012 we had 64 patents we could register. In 2013 we had more than 50 patents.
"Beyond that, we have very close relations with a user – IMOD – that possesses extensive experience. We can be involved in requirements for systems that normally precede the rest of the world. Another thing we think about is how we can enhance the advantage of our size beyond the advantage we already have.
"When you look at all those things, you identify the directions the Company will follow. For example, we have identified the entire field of robotics as a very serious activity. I refer to UAVs, USVs and even autonomous satellites in outer space and unmanned ground systems. On the ground, we believe in unmanned vehicles for the military field as well as in such civilian systems as our TaxiBot (a robotic vehicle that ferries aircraft on airport runways).
"Here is another example of robotics: we have a system that is yet to be implemented, for sea freight container storage management. It executes the entire cargo handling process automatically. We are entering these worlds on the basis of a synergy of solid robotic capabilities in fields that are evolving in both the military and civilian sectors.
"With all of that in mind, you stop and ask yourself – do we have the right people? And the answer is – yes, we do. We employ 6,000 engineers – more than any other employer in Israel. In the early 1970s, IAI had recruited a massive amount of engineers for the Lavi fighter project. Unfortunately, that project was cancelled, and in the meantime that generation of engineers is approaching retirement age. In the last four years, a whole generation has retired, about 20% of IAI employees have retired because of their age. This process enables us to recruit young people and change our personnel mix so as to make it more suitable to the Company's future.
"Over the last seven or eight years, the number of academically-qualified employees within IAI increased from 30% to more than 55%. The Company is becoming more and more high-tech oriented. Other skills and professional specializations still make a substantial contribution, but you must adapt yourself to the challenges of the future. On the other hand, we strictly observe an on-going process of knowledge conservation.
"There are technical skills that IAI still requires, so we have a vocational high school (Ort) within IAI, and we approach people that are suitable to such positions as UAV technicians. We train and raise them and then we place them within IDF and IAI. At the same time, new fields evolve that require new specialized skills, like the field of cyber technology. It could become a huge activity.
"We established a cyber technology company in Singapore and acquired the Cyberia Company. We are currently enhancing our capabilities in this field, which is evolving rapidly. In the future, we will be poised to offer cyber technology solutions on a global scale as well as in Israel.
"We base our personnel development on what we believe would be the primary field of activity; we continue to work on the 'system of systems' concept and are still working on the military field. If you compared our performance in the military field with that of Elbit Systems, for example, you would find that our performance is superior. If you take into account the civilian field as well – then the over-all performance will be less favorable, as the civilian field has been less successful for us. Consequently, we should reorganize our civilian activity so as to know which direction to follow.
"What else do we need in order to advance? More automation and robotics in our manufacturing. You need tools capable of operating 24/7 and highly accurately. We have recently established a plant for the manufacture of wings for the F-35 future fighter, and it is almost completely robotic. The establishment of this plant is an opportunity for us to modernize. We intend to do the same with other activities, too."ֿ
In Preparation for the IPO
"Naturally, we need to continue our investment in research and development in order to move forward," continues Rafi Maor, before addressing the Israeli government's plans to offer up to 49% of IAI's shares to the public in the coming years. This will enhance the Company's transparency on the Tel-Aviv stock exchange. IAI is already registered with the stock exchange and publishes financial reports through it, owing to the debentures it had issued years ago.
According to the financial reports, IAI's revenue in 2014 amounted to US$3.8 billion – a 5% increase compared to the year before. The military-defense market accounted for 73% of IAI's sales, while the civilian market accounted for 27%.
The military-defense market includes major activities in the fields of missile and space systems (about 30% of the sales turnover for 2014), military aircraft (about 18% of the sales turnover for 2014) and military electronics (one quarter of the sales turnover for 2014). The civilian market includes activities in such fields as civilian aircraft and aircraft maintenance.
