In Israel, the Defense Sector Will Not Be the First to Benefit from Coronavirus Crisis Recovery

Commentary: The global need to divert budgets to social needs (health and welfare) and the restoration of the economy is likely to make it, at best, difficult to obtain budget additions for defense, or at worst, to reduce them.

Photo: IDF Spokesperson's Unit

By Adv. Avi Kalo and Irit Nudelman

The following story illustrates most of all the expected change and size of the security challenge in the face of the corona crisis. The veteran IDF canine unit has recently performed an experiment, in collaboration with the Arms Research and Development Administration, to train dogs that locate explosives, to identify people infected with the corona virus through scent. This non-fiction and up-to-date story serves as an exemplar of the story of the corona crisis and the great reverberation in the security arena - international partnerships and frameworks are reshaping, security frameworks are being re-framed, traditional national security perceptions are undermined, and defense budgets have not yet experienced the blow. Already it can be estimated that the crisis is likely to project intensely on the defense industries in Israel and the world, which have not yet experienced such an event.

In practice, the global need to divert budgets to social needs (health and welfare) and the restoration of the economy is, at best, likely to make it difficult to obtain budgetary additions for defense, or at worst, to reduce them. Thus, the estimated cut in defense budgets in Israel as well as in Western Europe is expected to project on the traditional defense industries and damage the volume of trade and sales of weapons. It can therefore be hypothesized that the defense sector will not be the first to benefit from recovery from the crisis. Preceding this sector, the civilian sector, will require significant rehabilitation, ongoing capital, and political attention.

In Israel, it is likely that the "TNUFA" multi-year plan, which has not yet been ratified, will find itself facing not only the processes of swearing in a new functioning government but a chaotic budgetary reality. Even if parts of the plan are approved, the erosion of the planned budget is expected to harm the basic elements of the plan (preparations for the new innovative battlefield, etc.) and to negatively affect industry demand in Israel.

In the background lurks the limitation of U.S. military aid to Israel (FMF), which starting this year have been instituted in a way that reduces flexibility for Israeli ministry of Defense to use U.S. aid in the local markets, but solely on U.S. soil. In those times, initially a slowdown in sales will be recorded in light of the government's commitments to the crisis as well as the slowdown and complexity of production lines (limited employees, work in special shifts, supply, and transportation). In this chaotic reality, a number of fundamental trends beyond those relating to budget cuts can be pointed out, in a way that provide opportunities for the defense industry.

Promoting Medical Solutions

The diminishing and temporary decay in regional frictions (Israeli Air force strikes in Syria, on-going conflict with Iran, tension at Gaza Strip) enables increased involvement with the domestic civilian crisis (health and economic security initially) and enables reshaping business objectives in the defense sector. Thus, the local defense industry conglomerates (IAI, Elta, Elbit and others), governmental defense sector (Department of Production and Procurement (DOPP) at ministry of Defense)  and intelligence community (IDI, The Mossad) has mobilized quickly to assist in providing solutions for the partial or full production of essential medical equipment (respirators, protective equipment, barriers, alerting tools). This reality represents a real opportunity to change and adapt the defense sector to immediate and long-term civil-medical needs needed to stabilize the crisis: Israel's arms industry will be required to develop a "civilian muscle" as part of its strategy refinement for the day after the virus, and to expand its civilian product offering.

The trend of leaking civilian technologies into defense industries in recent years can take a slight turn here, due to the demand for identification, protection and battlefield technologies in the civilian arena. This is done by channeling the obvious advantage of the defense sector as a breakthrough leader in many areas and in particular at the technological dimension, such as the connection between military and scientific innovation (advanced R&D, multidisciplinary integration, robotics, and more) and in the world of knowledge and information management (from plague outbreak detection through carrier monitoring to patient detection). The IDF can similarly be expected to adapt, as it is already doing on various levels (medicine, intelligence, logistics, HLS and more).

