Small Defense Firms Pay the Price of War
Alongside an accumulated and unprecedented debt of NIS 15.5 billion to the three largest defense companies, the Defense Ministry is weakening its flow of orders to small and medium-sized firms because of a lack of budget. Most of the revenues of Israel Aerospace Industries, Elbit Systems and Rafael come from arms exports abroad. In 2025, the three accounted for about 90% of all Israel’s defense exports, which reached a record $19.2 billion, and they hold a combined order backlog of about $90 billion. The global demand for weapons has in recent years improved those companies’ financial position and made it easier for them to absorb the accumulated debts at the Defense Ministry. By contrast, most of the smaller companies rely primarily on the flow of orders from the Defense Ministry, and its slowdown.
"The number of tenders published by Defense Ministry units for the local industries in recent months has dropped sharply," an industrialist involved in producing key components for the air defense systems made by Israel Aerospace Industries and Rafael told Calcalist. In his words, "If not for the regular orders we receive for those components, it seems that procurement in other areas is stuck. Among suppliers who used to receive more and more orders from the Defense Ministry, there is a sense of stoppage. All the big prosperity celebration of the defense industries starts and ends with the three big ones. We are groaning under the weakening dollar, an increase in shekel-based wage costs and a drop in profitability."
At another defense company involved in the production of small arms such as rifles and pistols, they report a slowdown in the rate of publication of procurement tenders for the IDF. "These are tenders we know are supposed to come out because there is a need for those systems, but the tenders in question are not being published," he said.
"The big companies are not ordering from us"
In addition to orders from the Defense Ministry, many of the small and medium-sized companies are subcontractors for the larger firms. "These companies are hurt twice," said the CEO of one of them. "The Defense Ministry is not ordering systems or equipment from them, and it is also not ordering from the large companies systems that are not at the highest level of urgency, so they are not passing additional work on to us as subcontractors. It is frustrating, and we need to make decisions about investments that will establish the expansion of our sales abroad. It costs us a lot of money, but the alternative is that we will not be and will not survive. We have the ability to make such moves abroad, but there are many companies that do not even have that ability."
The explanations given within the defense establishment for the shortage of orders to small and medium-sized companies are tied to a central and prolonged struggle between the Finance Ministry and the Defense Ministry against the backdrop of losing control over the size of the defense budget. The Defense Ministry’s message is that it has run out of money, and that what it does spend is meant to finance ad hoc procurement in light of the IDF’s urgent operational needs and to fund its "ongoing existence", a definition under which sit the expenses for rehabilitating IDF wounded, benefits for bereaved families, and maintaining large reserve forces amid the ongoing activity in three security strips in Lebanon, Syria and Gaza, while preserving readiness and alertness for escalation with Iran.
Calculations made in the defense establishment, as Calcalist learned, found that the cost of 17 hours of war between Israel and Iran at the beginning of the week totaled about NIS 500 million. The sum includes the use of Arrow 3 interception missiles that were fired at 22 ballistic missiles launched by Iran at Israel, fuel for the Air Force aircraft that struck Iran in response, and the munitions fired. This amount is in addition to a fixed sum of NIS 100 million to NIS 130 million, the daily cost of IDF fighting across all fronts.
These explanations do not impress the Finance Ministry, which refuses to agree to another increase in the defense budget and accuses it of waste and managerial failures. About three weeks ago, Calcalist revealed that the Defense Ministry and the IDF are seeking to raise the 2026 defense budget to no less than NIS 184 billion. In the meantime, the demand has been updated to NIS 188 billion. The current defense budget stands at NIS 144 billion, after an addition of NIS 32 billion that the defense establishment received at the start of the second Iran war.
The Defense Ministry said to Calcalist that since the end of February, when the current campaign with Iran began, the total cost of all IDF activity has amounted to about NIS 47 billion. "The situation is difficult," a senior defense official told Calcalist. "We are in a budgetary emergency, the sums we are spending are constantly rising and the prime minister knows them היטב. When we cite a figure of NIS 188 billion by the end of the year for defense, we mean all the actions that will be required of us according to the current situation in the arena."
This clarification by the senior defense official is supposed to set off a red light in the Prime Minister’s Office and the Finance Ministry. It is only mid-budget year, and any security development in any sector could lead to another jump in the budget demands from the Defense Ministry, with the unimaginable NIS 200 billion mark, closer than ever.
Priority for systems that help against drones
A senior defense official told Calcalist that "there is no sweeping internal ministry directive to stop the flow of orders to small industries, but rather a result of the fact that we do not have money in the coffers. Sometimes issuing new orders is much more difficult than paying debts. The orders we issue to all companies come out sparingly and only according to their urgency for the war effort, such as systems that are supposed to help the IDF deal with the threat of drones guided by optical fibers. In the case of the drone threat, it is easier for us to deal with because about NIS 2 billion has been allocated to us to find an urgent operational solution."
Despite the frenzy in the defense industries and in defense tech companies to address the drone threat, no effective solution has yet been found that can eliminate the deadly nightmare, and development efforts on the issue continue.
Since the start of the October 7 war, defense procurement by the Defense Ministry inside Israel has totaled about NIS 260 billion, a figure reflecting a fourfold increase compared with the annual average before the war. According to Defense Ministry data, more than NIS 100 billion of this was allocated to procurement from small and medium-sized industries. According to a defense source, the boom in defense exports has also benefited small and medium-sized companies, and the Defense Export Controls Agency, SIBAT, intends to expand starting next year the level of subsidy for small companies seeking to present products at international defense exhibitions from 50% today to 70%.
A special team headed by Maj. Gen. (res.) Amir Abulafia, appointed by Defense Ministry Director General Amir Baram, has been working in recent months to review the ministry’s defense procurement, with an emphasis on the Procurement Administration and the Directorate of Defense Research and Development. The team headed by Abulafia is expected to submit recommendations for improving defense procurement processes by September.
