Israel's F-35 demands draw sharp criticism

Lockheed Martin is awarding Israeli companies reciprocal procurement contracts worth $4 billion.

The value of work that the F-35's manufacturer, Lockheed Martin Company (NYSE: LMT), is prepared to give Israeli defense companies, assuming that the Israeli government agrees to buy 20 planes, could amount to 180% of the procurement cost, reports "Defense News". This is an extraordinary return in international arms deals, and has caused sharp criticism in the US.

Lockheed Martin has undertaken to award Israeli defense companies contracts worth $4 billion for work related to production of the F-35, with the option of increasing the amount by at least a further $1 billion, over the next ten years, provided that Israel buys 20 F-35s. The procurement will cost $2.75 billion, which will be entirely financed by US military aid to Israel. If Israel gives the green light, it will be the first foreign country to buy the plane.

Minister of Defense Ehud Barak said that his decision in principle to buy the F-35s, made on August 15, was not only based on the plane's operational capabilities, but also because Israel obtained offset agreements worth $4 billion.

Barak's announcement declined to provide details about the offset agreement, except to comment on the work that Israeli defense companies will carry out on the F-35s for the Israel Air Force (IAF) and other buyers. Each Israeli company will have to conduct its own negotiations with Lockheed Martin after the Israeli government officially approves the procurement.

The Ministry of Defense announced that additional procurement officials would conduct negotiations with all the parties in order to increase the work that Israeli companies will receive to $5 billion.

"Defense News" Israel correspondent Barbara Opall-Rome says that Lockheed Martin's commitment to give so much work to Israeli companies is unprecedented in terms of value of the work compared with the value of the pending procurement. According to the US Department of Commerce, the ratio between large defense procurements and reciprocal procurements with the buyer averages 100%. The buyers are large countries in Europe, Australia, Canada, South Korea, etc. For less developed countries in the Pacific Basin, Asia, Eastern Europe, or Latin America, the ratio exceeds 50% on in rare cases.

The case of the planned $2.75 billion F-35 procurement, the reciprocal procurement ratio is 150%, and if the reciprocal procurements reaches or exceeds $5 billion, then the ratio that Israeli can expect could reach 180%.

For the sake of comparison, when Israel bought 102 F-16Is a few years ago, Lockheed Martin undertook to make reciprocal procurements of $1.45 billion. Since then, Lockheed Martin has renewed contracts for work related to these F-16s. Altogether, Israeli companies have received work valued at over $2.2 billion related to the F-16I deal, a reciprocal procurement ratio of about 50%.

Former Aerospace Industries Association of America VP Joel Johnson told "Defense News" that Israel has always obtained high reciprocal procurements, but the F-35 deal was completely out of proportion. He compared Israel's demands to eating twice from the same plate, since Israel was using US aid to buy the planes in the first place.

Johnson said that US defense companies always understood that reciprocal procurements was the price paid for deals with foreign governments, which spend their taxpayers money on expensive systems. He added that only the Israelis have the chutzpah to demand reciprocal procurements for products that the US sells them and paid for by US taxpayers. Reciprocal procurements of 150% or 200% is like eating three times from the same plate. It's chutzpah on steroids.

The reciprocal procurements from companies of some of other countries involved in the F-35 program are smaller. Canada has invested $650 million in the program, plans to buy planes for $15.5 billion, and will get $12 billion in reciprocal procurements - a ratio of 75%.

Denmark has reciprocal procurements equal to 100%. Italian companies will get 70% in reciprocal procurements, Norway has stated that it will not buy F-35s unless it gets 100% in reciprocal procurements, and Turkey expects to get at least 40% in reciprocal procurements.

"Defense News" says that Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) will get more than $1 billion in reciprocal procurements related to the F-35; Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) will get almost $2 billion, and $1 billion will be shared among smaller companies, such as simulator maker SimiGon Ltd. (AIM:SIM), avionics maker Rada Electronic Industries Ltd. (Nasdaq: RADA), and Israel Military Industries Ltd. (IMI) unit Ashot Ashkelon Industries Ltd. (TASE: ASHO).

Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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