Globes:-Rivalry between Elbit Systems and IAI led to diplomatic embarrassment.

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Ministry of Defense director general Dan Harel has withdrawn the export licenses to Poland for two large Israeli defense companies –Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) and Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1). Following the extraordinary decision, the two companies are banned from operating in Poland and selling unmanned aerial vehicles (UAV) there.

The decision was taken because of a quarrel between the companies in the affair of UAV exports to the Polish Army, which resulted in the resignation of Poland’s Deputy Minister of Defense General Waldemar Skrzypczak two months ago. He was forced to resign for internal reasons, but the competition between Elbit Systems and IAI for the sale of UAV’s to the Polish Army, which got out of control, was a contributing factor. A high point in the competition occurred when IAI questioned Skrzypczak’s preference for Elbit Systems’ Hermes 450 UAV. Skrzypczak allegedly sought to promote the procurement of the Hermes UAV through an initial $50 million order. Complaints by IAI and other correspondence reached the Polish media, causing a storm that shook Poland’s defense establishment.

Now, neither IAI nor Elbit Systems may sell UAVs and peripheral systems in Poland until further notice. This is happening when the Polish Army is undertaking an extensive procurement plan, which could have been good business for the Israeli companies.

“This is a sad story,” a defense source familiar with the affair told “Globes”. “Both companies invested a lot effort in the Polish deal, and it has now gone to waste.”

The source blamed IAI’s management for the affair. “Even in bitter competition between companies there are rules. Every tender comes to an end in which one company wins and the other loses. The role of the loser is to accept the customer’s decision and leave the field, but IAI decided not to let it alone. This is not how to lose.”

Ministry of Defense sources told “Globes” that the affair in Poland forced top ministry officials to take what is seen as extraordinary and radical action against the two companies, knowing that this is liable to harm competition and the companies’ businesses. “This out-of-control competition continued to the point of fear of real damage to relations between Israel and Poland. After many consultations on the matter, the Ministry of Defense director general decided to exercise his authority and cancel the export licenses. The Ministry of Defense’s job is not only to protect defense interests and the interests of defense companies, but also Israel’s diplomatic interests,” said a source.

The Ministry of Defense told “Globes” today, “The Ministry of Defense does not comment on internal correspondence between us and the heads of defense companies.”

Elbit Systems’ spokeswoman confirmed the report, saying. “The company acted legally, and on the basis of the export permits given it by the Ministry of Defense. The company respects the decision and abides by it.”

IAI said in response, “IAI confirms the report, and states that the company is bound by the Ministry of Defense’s decision on this matter.”

Published by Globes [online], Israel business news – www.globes-online.com – on February 10, 2014