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Despite its status as the go-to country for homeland security technology, Israel has yet to capitalize on the flood of post-9/11 U.S. defense contracts.
November 15, 2004 Print Issue
After 30 grueling years of living under a near-constant security threat, Israel has gained a reputation for being among the world’s top security and defense innovators. So on September 11, 2001, when the United States was attacked on its own soil for the first time in over half a century, Israelis rushed in to help - and make a profit.
Israeli security companies sought contracts in the U.S. at the national, local, and even state level. Yet although the U.S. terror alert level remains high, and the Department of Homeland Security (DHS) retains a $33.8-billion budget in fiscal year 2005, Israeli companies have yet to rake in the U.S. government dollars.
“After 9/11, there was a sense of euphoria: ‘They’re going to buy Israeli know-how, equipment, and software,’” says David Rubin, former Israeli economic minister to North America, who co-hosts The Israeli eXperience homeland security seminars. “As time went on, more and more people I know were disappointed - very little materialized.”
Security for a new age
In the fall of 2001, grizzled Israeli military and intelligence veteran Rafi Ron was nearing the end of a five-year contract as director of security for the Israeli Airport Authority at Ben Gurion Airport.
Then the Massachusetts Port Authority came calling. Just weeks before, two of the flights hijacked on 9/11 had flown out of Boston’s Logan Airport, which was operated by the independent public authority Massport, and its executives were under pressure to make big changes.
So they hired Mr. Ron, head of security at Ben Gurion, one of the world’s safest airports, despite its location within one of the globe’s most dangerous regions. Mr. Ron and his newly formed company, New Age Security Solutions (NASS), which is registered in both Israel and the U.S., set to work on a total security overhaul, from teaching Behavior Pattern Recognition - a systematic method of identifying threatening individuals based on behavior - to the Massachusetts State Police assigned to Logan, to implementing a system that screens every piece of baggage that travels through the airport.
Two years later, the airport had won awards for having the country’s best security in place, and since then, dozens of airports in the U.S. and Europe have offered NASS contracts. While Mr. Ron’s company achieved success with a logistics-heavy approach, the more technological-focused Israeli security companies have yet to live up to high post-9/11 expectations.
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Some blame a “buy-American” mentality for the disappointment among Israeli companies, while others point to domestic firms’ insider-Washington ties. Nevertheless, optimism about Israel’s prospects for huge U.S. contracts endures. The Challenge Fund, a venture capital firm headquartered in Tel Aviv, is raising cash for its third fund of more than $150 million, devoted entirely to homeland security, with expectations that the portfolio companies will concentrate on the U.S. market.
Israeli companies are doing everything they can to compete for government deals with U.S. IT companies like Accenture - which this spring landed a 10-year, $10-billion deal to track foreigners in the United States - and defense firms like Boeing, which has secured over $1 billion in contracts for projects including the installation of explosive detectors at airports.
Where’s the money?
Homeland security is a lucrative, if imprecise, sector that includes everything from computer vision technology that can identify suspicious individuals in a crowd to the reinforced cockpit doors on passenger jets. The market for all U.S. homeland security contracts will be about $50 billion in fiscal year 2005, beginning this October, and could be worth $125 billion by 2010, according to Homeland Security Research Corporation (HSRC), a market research firm.
That figure eventually could be matched dollar-for-dollar by corporations that need to protect information and infrastructure assets, says Sheldon Shulman, a consultant to several Israeli homeland security companies. If Israeli companies win just 5 percent of those contracts - which some analysts and consultants say is entirely possible - the money would dwarf current Israeli defense exports to the U.S., which reached just under $500 million last year, or about one-fifth of total Israeli defense exports, according to the Defense News industry newsletter.
Despite the potential rewards, some Israeli companies are staying away from the homeland security market, because of the long sales cycles and politics involved.
“We have made a conscious decision to avoid the temptation of chasing the funds available to companies providing homeland security solutions,” says Gadi Aharoni, CEO of Algorithmic Research, a digital signature and data security company. “We find it a lot easier to go after business in financial, health care, and other markets.”
Of those Israeli homeland security CEOs who do take up the challenge, many increase their chances of landing contracts in the U.S. by employing the same tried-and-true tactics that have helped Israeli entrepreneurs sell to the U.S. market - and the U.S. government - for as long as the state of Israel has existed: establishing an American presence, partnering with well-connected U.S. firms, and finding brokers to make government introductions.
Going local
When it comes to awarding security and defense contracts, most governments go local, and the U.S. is no exception. Some call this protectionist, and others say it’s just a result of the huge lobbying operations by the likes of Northrop Grumman and Boeing, but favoritism toward U.S.-based companies is a reality that foreign vendors must deal with.
Many Israeli companies adapt to the situation by establishing a U.S. presence: the leading security and defense companies, such as Magal, Elbit Systems, and Rafael, maintain either wholly owned subsidiaries or world headquarters in the U.S.
Homeland security startups from Israel have duplicated this approach, hoping to achieve the success of companies like Elbit Systems, whose Fort Worth subsidiary landed a $10-million DHS contract to provide unmanned aerial vehicles (UAVs) to patrol the Arizona-Mexico border. Actimize, whose Israel-developed data analysis software identifies mission-critical events for the DHS and the U.S. Intelligence Community, has been headquartered in New York City, with a staff of over 50 there, since shortly after its founding in 1999.
For many of the most sensitive contracts, however, a U.S. presence just isn’t enough - Israeli businesses rarely have the insider-Washington relationships of the U.S. defense industry, many of which reach back to World War II. Often, they must partner with powerful U.S. companies, like Northrop Grumman, Rockwell Collins, and Boeing, to gain access.
By linking up with Evidence-Based Research, which is based in Vienna, Virginia, Israeli-founded Quigo has sold its information retrieval software to several government agencies, which use it to gather and analyze data.
Some Israeli firms, like their American counterparts, also turn to Washington-area brokers that can facilitate contracts. American Business Development Group (ABDG) of Arlington, Virginia, whose staff includes nearly two dozen former Capitol Hill aides and military men, just signed an agreement with the Israeli Export and International Cooperation Institute to locate business opportunities for Israeli exporters in the homeland security market.
ABDG will take in about $30,000 per firm initially, and if the companies are successful, they could take home as much as $4 million in fees in the next few years. Though this is the first large-scale arrangement of its kind, ABDG did team with Elbit Forth Worth and Israeli Aircraft Industries to gain a contract with the Air National Guard worth tens of millions, and they have an 84 percent success rate with American clients, according to Rob Hartwell, a senior consultant at ABDG.
Far from giving up
Despite the obstacles, industry analysts and companies agree that, compared to defense agencies, U.S. government homeland security projects are far more open to competitive bidding from foreign firms, largely because of the urgency of the task.
The U.S. Congress has even moved to encourage Israeli help: Representatives Jim Turner (D-Texas) and Curt Weldon (R-Pennsylvania) introduced a bill in March that would set up a $25-million joint Israeli-American fund for homeland security research.
When a nation is under threat, protectionist concerns on contracts lose their importance; Israeli security companies hope to capitalize on this situation.
“The priority for security and cost-performance is higher than the ‘buy-American’ tendency [at the Department of Defense],” says Homeland Security Research Corporation’s Dan Inbar. “Your name can be Dan bin Laden, if you can make the better mouse trap.”
