Industrie israélienne

Long before Israel became world-renowned as the “Startup Nation,” the country was already home to a highly successful startup: Israel Aircraft Industries (now called Israel Aerospace Industries), which shot up like a meteor in a few years, from a small aircraft overhaul and maintenance shop to a major player in the aerospace industry.

Initially encouraged by David Ben-Gurion and Shimon Peres, staffed by talented Israeli aeronautical engineers, and led by an ambitious and active management, IAI accomplished in a few short years the seemingly impossible, arousing wonder and admiration throughout the international aerospace community.

Those were not the years when Israeli governments demonstrated an understanding of high-tech industries or promoted startups. In fact, at the time, there was skepticism and even a measure of envy when it came to modern industry. The political leadership thought IAI was getting too big and, for a while, considered splitting it up into separate units. Senior air force officers insisted that the winning combination of Israeli pilots flying foreign fighter aircraft should not be disturbed by a new combination: Israeli pilots flying Israeli-developed fighter aircraft. The skeptics did not realize that IAI possessed unique potential as an aerospace company, as it had mastered know-how across a spectrum of technologies - aircraft, missiles, electronic systems, and space technology. No other aerospace industry could match that.

But IAI did not fulfill its potential of becoming a rival to Boeing, Lockheed, Grumman, or General Dynamics. After the government’s unfortunate decision in 1987 to cancel the Lavi fighter project -- the world’s best fighter aircraft at the time -- IAI was sentenced to remain a medium-size player in the aerospace industry. The arguments used to justify the cancellation of the Lavi program sound primitive and archaic in retrospect. “This project is too big for a small country like Israel,” some said.

Economic experts claimed that the program, if continued, would bankrupt the country. There was also the bizarre theory, betraying the technological ignorance of its advocates, that Israel should concentrate on developing systems and not platforms. Behind it all was the fear that IAI was becoming too big. Yitzhak Rabin, the defense minister at the time and no proponent of Israeli-developed weapons systems, directed IAI to close its engineering division after the Lavi cancellation, fearing other projects the ambitious engineers there might dream up. He and his advisers did not realize that an engineering division was essential to any aerospace industry. For years, successive IAI management teams failed to correct this aberration.

Then, when IAI developed the Gabriel sea-to-sea missile, the Arava transport, the Jet Commander executive jet, the Kfir fighter, and was developing the Lavi, a small company in Brazil entered the aerospace business. Back in 1974, Embraer got its start by assembling light Piper aircraft. Over time, it grew exponentially to become a rival to Boeing and Lockheed with its line of medium-size jet passenger aircraft and its modern military transport aircraft. While IAI has almost abandoned the manned aircraft business, which used to be its core specialty, Embraer has succeeded in penetrating an important segment of this market. The financial numbers tell the story of these two companies. While IAI’s revenues in 2012 were $3.3 billion, with a profit of $69 million, Embraer’s revenues that year were $6 billion, with a profit of $340 million.

IAI’s failure to fulfill its great potential is a loss to the Israeli economy and its industry. Some of its best Israeli engineers are now working for aerospace companies around the world. At the management and corporate level, the past few years have been years of mediocre leadership at IAI, bringing about an inevitable decline. The question IAI management should now be pondering is: Can it catch up with Embraer?