About 78% of IAI's sales in 2014 were export sales. The main export objectives were Asian countries (about 38%), North America (24%) and Europe (10%).
IAI concluded that year with a gross profit of US$ 571 million, and the operating income was US$ 141 million.
According to Rafi Maor, he had considered the possibility of IAI acquiring the defense division of high-tech leader Nice, but this move could not be executed as the government-owned company lacked the necessary financing resources. Eventually that division was acquired by Elbit Systems in the spring of 2015.
"If we remain a government-owned company in our present format, how will we produce the funds required for investments?" asks Rafi Maor. According to him, "The IPO that we have on the agenda is a part of our planned (financing) sources: we will raise capital, some of which will go to research activities, some to modernization of our means of production and another part to inorganic growth through acquisitions and mergers. For example, we will be able to acquire a company that generates revenue, thereby increasing our own revenue. Such a move will produce fantastic growth for IAI. Consequently, I regard the IPO as a strategic move."
Do you see the IPO actually materializing?
"It will happen, possibly after a slight delay, but it will happen. Originally, the IPO was to take place between April 2016 and April 2017. In reality, I think it will begin only within the quarter of April 2017."
Does the state have any predictions as to how much it stands to profit from such a move?
"Some of the funds raised by the IPO will go to us and some to the state. I will not answer the question regarding the actual predictions, as it is one of our greatest secrets."
Will you be able to improve your bottom line in preparation for the IPO in order to raise the Company's value as perceived by potential investors?
"Of course. We are making all kinds of moves in order to improve the bottom line. Another thing we do is changing the Company's DNA. If we go ahead with the IPO we will have the option of distributing options to our employees. The share can rise if the employee succeeds. This is a serious incentive. Another thing, the IPO will lead to a DNA of enhanced transparency."
IAI is one of the world's most diversified companies, with activities at sea, on land, in space and in the air. Do you consider focusing more on any one of those fields?
"We have an internal grading on which I will not elaborate, regarding our advantages in the various markets. We prioritize our activities according to all sorts of criteria. For example, we believe in the concept known as 'Persistent Area Surveillance' – you take a 'square' and you need to know everything about whatever happens therein using a series of resources, from surveillance aerostats through UAVs, ground-based surveillance, SigInt, ElInt, etc. You fuse the information obtained about that square and produce target intelligence in real time.
"You keep up-to-date all the time. We command mission aircraft, sensors, satellites, some of the ground forces, C4I centers; all in all, when you take all of our capabilities into account, it is a classic advantage and the realization of the 'system of systems' concept. If you do not have it, you will not be able to become a serious player at this level."
Do you believe in international cooperation as a lever for growth?
"We have all sorts of criteria for that. We established a company in Mississippi called 'Stark'. We have an agreement with the state governor regarding grants we receive in that state. Regardless of that, we are transferring a major percentage of the assembly activities of the Arrow missile to Boeing in the USA.
"We are subject to numerous restrictions regarding cooperation as we are a government-owned company, but the Government Companies Authority is fairly open-minded and allows us to do these things. They go the extra mile in our direction. We established a cyber technology company in Singapore, we acquired two companies in Brazil in order to work with them. We are developing 'Stark' – all of this is not done at random. There is a strategy behind all that."
How do you regard the space field? Does it still offer any potential for IAI?
"This field is developing very intensively. The entire activity of satellites, starting with communication satellites – offers tremendous business opportunities. Assuming you want to dispatch a UAV to operate over Italy, you will be able to communicate with it only through satellite systems. We have a joint space research program with France and Italy – for the purpose of improving agricultural crop yields on the basis of information from space, for example.
"And there is the field of nanosatellites, based on a complete system of satellites. You launch multiple satellites into space. For example, if you position such a 'cluster' above the ocean, you will be able to provide the ships in that area with constant Internet access. Nanosatellite applications are currently being developed that enable all sorts of activities. You launch the nanosatellite as a 'hitch-hiker' that is released from another platform."
