News Analysis – December 2014

General News Summary

Elections, Again

Prime Minister Benjamin Netanyahu, long the favorite to be re-elected any time, finds himself in electoral trouble three months before Israelis go to the polls, again, in an early election he himself triggered. Election Day, March 17, comes only two years and two months after the last election in 2013.

Netanyahu set the early election mechanism in motion by firing Finance Minister Yair Lapid and Justice Minister Tzipi Livni, leaders of two of the parties in his coalition, over what can be considered relatively trivial issues – disputes with the former over the 2015 budget, and with both over a law declaring, redundantly, that Israel is a Jewish state. A more serious challenge behind his decision appears to have been indications that he was losing popularity in the general public and might lose his grip on his own Likud party.

Indeed, recent surveys have Netanyahu’s approval ratings at a nadir, with over half of the population wanting him out. After attempts to bolster his popularity by currying favor with the hard-right and settler populations which are his natural constituency, failed, Netanyahu opted to cut his losses, perhaps even stop the erosion, by taking moves which necessitated elections.

Three months before Election Day, the race for the prime ministership seems almost surprisingly wide open. Livni, the fired justice minister, has brought her small Hatnua party into an alliance with the Labor party led by Yitzhak Herzog, in a ticket which early polls indicate would win 20-23 seats in the 120-member Knesset, Israel’s parliament, a number which could be larger than the 20-odd seats anticipated for Netanyahu’s Likud. The Likud could even finish in third place, behind Labor-Hatnua and a still-unformed but discussed alliance between Lapid (Yesh Atid) and former Likud minister Moshe Kahlon, who has returned to politics after an extended absence with Kulanu (All of Us), a new party. Other factors in the formation of a new government after the elections might include the Yisrael Beitenu party of Foreign Minister Avigdor Lieberman and the Jewish Home, a largely religious pro-settlement party led by former high-tech millionaire and current Economics Minister Naftali Bennett.

The Labor-Hatnua list received a boost when prominent economist Prof. Manuel Trajtenberg said he was leaving his post as head of budgeting for the Higher Education Council, to enter politics out of the belief that “I can contribute to the economy’s continued prosperity while shaping a more just society.” Trajtenburg, brings to two the number of top economic figures on the list, joining Labor Knesset member Erel Margalit, the founder of JVP, one of Israel’s top venture capital firms. Negotiations reportedly are under way to include Shaul Mofaz, a former defense minister who heads the Kadima party, to the ticket, which lacks a very senior defense figure.

The closeness of the race may be tricky. If Labor-Hatnua wins the largest number of Knesset seats and President Rivlin asks it to form a government, the creation of a viable center-left coalition seem tough. The parties of the right and allies in the ultra-Orthodox camp apparently hold 50-odd of the 120 Knesset seats. The Kahlon party may likely join the center-left, more likely than the Likud. Kathlon enjoys consumerist support for his performance as communications minister, but despite being a former Likud member with a right wing record, he is still the center-left hope for a new chapter in Israeli politics.

In fact, Netanyahu needs to spend major efforts to be able to maintain control of his own Likud party which, like the general public, is restless about his continued leadership. It’s not clear whether he’ll be able to secure easily and win the party leadership nomination in primaries scheduled for January 6, even after former Interior Minister Gideon Sa’ar announced his withdrawal from the race; MK Danny Danon, extreme right, 44, is the only remaining adversary. He will be facing a party which has changed considerably over the past few years, becoming younger and more militant. Even before the Knesset voted on December 8 to dissolve itself, Culture and Sport Minister Limor Livnat, a long-time Likud front-bencher, 63, did concede that there was a “generational change” inside the party and resigned from the next election, bringing to 3, the number of Likud resigning leaders.

The confusion is exacerbated by the propensity of Israeli political parties to split and recombine: This time round, Eli Yishai, former party leader has left Shas, the party of ultra-Orthodox Jews of Middle Eastern and North African origin, to form a new right wing, religious party. Polls give Yishai’s party about the same number of seats as Shas, headed by bitter Yishai rival Aryeh Der’i.

The bottom line: With less than three months to go, it is far too early to predict the outcome of this election, which comes at a crucial time when Israel faces the challenges of eroding relations with the US administration, Iranian nuclear ambitions and the Islamic jihadist movements. Stay tuned. But however, this is the first election in years that premier Netanyahu may loose and Labor candidate Herzog may be the eventual winner.

