TEL AVIV — Unlike the many ex-generals and other political nominees who parachuted into corporate command of Israel Aerospace Industries (IAI), Rafi Maor started as a student in the state-owned firm whose board of directors he now chairs.
In exchange for IAI tuition funding, Maor worked summers and committed to three years as a design engineer for Israel's largest aerospace and defense firm. He stayed nearly 20, working his way through myriad managerial positions until finally departing, in 1993, as executive manager of IAI's Malat UAV Division.
After spending the past 19 lucrative years in the local high-tech sector — which included presiding over a $1 billion sale of Netherlands-based Indigo to Hewlett Packard, then considered one of the biggest exits in Israeli history — Maor has returned home.
Since November 2013, he's been working to rewire IAI's "corporate DNA" to be more competitive, higher performing and better prepared for long-planned privatization.
With $1 billion invested annually in research and development, Maor is positioning IAI's portfolio for new markets to come, particularly from unmanned air, sea and ground systems, their specialized payloads and supporting C4I capabilities.
Q. Nearly three years ago, the Treasury announced plans to sell at least 20 percent of IAI. Where do things stand now?
A. We are building a very substantive plan to go public through an initial public offering [IPO]. But because there are so many complex factors involved, it will require lots of incubation time and behind-the-scenes work. It's not wise to speak about it prematurely.
Q. But there's been talk for decades. In 2011, Yair Shamir, one of your predecessors, now a government minister, cited a two-year incubation period followed by an IPO of up to 30 percent. After five years, he spoke of the government reducing its holdings to slightly less than 50 percent.
A. It helps to understand all the complexities when you view IAI metaphorically as a huge aircraft carrier. We are the biggest R&D firm in Israel, with some 6,000 in-house engineers. We employ a little more than 15,000 workers, and through our procurement and service contracts, we provide for about 50,000 households in Israel.
We're unionized, and we have levels of government bureaucracy and hurdles to clear. And in the last 20 years, we've managed to remain profitable and haven't suffered any strikes or worker disruptions. And we provide some 40 percent of all Israeli defense exports; about 7 percent of the country's industrial export capacity.
Q. But what does all that have to do with the agonizing pace of long-planned privatization?
A. That's all background to illustrate that we're an aircraft carrier, not a speedboat. We need to be very calculated and supported by an airtight strategic plan before we venture any turns.
Q. At the end of the day, will the government reduce its holdings to less than 50 percent?
A. The government will retain its majority share, about 51 percent. But we'll offer the public significant minority shares.
Q. NASDAQ? Tel Aviv Stock Exchange?
A. I think we'll have our first IPO in Tel Aviv. But from the financial system we've built in recent years, IAI is ready to go to NASDAQ or the New York Stock Exchange. All the controls are in place.
Q. Are you referring to the financial prospectus, bond offerings and reporting procedures instituted under
Shamir?
A. A large part of the credit goes to Yair for helping to build the financial foundation that will support our next moves. Today, we are working according to the standards of the Israeli bond market. Our rating is very high. We have bonds for 3.3 billion shekels [US $837.9 million] in the market and there is a very stable and high demand.
Our last offering — about three months ago — was for about 500 million shekels. Demand was nearly double the supply, and today, we've returned about 1 billion shekels from earlier offerings.
Q. In the meantime, how are you changing corporate culture — IAI's DNA, as you say?
A. We need to perform like a public company and meet all kinds of key performance indicators. That requires a change in DNA — a different state of mind, starting with management. We changed almost all division managers in the past year. Together with [IAI CEO] Yossi Weiss, we intend to disseminate changes to all our employees. We want employees to think of themselves as partners with options, something they don't have today.
Q. What about growth? Until IAI is privatized, or partially privatized, you can't grow through mergers and acquisitions [M&A] like non state-owned firms.
A. Correct. Because of all the restrictions, we have only very low scale M&A, which forces us to focus on organic growth. That said, since 2002, IAI has doubled growth, from some $2 billion to $4 billion in annual revenue.
Q. Are you continuing to downsize?
A. Since the global economic crisis in 2008, we've reduced our headcount by 2,000, some 20 percent, while organically growing our revenue by 33 percent. In the last three years, we let go 1,000 employees and, in addition to that, we relocated about 10 percent of our workers from Bedek [IAI's civil aviation division] into other sectors of the company. And in the next four years, we expect about 20 percent of our entire workforce to retire, which presents enormous challenges, but also opportunities to change DNA.
Q. How so?
A. There will be less people with new types of skills supporting this big IAI aircraft carrier I've talked about. The pie of professions is changing. It's much more high-tech. Remaining positions will be highly focused and of added value.
We're working to train high school students from neighboring communities so that, after five years, they can earn a degree with us in practical engineering that can certify them to be UAV technicians, for example. We aim to benefit from diversity and meld it into a larger, more solid culture.
Q. Please explain IAI's independent research and development [IR&D]. From your latest financials, it appears that IAI reinvests much less than 5 percent of sales in R&D. Yet you said IAI invested $1 billion last year in R&D, which would surge that to some 25 percent of sales.
A. It's a matter of definition and accounting. We're about $4 billion in annual revenue, and from that, we reinvested $182 million. On the face of it, it appears low. But more than $800 million invested last year in R&D was customer-funded. A major portion of our R&D comes from development fees we charge our customers for NRE [nonrecurring engineering] for unique programs.
That's a big-time vote of confidence in us. Our customers know we are a system of systems design house and they put their trust and also their money in us.
Q. Given that IAI counts on some 80 percent export sales, how are you using company- and customer-funded R&D to reshape your portfolio for future markets?
A. We're fortifying our portfolio of unmanned air, land and sea systems. We intend to replicate our successes in UAVs with an exciting new portfolio of ground systems so that once concepts of operations are determined, we will be ready with needed scalability to meet cost and performance demands of our customers. Within five years, give or take, I expect to grow our land systems portfolio to some 20 to 25 percent of our business, which is minor right now.
Q. What are your other priority sectors?
A. Layered missile defense systems, which include the Barak-8, Arrow-2, Arrow-3 and a host of other systems capable of intercepting everything launched from land or at sea. All of these systems are supported by Elta Ltd. radars, our fully owned subsidiary, which will continue to be a major priority for us.
C4I is another huge area where we have the capability of offering complete special mission aircraft and all the sensors that support them. Then there is robotics, the whole field of cyber and, last but not least, space. Ultimately, we need to offer top value. If our systems and technologies are not among the world's top tier, we won't consider them a core business.
Q. Finally, you talk about acting more like a public firm, yet IAI cannot collect nearly $400 million in outstanding debt from the Ministry of Defense, its owner. Any thoughts?
A. MoD owes us more than $300 million; that's a lot of money. But it's a solid debt that will be repaid. We understand their budgetary pressures, so we're working with them to find all kinds of creative ways to help them help us. But now that we're going to elections, there's the question whether we'll have a budget.
That obviously will complicate things.
Opall-Rome is Israel bureau chief for Defense News. She has been covering U.S.-Israel strategic cooperation, Mideast security and missile defense since May 1988. She lives north of Tel Aviv. Visit her website at www.opall-rome.com.