What about the surveillance satellites of the Ofek series that IAI manufactures and launches into space for the Israeli defense establishment?
"I feel less comfortable speaking about them," says Rafi Maor, for information security considerations.
In the civilian world, IAI is having a problem with the aircraft maintenance division, which loses a lot of money. Do you have a solution in mind?
"Our BEDEK division is currently highly problematic. It does not generate profits for many reasons. We can make a decision to close down this division, which will not only lead to a tragedy for many people who would lose their jobs, but this will also cause us to lose critical capabilities associated with civil aviation and 'system of systems' capabilities. We chose a different approach – to reestablish BEDEK as a healthier business, with a new structure.
"The changes include capital investments and organizational issues regarding which we will have to reach an agreement with the employee committee. We have a good employee committee that cares about the Company's future just as I care about it. I am not saying that no struggles whatsoever will take place, but they care about the Company. I can say that the former chairman of the employee committee, Haim Katz (who currently serves as the Minister for Walfare and Social Services) was very rational, and we had excellent working relations. He supported everything I did. It is possible that the present chairman, Ehud Nof, will turn out to be excellent, too. Haim had worked for the employees and when you work together (with the management) and coordinate things, you succeed for the benefit of the Company."
The Future of UAVs
IAI is currently regarded as a global leader in the field of surveillance aircraft and in the field of Unmanned Airborne Vehicles (UAVs), offering an extensive range of UAV models, from miniature quadcopters and 'Kamikaze' UAVs to the giant Heron TP (designated "Eitan" in the IDF), whose wingspan is the same as that of a Boeing-737 passenger aircraft.
"I believe that anything that can be unmanned will eventually become unmanned," says Rafi Maor. "Think of all the computer hardware today's aircraft have on board. You board a Boeing-777 on a flight from Tel-Aviv to New York. There's some work to be done during take-off. Then, the pilot begins 'working' again on the approach to landing. All of the systems are automated. So what sets such an aircraft apart from an unmanned aircraft? The problem is with the technical aspect of operating in a hybrid environment, where both manned and unmanned aircraft operate side by side. The other aspect is a regulative one, and has to do with the US Federal Aviation Authority (FAA): you need to take into account ten more years until licensing will be granted to unmanned aircraft for passenger flights. Even then, they will begin with a pilot manning the cockpit, just to be on the safe side. Another aspect is psychology. There is a psychological effect to overcome. Admittedly, this revolution will not take place overnight. Cellular communication took some time before it incorporated cameras and applications. The field of unmanned vehicles will advance gradually, but at the end of the process, I believe that even most cars will be driven automatically.
"I see IAI leading the field of unmanned cargo and passenger aircraft. It is a part of our vision. In my position, I benefit from the vision of my predecessors, for example David Harari who led the UAV vision many years ago, and whoever succeeds me will benefit from my vision."
What about the field of cyber technology, in which you are investing heavily? Are you already reaping the rewards of your hard work?
"We are already reaping handsome rewards. In my opinion, in today's cyber world, the business models are yet to be developed. It is a technological field with an undeniable potential, and business models are currently being developed for it. I cannot elaborate on all of our investments in this field. How do you make money from cyber technology? That is what we are working on at the moment."
Is the missile defense field progressing as expected with such major projects as the Barak-8 and Arrow-3?
"It is progressing intensively. Our Barak-8 system has already been sold for billions of dollars, to many countries."
And the Arrow-3?
"It is a highly successful project, although during a trial a few months ago we decided to abort the launch. We were not certain that the target missile had been launched properly."
Have you had any deals in the field of mission aircraft?
"We have a number of projects, clients entering the implementation stage. This is a serious growth engine with projects on the scale of hundreds of millions of dollars."
How do you see IAI in four years' time?
"I see it as a privatized company with a revised mix. IAI will be a very healthy member of the stock exchange, making good money."