(Repeats story from Tuesday)
* U.S. to provide Israel $38 bln in military aid over 10
* Deal phases out Israel ability to spend 26.3 pct locally
* Defence sector sees large layoffs, many small companies to
* PM Netanyahu rejects political criticism of new aid
By Steven Scheer
JERUSALEM, Sept 20 Israel's defence industry
faces layoffs, closures and a scramble to set up shop in the
United States following the signing of a new U.S. military aid
package that phases out Israel's ability to spend a quarter of
the funds on its own businesses.
The 10-year, $38 billion agreement, signed on Sept. 15 after
a year of negotiations, comes into effect in U.S. fiscal year
2019. It constitutes the most military assistance Washington has
ever provided to an ally, but was clinched only after Prime
Minister Benjamin Netanyahu accepted concessions.
Key among those is the gradual phasing out of a clause
allowing Israel to spend 26.3 percent of the funds on its own
defence sector, which competes actively with U.S. firms such as
Boeing, Lockheed Martin, General Dynamics
That means Israeli defence companies will miss out on up to
$10 billion that might otherwise have been spent on home-made
drones, missiles, tanks and other equipment, depending on the
precise terms of the phase-out, which remain unclear. Once that
phase-out is completed, all the funds in the agreement will have
to be spent in the United States.
"It's quite a problem," said one Israeli defence industry
official, who asked not to be named because of the sensitivity
of the issue. "The bigger companies and most advanced ones with
the best technology and capabilities will be able to survive,
but the smaller you are, the bigger the problem is."
Netanyahu's office declined to comment on the domestic
consequences of the aid deal but has said the agreement "will
greatly strengthen the security of Israel".
Israel has about 700 defence-related firms, most of them
with only 50 to 150 employees. They mainly act as subcontractors
to Israel's four largest defence companies -- Elbit Systems
, Israel Aerospace Industries, Israel Military
Industries and Rafael Advanced Defence Systems.
Israel's defence exports totalled $5.7 billion in 2015,
about 14 pct of all exports and a major driver of the economy.
None of the companies asked by Reuters to discuss the aid
package were willing to speak on the record, mentioning concerns
about future business. But several executives, speaking on
condition of anonymity, said that as a result of the deal they
were already considering contingency plans.
One option would be for larger firms to open subsidiaries in
the United States, like Elbit has done, to compensate for the
loss of business. They might also acquire smaller U.S. firms.
As one executive put it: "This should be translated into an
opportunity for the Israeli industry, which should penetrate new
markets and improve their competitive ability."
"We should face the global trends and the fact that Israel
is losing its ability to compete," the official said, adding the
company where he works would "accelerate the process" of
searching for a U.S. company to buy.
Another area of concern is the loss of Israeli know-how,
with aerospace engineers and scientists potentially moving
abroad if there is a decline in inward spending and investment.
The executives said they hoped that when the time comes, the
government will find the nearly $1 billion a year extra needed
to keep the sector afloat under terms of the agreement, although
the sum may be hard to come by given the fractured political
According to Israel's Manufacturers' Association, even a 1
billion shekel ($265 million) cut in the defence budget will
lead to the layoff of more than 2,000 workers, mostly from
small- and medium-sized subcontractors that have a "to be or not
to be" dependence on orders from the Israeli defence
A source close to Netanyahu said the prime minister didn't
anticipate any closure of small defence companies, and noted the
procurement changes would go into effect only in time.
On the domestic political front, the right-wing leader has
drawn fire over the new pact from critics, including his former
defence minister Ehud Barak, who said that Netanyahu's vocal
opposition to last year's U.S.-led nuclear deal with Iran had
jeopardised a potentially larger package.
However, with uncertainties surrounding a tightly contested
election for the White House, Netanyahu was keen to wrap up an
agreement, replacing the current $30 billion deal that expires
at the end of fiscal 2018.
Addressing his cabinet on Sunday, Netanyahu called arguments
that Israel was short-changed in the negotiations "distortions
and fabrications of parties with political interests".
Avraham Bar David, a former general who works with some 200
small Israeli defence contractors through the Manufacturers'
Association, predicted that "70 to 100 of them" will not survive
the local procurement restriction.
"These companies are too small to sell abroad," he said.
($1 = 3.7734 shekels)
(Editing by Jeffrey Heller and Giles Elgood)