"The damage that was done to our relationship with China is done. Now we must focus on containing further damage to our industry and to our relationship with the Chinese in ways that give full consideration to the vital defense interests of America, our most important ally," said Ephraim Sneh, chairman of the Israeli parliament's Defense Policy Planning subcommittee.
http://www.defensenews.com/story.php?F=985998&C=thisweek Posted 07/25/05 14:42 Israeli Firms Say Goodbye to Chinese Market Still Oppose U.S. Pressure To Restrict Dual-Use Sales By BARBARA OPALL-ROME, TEL AVIV While most Israeli industry executives are conceding the loss of China as a core defense market, and have adjusted their business development plans accordingly, they insist their government must not succumb to U.S. pressure to restrict so-called dual-use sales as well. In interviews here, business and political leaders say they mustn�t be forced to sacrifice the rapidly expanding Chinese markets for homeland security, port protection, telecommunications and law enforcement, especially when European and even American firms are permitted to bid on such international tenders. �The damage that was done to our relationship with China is done. Now we must focus on containing further damage to our industry and to our relationship with the Chinese in ways that give full consideration to the vital defense interests of America, our most important ally,� said Ephraim Sneh, chairman of the Israeli parliament�s Defense Policy Planning subcommittee. Since March, Israeli firms have been prohibited from doing any type of defense-related business in China. The wholesale clampdown, which includes a broad list of dual-use technologies and products, was imposed by Defense Minister Shaul Mofaz in response to intense pressure from U.S. officials concerned that Israeli exports to China could one day be used in anger against American troops or allies. A Mofaz spokeswoman said the ban on discussions, visits and all other types of defense and dual-use business activity with China or its representatives would remain in place until the Israeli minister and U.S. Defense Secretary Donald Rumsfeld finalize a sweeping accord aimed at preventing future rifts over Israeli technology transfers to the People�s Republic. She declined to say when the agreement would be signed or what it would contain. U.S. and Israeli sources here said part of the bilateral technology export-control package would deal specifically with dual-use items. Shraga Brosh, chairman of the Israel Manufacturers Association, declined to speculate on how the U.S.-Israeli agreement might affect Israeli dual-use exports to China. �We�re trying now to determine what will be the ramifications of this agreement as far as dual-use exports are concerned. We had hoped the agreement would pertain only to defense items, but it could be extended into other sectors,� Brosh said July 19. �One Big Absurdity� Israeli industry sources point to the Holon, Israel-based Mer Group as an example of how local dual-use technology providers are already suffering from the Ministry of Defense�s (MoD�s) broad-based ban on business with China. The firm was selected, along with U.S. and Greek partners, to deploy a comprehensive security management system throughout the city of Athens for the 2004 Olympics. Successful implementation of that program drew the interest of Beijing, host of the 2008 Olympic Games, but MoD restrictions preclude Mer from negotiating a partnership and bidding on the program. �It�s one big absurdity, especially because we want to work with American companies that have already been cleared by their own government to do this type of business with China,� said Roy Hess, Mer�s corporate vice president for business development. In a July 18 interview, Hess said the firm is trying to obtain a waiver from Sibat, the MoD�s export authority, but doubts one will be granted before outstanding issues with Washington are concluded. �The requests for proposals are about to be issued, and we are not allowed to negotiate with prospective partners. If this is not resolved by the end of the month, we will lose our opportunity to bid,� Hess said. MoD spokeswoman Rachel Naidek-Ashkenazi confirmed that current MoD restrictions pertain to dual-use providers like the Mer Group. She added that Mer�s waiver request was under review by MoD authorities, but declined to say when a determination would be made. David Arzi, chairman of the Israel Export Institute, said the Mer case was unfortunate but understandable given the precarious state of relations between Israel and the United States over transfers to China. �We�re locked in a genuine dilemma. Until that agreement with Washington is concluded, MoD wants to err on the side of caution,� Arzi said July 18. �Once an agreement is in hand, there will be clearer guidelines regarding dual-use items.� He noted, however, that in the long term, �We hope and expect that Washington won�t interest itself in homeland security, law enforcement and other dual-use fields, but will focus the oversight mechanism on frontline military and defense technologies.� A former executive of the Bedek civil aviation group at government-owned Israel Aircraft Industries (IAI), Arzi said any damage caused to Israel�s relationship with China could be repaired, in time, through enhanced trade and nondefense, high-tech cooperation. He estimated that IAI�s Bedek group has averaged about $5 million in annual exports to China. �The Chinese are sensitive to our limitations with regard to the United States and know how to distinguish defense from nondefense trade,� he said. Detailed breakdowns of dual-use Israeli exports to China were unavailable, but overall Israeli exports amounted to nearly $790 million in 2004, compared with about $1.5 billion in imports. In an April lecture at Hebrew University in Jerusalem, Chinese Ambassador Chen Yonglong noted that Sino-Israeli nondefense trade is growing at an annual rate of some 40 percent, and that by the 2008 Olympic Games, Beijing hopes to double its trade with Israel. Closed Defense Market Even before the current crisis with Washington over upgraded attack drones or the U.S.-forced cancellation in 2000 of a potential $1 billion spy plane deal, some Israeli executives made a strategic decision not to enter the Chinese market. At a time when colleagues from government-owned IAI, Israel Military Industries and Rafael were assiduously pursuing the Chinese defense market, executives from two leading private-sector firms intentionally avoided Beijing in deference to growing U.S. concerns about the potential China threat. �Now, the China market is closed for us,� said Miko Gilat. �But the writing was on the wall for the past 10 years. It�s just taken some of us longer than others to get the message.� As chairman of the Soltam Group, Gilat presides over seven defense firms, including the flagship Soltam Systems and ITL Optronics. �China was never a strategic goal for us, since we determined the need to focus on the American and Western European markets and devote our resources accordingly,� Gilat said July 19. �Even if the United States had not objected to advanced sales to China, we probably still would have refrained from joining the fray. Because the Chinese weren�t going to buy in large quantities in any case, we never believed it was worth the effort to adjust ourselves to that market.� Likewise, Elbit Systems, Israel�s largest nongovernment defense firm, has purposely avoided the China market, opting instead to pursue strategic growth through U.S. sales and cooperative ventures. �We don�t do business in China. That�s been our corporate policy for more than a decade,� said Yossi Ackerman, Elbit�s president and chief executive. Earlier this year, Ackerman said, �When MoD policy prohibits us from doing something, I take that as an absolute order. But when MoD policy allows us to do something, I take that merely as a suggestion.� Even at the height of Sino-Israeli defense trade, an MoD official estimated that sales to China never exceeded $80 million per year. 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