Prioritizing Israel creates problems for Elbit Systems

During the war, Israel’s Ministry of Defense contacted domestic defense companies, large and small, asking them to divert supplies to other countries for the benefit of the war effort. Two senior defense executives told “Globes” that unlike other countries, the Philippines did not sympathetically accept the demands of Israel’s Ministry of Defense, despite the complicated situation in the Middle East. This led to tensions expressed in an exchange of messages and clarifications between high-ranking officials in both countries.

The delay, resulting from what was essentially an order to Israel’s defense companies, placed one of the largest companies in the industry, defense electronics company Elbit Systems Ltd. (Nasdaq: ESLT; TASE:ESLT), in a challenging situation vis-à-vis the Philippines – one of the most significant customers of Israel’s defense industry.

Israel’s Defense Ministry: “The issue was settled to the understanding of the sides”

Most Israel defense industry customers accepted with understanding the necessary delays in deliveries due to the war, and the Ministry of Defense ended 2024 with an unprecedented amount of procurements totaling NIS 220 billion, of which NIS 170 billion was with Israeli companies – four times the normal amount. But the Philippines was not sympathetic to the fact that they products they needed would not be received on time.

Data from the Stockholm International Peace Research Institute (SIPRI) shows that between 2019 and 2023, Israel was the world’s ninth biggest defense exporter. According to the data, India procured 37% of these Israeli exports, and the Philippines came in second place with 12%.

The Ministry of Defense does not deny the awkward situation in which they found themselves with the Philippines, and told “Globes,” “During the war, we were required to make adjustments in defense supplies to a number of countries, due to the operational needs of the State of Israel. The defense industries worked in full cooperation with the Ministry of Defense to resolve the issue with customers abroad, while maintaining long-term defense relationships. The issue was settled to the understanding of all sides.”

Despite the political tensions created by the delays in deliveries, a senior industry official believes that no long-term consequences are expected for the government in Manila’s demand for Israeli defense companies’ products. This is reflected, for example, in Israel Shipyards’ announcement in December about the delivery of a Shaldag 5 patrol ship, as part of a deal that includes nine ships from the shipyards and was signed in 2020 for about $200 million.

The Philippines is preparing for the Chinese threat

The biggest threat to the Philippines, as well as to other countries in the region, is China. The Philippines and all countries bordering the South China Sea have disagreements with the Chinese on the borders of their economic waters. This situation has led the Philippines to procure a range of products from Elbit Systems.

According to “Defense News,” Elbit Systems is Israel’s highest ranked company in the world’s top 100 defense companies. It was ranked in 22nd place in 2023, above companies like the UK’s Rolls Royce, US’s General Electric, and France’s Naval Group. Since then Elbit’s revenue and the revenue of Israel’s overall defense industry, has grown.

The rise in local demand due to the war saw Elbit’s revenue from Israel in the first nine months of 2024 jump to $1.39 billion, representing 28% of its overall revenue. In the corresponding period of 2023, domestic revenue represented 17% of overall revenue. The increase in orders from Israel is an across-the-board process, but among rival companies, there has been a more moderate increase. At Israel Aerospace Industries (IAI), for example, the share of revenue from Israel rose from about 29% in 2023 to about 34% last year (about $1.52 billion).

The increase in the proportion of Israeli procurements from Elbit and IAI stems from the Ministry of Defense’s policy of increasing Israel’s self-sufficiency. Consequently, in recent months, Elbit has received, among other things, a $200 million order, as part of expanding production of the Iron Beam laser air defense system, and a $280 million order to produce heavy air weapons and build a raw materials plant.

A senior industry official from another company expresses admiration for the “well-oiled business machine” under CEO Bezhalel Machlis, who has led the company for over a decade. “Bezhalel works to control the entire chain personally – and this trickles down. All of Elbit’s senior executives sit physically in the Ministry of Defense, due to the understanding that they must be as close as possible to the customer.”

A UAV fault and supply problems to Switzerland

Elbit is currently facing two conflicting issues. On the one hand, demand for the company’s products is constantly reflected in orders. On Monday, the company announced that a European country had selected it to supply a national digital fire control center, to which the country’s strategic and tactical fire platforms will be connected and integrated. As part of the new contracts, which are worth about $100 million, Elbit will provide an advanced multi-arm networked combat solution for the command level.

However, the delays in deliveries by the company have also received negative publicity. In January, the Swiss media reported a significant delay in the delivery of six Hermes 900 reconnaissance drones to Switzerland. According to the same report, federal parliamentary finance committee , the body responsible for overseeing Switzerland’s state’s budget, sent a letter to Minister of Defense Viola Amherd, warning that Elbit’s drones are not sufficiently advanced and also lack essential technology. The letter added that Swiss government defense corporation RUAG is required to program them accordingly.

This was a deal that the Swiss parliament had approved back in 2015, but so far only four of the six UAVs have been delivered, and they are likely to be operational only in 2029, rather than 2019. The Swiss finance committee criticized the “slow development,” writing that the ‘detect and avoid’ system involves “significant risks in terms of technical feasibility, licensing and costs.” Without the system, “the autonomous use of drones will be limited and operating costs will increase significantly.”

Elbit Systems has also made headlines for another incident: the Indian Drishti 10 Starliner UAV, which is being produced in collaboration with the security arm of the Adani Corporation as a local version of the Hermes 900, was grounded near the border with Pakistan due to a malfunction. The UAV, which reaches medium altitude and has a long range, entered service with the Indian Navy last year. In this case, the fault was discovered, according to a report in the Hindustan Times, during the final tests before it was delivered to the Navy.

Elbit Systems said: “Elbit operates in dozens of countries through local companies with armies and defense ministries, which express full confidence in the company. Despite the war, and Elbit’s commitment first and foremost to the IDF, Elbit has striven above and beyond with the company’s customers and in accordance with binding contracts, to meet schedules and delivery dates, in coordination with the company’s customers.”

Published by Globes, Israel business news – en.globes.co.il – on February 11, 2025.

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