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Up in arms: Israel's defence industry resists change

But Israel's defence industry, like those of the rest of the industrialised world, can only survive if it exports. And competition is increasingly fierce. The BBC's Defence Correspondent Jonathan Marcus looks at the challenges facing the country's arms manufacturers.

Behind the promotional glitz and glamour, Israel's defence industry faces a fundamental paradox. While spectacularly successful in developing high technology weaponry, individual Israeli companies may not be big enough to survive in an increasingly competitive world. And this has serious implications for the country's security.

Moshe Peled, a veteran of Israel's wars who is now the industrial advisor to Israel's Defence Ministry, says that the defence industry is at the heart of the country's defence.

"By having very advanced technology and a very strong defence industry, we are able to produce the weapons that are necessary for our soldiers. We are able to create surprise when we come out with a new weapon which is still unknown," he said.

One example of technology where Israel has a leading role is the production of Unmanned Aerial Vehicles (UAVs). Israel began manufacturing UAVs 22 years ago. After being caught by surprise at the start of the Yom Kippur War, the Israel Defence Forces decided that they needed better intelligence gathering capabilities. Spy planes now help to prevent another military catastrophe.

Today, UAVs have been sold to at least 10 other customers apart from Israel's own defence forces. Indeed the end of the Cold War and the development of the peace process mean that Israel now has customers all over the world - from Romania and Poland to China, the Philippines and Chile.

Another major part of Israel's business focuses on upgrading old equipment. Israel Aircraft Industries (IAI), for example, is upgrading 54 US-built Phantom fighters for the Turkish airforce. The company also has just won a contract for similar work on Turkey's F-5 aircraft as well.

But while order books are full, IAI has suffered severe cash-flow problems and labour unrest. Critics say that the state-owned company is not flexible enough to change with the times.

And the government wants change - quickly.

Moshe Peled already has produced a detailed report of the way ahead. In his view, it is a matter of industrial survival.

"If we are able to privatise the government-owned companies and create mergers, then we will be able not just to exist but to sell systems to the IDF at a better price and be able to compete in the world market."

Privatising sounds simple. But given the arms industries key role in Israel's whole approach to national security, private ownership raises all sorts of questions.

Nevertheless, the government maintains that there are too many small corporations competing with each other. Already it has taken steps to try to get the industry to work together to secure foreign sales. But this government, like its predecessor, shows little enthusiasm for administering the sort of harsh medicine that its own experts say is necessary.

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