Palestinian UN Bid

Prime Minister Benjamin Netanyahu said that a Palestinian initiative at the UN aimed at ordering Israel to leave the West Bank by 2017, unilaterally, would result in a Hamas takeover of the West Bank. Palestinian Authority President Mahmoud Abbas “thinks that he is threatening us with unilateral steps,” Netanyahu said. “He doesn’t understand that the result will be a Hamas takeover of Judea and Samaria (West Bank).”

On December 17, Jordan submitted a draft resolution to the UN Security Council calling for an end to the Israeli rule by 2017, on behalf of the Palestinians, and setting a two-year deadline for a solution. State Department officials say that the US will not support such a resolution, but Israeli sources said that rather than exercising a veto as one of the Council’s permanent members, Washington was likely to push for a modified version of the resolution, which would not set a timetable for the process and won’t settle any of the core contested issues ahead of future negotiations. Secretary of State John Kerry reportedly has said that Washington won’t allow a resolution to be passed until after the Israeli elections on March 17, noting that such a resolution at this time would only boost the Israeli elements who oppose the peace process. According to reports, Kerry told a meeting of diplomats that former president Shimon Peres and former justice minister Tzipi Livni, now on the Labor ticket, had both warned him that a resolution that pressured Israel would serve the political interests of Netanyahu and Naftali Bennett, head of the settler-religious Jewish Home party.

Eizenkot New C-O-S

The cabinet has confirmed the appointment of Maj-Gen Gadi Eizenkot, 54, as Israel’s next chief of staff. He is due to succeed current Chief of Staff, Lt.-Gen. Benny Gantz, whose term ends in February.

Eizenkot rose through the ranks of the Golani Brigade and took part in complex counter-terrorism raids in Lebanon in the mid-1980s. In 1991, he became the Northern Command’s operations officer, and the following year, he took command of the Carmeli reserves division. In 1997, he was appointed commander of the Golani infantry brigade.

He commanded the Bashan Armored Division, the Judea and Samaria Division, the IDF’s Operations Branch and the Northern Command.

In 1999, he became the military secretary of former Prime Minister Ehud Barak, and in 2005 head of the Operations Branch in the IDF’s General Staff, a role he filled during the Second Lebanon War.

Hamas Rejects Aid Plan

The Hamas rulers of the Gaza Strip say that none of the $5.4B in reconstruction aid pledged by an October Cairo donor conference has reached Gaza. Earlier, Hamas rejected a UN reconstruction plan, saying that it gave too much authority to the Palestinian Authority, which would be responsible for rebuilding homes and to the UN, mandated with restoring public facilities, too much control to Israel over the import of construction materials – and, of course, too small a role for Hamas itself in the rebuilding process.

Very little of the promised aid money has actually reached Gaza. Palestinian, UN and other officials say barely 2 percent of the money has been transferred. The conference in Cairo had been hailed as a success, with Qatar promising $1B, Saudi Arabia $500M and the US and European Union a combined $780M in various forms of assistance. Only $100M has been received, and very few of the new pledges have been honored.

According to Israeli press reports, Hamas was stepping up its military preparations in mid-December, holding what was reportedly its largest training exercise since last summer’s Gaza war.

Residents of Israeli communities surrounding the strip reported hearing explosions and machine-gun fire. It was the first time Hamas had held a large-scale training drill late at night. A few days earlier, it displayed its latest rocket capability during a parade through Gaza City to mark the 27th anniversary of the organization’s founding – including a new rocket that apparently has a longer range than the 160 kilometers of the already-known R-160.

At the same time the PA and Hamas, partners in the so-called Palestinian unity government, are busy accusing each other of trying to take a cut of relief funding. The PA says Hamas has asked for 29% of the money, Hamas says the PA is seeking control of half of the relief funds. Hamas is also furious with Egypt for closing border crossings with Sinai after 32 Egyptian soldiers were killed by Islamists in a terror attack.

Revealing Statistics

An investigation by the Meir Amit Intelligence and Terrorism Center, based in Herzliya, has disclosed that 52% of Palestinians killed during last summer’s Operation Protective Edge were terrorists and 48% non-combatants. The survey constituted an examination of the identifiable published names of fatalities. Its organizers cautioned that in early December names of only 54% of the 2,157 reported dead had been checked.

Boston Flights

Israeli airline El Al is to begin flying to Boston with three weekly flights, beginning next June. The Massachusetts city is considered a preferred destination due to the many high-technology firms located there.