The Day after the Crisis: A genuine unique opportunity

The Corona crisis has sharpened the fact that the traditional (security) state of emergency which Israelis are accustomed is not necessarily the only one, and moreover, it is not necessarily the most dramatic one (economic repercussions in this crisis are significant compared to those in past wars, even more than the traumatic war of “Yom Kipur”, 1973). In other words, "civil emergencies" are becoming more frequent, faster and deadly in the global era (from natural disasters to cyber-attacks to epidemics) and hence there is a need, not necessarily identified to date, for local defense industries to adapt to this reality. For example, imitating characteristics of the military world alone is sufficient to derive relative benefits to the defense sector as it addresses the civilian emergency challenge.

For example, with the optimization and adaptation of military field feedback systems for the management of the "civil emergency", such as "war management" virus artificial intelligence solution that segments the population by different characteristics will act as a “force multiplier” in rapidly dealing with similar crises in the future. Similarly, drones, which are a major focus of the industry, can gain momentum, being able to cover a wide range of monitoring tasks and overseeing civilian emergencies with the ability to quickly convert to different scenarios, have significant business potential.

In the background, the increased involvement and support of the Ministry of Defense (the richest of the government ministries) for "civilian" government offices in emergency preparedness can be seen. This manifests in support with information systems (a prominent gap in the Ministry of Health in the current crisis) to establishing training systems, for example. All of these are expected to provide additional integration and growth opportunities for the defense industry. Either way, Israel can, and should be, a world power in the field of "civil emergency".

Promoting the Defense Sector Internationally and Breaking Barriers

The inspirational stabilization and innovation of the defense sector to overcome the crisis contributes to the image of it globally. In the years when Israel returned to and is challenged especially in Europe by delegitimize campaigns in a way that is burdensome to trade, it seems that there is no better remedy for the fight in this anti-Israel campaign than presenting the “beautiful face” of the defense industry that is enlisting to the global fight against the virus. It seems that an extensive diplomatic and public campaign that will export and market the great added value that the industry has in the country in the fight against the virus, will do a great service to the sector and accelerate renewed functioning to the local defense companies.

Beyond that, the day after the crisis may produce new alliances, fresh political and regional architectures and changing economic realities. All of these are expected to create a rare and unique window of opportunity for breaking traditional barriers to setting new markets and strengthening political and defense ties. In other words, if the return to routine allows, a gradual return to a different routine will take place – also due to the legitimacy that the virus generates - to examine agreements and partnerships, to sell weapons in new areas and even to move or remove red lines that have not yet been crossed.

The IDF can market its relative advantage to the home front (a matter that does not exist in the Western armies, other than the German army trained for civilian aid) and trade as "foreign currency" (foreign relations) its home defense and civilian crisis expertise such as on epidemics and response to natural disasters. Such a move could also contribute to changing the defense industries in the country by strengthening the "civilian muscle" in the mix of traditional capabilities, which are gaining worldwide reputation.

Apart from all these, the top three companies, Rafael, Elbit and the IAI, have released optimistic 2019 data, indicating a large backlog of orders from previous years. The backlog of orders, which is one of the key characteristics of stability and a measure of future revenue in the defense industry, although give a positive indication, but uncertainty creates unknowns, given the question of the impact of the US in addition to all the effects mentioned.

At the operative level, while the defense industry is defined by law as "essential", it has to deal with constraints that affect production capacity and produce difficulties and burdens, while allowing an opportunity to gauge and examine the durability of the production and supply chain. Information systems that are not always up to date have long evolved in civilian industries of home-based work are being given the opportunity to adapt (despite the limitations of security clearance and classification). Frozen business development activities, in a conservative industry accustomed to "DOING BUSINESS" in face-to-face meetings many times, can learn to proceed more digitally and of course digital marketing needs to be strengthened precisely in the context of the crisis.

Like other sectors, the defense industry can learn from the crisis about what the more resilient fields are during these periods, as well as identify business opportunities, ranging from cybersecurity addressing remote and digital operations, to biological crisis management solutions as well as solutions for medical teams.

 

Adv. Avi Kalo is senior defense analyst at Frost & Sullivan Israel, and Irit Nudelman is head of strategic consulting at Frost & Sullivan Israel.

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