Israel Plans Mechanism to Manage Export Competition Between Defense Giants IAI and Rafael
Israel Aerospace Industries (IAI) and Rafael Advanced Defense Systems, two government-owned defense companies, have long competed both domestically and internationally, creating technological breakthroughs but also economic inefficiencies for the Israeli government as their shared owner. When both firms bid for the same foreign defense contracts with alternative solutions, the competition drives down prices and forces concessions that ultimately reduce the combined value of these national assets, benefiting foreign buyers at Israel's expense.
This economic self-sabotage, described as "autoimmune," stems from rivalry that strengthens Israel’s technological edge at home but erodes export value abroad. The solution is not a merger but a clear boundary to manage export competition. Israel requires two centers of knowledge and engineering approaches to maintain innovation and resilience, but competition should be limited when it no longer increases Israel’s chances of winning contracts and instead only boosts the buyer’s bargaining power.
The Israeli government has recognized this problem for years, with the Defense Ministry establishing a committee in 2009 and issuing warnings about destructive competition in 2016. A voluntary ethical code was introduced in 2023, but it only curbs misconduct rather than preventing value destruction caused by competition itself. The upcoming public offerings of IAI and Rafael complicate matters further, as ownership will no longer be unified, making coordinated management of export competition more difficult.
Boaz Levy, chairman of IAI, advocates for a narrow mechanism activated only when both companies compete for the same client and operational requirement with alternative solutions. Default competition remains, but when a joint Israeli offer preserves more value, one company leads and the other supports. This approach mirrors Italy’s model, where two state-controlled firms collaborate under a shared platform without merging.
To implement this, explicit authority is needed beyond current export control laws, which focus on national security rather than managing economic value between government-owned companies. The mechanism will be formalized as part of the IPO framework to protect minority shareholders and ensure fair value distribution. The government must avoid transferring value between minority shareholders of the two companies and manage conflicts of interest transparently. IAI’s IPO will precede Rafael’s, with tailored ownership rules for each. The goal is to stop Israel from losing value due to internal competition, not to pick a winner, preserving both companies’ strengths while safeguarding national interests.