The Economy

Growth Skids

The Israeli economy registered negative growth for the first time in four years, as Gross Domestic Product dipped by 0.4% in the third quarter of 2014. The decline can be attributed to the impact of Operation Protective Edge in Gaza, since the economy grew substantially in the first two quarters of 2014 – by 3.2% in QI and 2.2% in QII.

Nevertheless, the Organization for Economic Cooperation and Development (OECD) predicted that “after a pronounced but temporary weakening,” the Israeli GDP would grow 3% in 2015 and 3.5% in 2016.

CPI Rises

The Consumer Price Index rose by 0.3% in October, according to a report by the Central Bureau of Statistics. The rise was anticipated. Since the start of 2014, the inflation rate has remained unchanged.

Tax Collections Rise

The Israel government collected NIS 233.7B in taxes in the first 11 months of 2014, a 5.9% increase over the corresponding period in 2013.

Moody’s Warning

Israel’s government collapse and early elections has a negative impact on the economy, the Moody’s rating service said in a special early December report, which emphasized that only 20 months had passed since formation of the ruling coalition. The report said that the events “will dampen economic confidence, delay the implementation of growth-boosting reforms and hinder economic planning for the next two years.”

The Fitch ratings agency had earlier issued a similar warning by revising its outlook on Israel’s long-term foreign currency Issuer Default Rating (IDR) to Stable from Positive. The ratings agency did not, however, change Israel’s actual credit rating, leaving the long-term foreign IDR rating at A and the local currency IDR at A+.

Italian Pipeline

Energy Minister Silvan Shalom was due to travel to Europe in December to discuss building a pipeline that would carry Israeli natural gas to Europe. Shalom raised the proposal at a recent meeting of European and Middle Eastern energy ministers, held in Rome. The initiative is not entirely new: What Shalom proposes is a revival of a once-mooted suggestion of a pipeline passing through Cyprus and terminating in Italy. The idea apparently has raised interest now due to Europe’s uncertainty about the continued supply of Russian gas to the Continent.

New Gas Field

A new natural gas field off Israel’s Mediterranean coast may hold about 3.2 trillion cubic feet of gas, about one third the size of the giant Tamar field, its two Israeli partners said after a 3D seismic survey of the area. If the estimate is accurate, reserves for the Royee prospect, located about 150 kilometers offshore and close to Israel’s maritime borders with Cyprus and Egypt, would be the third-largest discovered in Israeli waters and the fourth-largest in the Mediterranean Basin, said Israel Opportunity, a partner in the group. The license for the field is held by Ratio Oil of Israel, which has 70%, and Edison, the Italian power company, with 20%.

African Water Deal

Israel’s Baran Engineering has signed a $200M water infrastructure contract with an unnamed West African country. The turnkey project will include 90 km of conveyance systems, plus collection, treatment and pumping facilities. Completion is expected within 3½ years.

Peterburg Named for Teva

Prof. Yitzhak Peterburg has been named to succeed Dr. Philip Frost as chairman of Teva, Israel’s world-class pharmaceutical firm. Peterburg previously held senior posts in Teva, headed the Cellcom mobile firm and Clalit, Israel’s largest health services organization.

Precious Stones

Shefa Yamim Ltd. has informed the Tel Aviv Stock Exchange that it has located potential deposits of precious stones – including sapphires, rubies, corundum and moissanite – in the Kishon riverbed in northern Israel.

Finance & Investment

Singapore Investment

Singapore-based investment firm Tamasek is investing $5M as the second lead investor in Technology Innovation Momentum, a fund run by Tel Aviv University’s Ramot technology transfer company. India’s Tata Industries is the lead investor in the TAU fund.

Cleantech Opportunities

Don Ye, managing partner of China’s Tsing Capital, says his firm has seen many interesting Israeli opportunities in clean tech. Speaking at the China-Israel High-Tech Investment Summit in Haifa, Ye pointed to opportunities in water economizing, recycling, irrigation, material and energy, among others.

Potash Investment

Israel Chemicals is investing $452M for 50% ownership of a joint venture that will operate a fully integrated, phosphate business in China. Israel Chemicals will also take a 15% strategic holding in Yunnan Yuntianhua, one of Asia’s leading producers of phosphate rock, which is traded on the Shanghai stock exchange with a market cap of $1.8B. The joint venture will include a mine that produces 2.5 million tons of phosphate rock annually for the next 30 years, a downstream phosphate operation and a marketing and sales organization that primarily serves the Chinese and the Asian markets.

Mergers & Acquisitions

Perrigo-Omega Pharma

Perrigo, the international health care provider with headquarters in Dublin, Ireland, has acquired Omega Pharma, one of Europe’s largest makers of over-the-counter drugs, for $4.5B. Perrigo has four business units in Israel.

