By Adam Dempsey
Israel’s Elbit Systems Ltd (Elbit) ended 2010 with the purchase of two Brazilian defence companies. In a combined deal worth ‘tens of millions of Reals’, Elbit has acquired Ares Aeroespecial e Defesa S.A. ("Ares") and Periscopio Equipamentos Optronicos S.A. ("Periscopio"). Both companies provide defence electronic products to the Brazilian military. The investment is expected to bolster Elbit’s position in Latin America’s defence market and provide opportunities for regional expansion. The acquisitions also concluded a busy 2010 for Elbit throughout South America, both for its subsidiary and regional partnerships.
Elbit’s first major transaction of 2010 occurred in June with the announcement of a $130 million contract award to supply Command, Control, Computers and Communications (C4I) and Electronic Warfare (EW) systems to an undisclosed Latin American army. As part of a major modernisation programme covering all echelons of the army, Elbit will be contributing to the development of a unified communications network that aims to improve overall situational awareness. Yet whilst the identity of the army in question remains undisclosed, Elbit were more vocal about their bid to supply Chile’s Air Force with its Hermes 450 Unmanned Aerial Vehicle (UAV).
The contract win builds upon several years of solid, if unspectacular, success for Elbit throughout the Americas. In September 2008, for example, the company won a $25 million contract to supply a further undisclosed country with its Hermes and Skylark I UAV systems. This was swiftly followed by a $50 million contract to provide military communications systems to another undisclosed South American military. Elbit’s Annual Report for 2009 also highlights the company’s success in gaining contracts from again undisclosed Latin American countries for tactical radio systems.
Yet it is in Brazil that Elbit continues to consolidate its foothold in the Latin American defence marketplace. Elbit began a busy December 2010 with the selection of its Hermes 450 by the Brazilian Air Force to fulfil its operational requirements for two UAVs and a ground control station. The contract was formally signed on the 19th January. Elbit have also recently announced a $260 million contract to supply the Brazilian Army with UT30 BR 30 mm unmanned turrets for its Iveco 6x6 Armoured Personnel Carriers (APC).
The UT30 BR turrets and Hermes UAVs will be supplied by Elbit’s Brazilian subsidiary, Aeroeletronica Ltda (AEL). Elbit acquired AEL in 2001, placing them at the helm of a company with over two decades of experience of providing Brazil’s defence and civilian sectors with electronic products and support. Since the acquisition Elbit/AEL has been responsible for the maintenance of avionics equipment for the Tucano T-27 trainer. In 2008 Embraer awarded Elbit/AEL a $67 million contract for an avionics upgrade for the AMX A1 jet fighter. More recently, AEL has provided Embraer with multifunctional displays and communications and navigation equipment for its EMB-110 Bandierante transport aircraft. These products were tested in December 2010 when the Brazilian Air Force performed its first flight with the EMB-110.
Whilst Elbit/AEL has achieved some notable contract awards, its partnership with Embraer has been integral to the company’s success within Latin America. In 2006, for example, Embraer awarded Elbit a $17 million contract to provide avionic systems for Colombia’s Super Tucano aircraft. The contract mirrored Elbit’s provision of avionics packages and logistics for Brazil’s fleet of Super Tucano. Yet neither Embraer nor Elbit have been available for comment regarding the impact of the Israeli company’s purchases upon their commercial relationship.
As Western governments in particular have now begun to substantially reduce expenditure, 2010 became the year in which the defence sector inevitably felt the impact of austerity measures. Traditionally, the United States and Europe have accounted for between 50-60% of Elbit’s annual sales revenue. Yet with the United States seeking to reduce defence expenditure by 14% by 2014, Elbit will need to look beyond geographical regions that traditionally account for most of the company’s income.
By contrast, geopolitical tensions are driving up defence expenditure around the Asia Pacific and Middle East regions. According to SIPRI, defence expenditure amongst Middle Eastern states is closing in on the $100 billion threshold. When defence expenditure is measured as a proportion of Gross Domestic Product, spending in the Middle East is greater than anywhere else in the world. Yet beyond Turkey, the Middle East is a closed marketplace for Israeli defence industries. Elbit’s principal Latin American partner does not share the same problem. In 1989, for example, Embraer sold Tucanos to Iran. More recently Embraer has located service centres for its executive jets in Abu Dhabi. Accordingly, as Embraer seeks to increase revenues from defence projects, Brazil’s traditionally close relations with the Middle East makes this region an ideal market.
As the Middle East will undoubtedly remain off limits to Israeli defence industries, South America will gain in importance to Elbit’s business activities. Like the Middle East, South America has consistently increased its defence expenditure in recent years. In 2009, military expenditures approached $52 billion, more than twice the 1990 figure. Tensions between Colombia and Venezuela also made the continent a lucrative marketplace for defence industries. Whilst Venezuela primarily looked towards Russia for the rearmament of its land forces, one of Colombia’s key projects involved the expansion and upgrading of its Israeli Aerospace Industries Kfir fighter-bombers.
Joseph Ackerman, the President of Elbit is confident that the recently-signed contract for the Hermes UAVs will lead to further cooperation between AEL and its Brazilian customers. Elbit’s acquisition of two smaller Brazilian defence companies will undoubtedly reinforce confidence that the company is a major actor within Brazil’s defence sector. Yet the acquisitions demonstrate that Elbit remains a serious competitor for a larger stake within the global defence market in its own right. Despite its close commercial partnership with Elbit, Embraer continues to pursue business opportunities within markets that will remain closed to Israeli industries. As only South America will provide Elbit with an opportunity to offset its loss of revenue from more established markets, it seems plausible that its regional expansion will continue apace. To date, cooperation has been the keyword underscoring Elbit’s relationship with Embraer. In 2011 cooperation may well change to competition.
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