Liveperson-Contact at Once!

Digital engagement firm LivePerson, headquartered in New York and with a development center in Ra’anana north of Tel Aviv, has acquired cloud-based consumer connection firm Contact at Once! for a reported $65M. CAO, a US firm, is a major chat provider for the automotive industries whose customer base includes over 13,000 auto dealerships, automakers and the most top automotive search and ad websites.

Microsoft-Aorato

Microsoft has confirmed a July report that it is purchasing Aorato, a cyber-security specializing in detection of hacker activity on company networks. Purchase price for the company, based in Herzliya north of Tel Aviv and founded by graduates of one of the Israel Defense Forces technology units, was not announced. But the Wall Street Journal reported that it was an estimated $200M. Elul’s David Kolitz is one of the investors.

3D Systems-Cimatron

Cimatron, a CAD/CAM developer based in Givat Shmuel, just outside Tel Aviv, has been sold to CD Systems, a three-dimensional printer developer based in Rock Hill, South Carolina. Purchase price was $97M.

CD Systems CEO Avi Reichental, a former Israeli, earlier this year acquired Simbionix, an Israeli developer of medical simulation systems, for $120M.

Safechange-Credit Guard

Safechange International, controlled by Israeli Internet gaming tycoon Teddy Sagui, has purchased Israel’s CreditGuard for a reported $8M. Both companies deal in advanced credit clearing technology.

Silicom-Fiberblaze

Silicom, an Israeli networking firm based in Kfar Saba in the high-tech belt northeast of Tel Aviv, has acquired Fiberblaze of Denmark. Fiberblaze provides high-performance application acceleration solutions for the networking, cyber security, telecom and other industries. Reported price was about $10M.

L’Oreal-Coloright

L’Oreal, the French cosmetics firm, has acquired ColoRight, a developer of hair fiber optical digital reader technology. Purchase price was not announced. The company was owned by Benny Landa, the digital printing pioneer who sold his Indigo to Hewlett-Packard a decade ago. According to reports, another investor is Yair Goldfinger, one of the four Israelis who founded digital messaging company Mirabilis, which they sold in the 90s to AmericaOnLine for upwards of $400M.

Science & High Technology

Consumer Aid

A new Israeli high-tech development might just revolutionize the consumer experience, the daily Haaretz reported. The Scio, developed by Consumer Physics, is the world’s first molecular sensor that fits in the palm of a hand, enabling a consumer to scan any product and get instant information on its chemical make-up.

Consumer Physics CEO Dror Sharon says that consumers will be able to avoid unsafe ingredients in products and will not have to trust the vendor who says, for example, that a cheese is low-fat. The Scio is due to go on sale towards the end of this year at a list price of $250.

ICL Selling Desalination Stake

Israel Chemicals has decided to sell its 50% stake in IDE Technologies, its water desalination arm, as part of a move to concentrate on its core business of chemicals. The company also decided to invest NIS 1.2B in a California potash mine. In September, ICL reportedly turned down a $350M offer for its IDE stake from Yitzhak Tshuva’s Delek Group, which owns the other 50% of the desalination firm.

Israeli Connection

Steve Wozniak, co-founder of Apple with the late Steve Jobs, will serve as chief scientist at Primary Data, an Israeli-American company specializing in data virtualization. Primary Data, based in Los Altos, California, grew out of Tonian, an Israeli start-up.

Pay Pal Winners

Israelis Shai Mishali and Pavel Kaminisky have won the $100,000 first prize in Pay Pal’s Battlehack development competition. AirHop, developed by Mishali and Kaminsky, enables users to share wireless or wi-fi access to Pay Pal.

Pfizer Buys Israeli Drug

Pharmaceutical giant Pfizer Inc. has acquired commercial and development rights for a growth hormone deficiency treatment from Opko. Opko, which is headed by outgoing Teva Pharmaceutical Industries chairman Dr. Philip Frost, acquired the drug a few years ago when it bought Prolor, a small Israeli company, for $560M.

Landa on the Move

Benny Landa, founder of Indigo, the Rehovot-based digital printing company acquired by Hewlett Packard in 2001, is on the move again. His Landa Digital Printing, which utilized nanotechnology, is hiring employees in Israel and plans to introduce its first products sometime next year. Six months ago, Landa Digital raised €100M from German group Altana at an estimated value of over NIS 1B ($270M). Landa’s company has developed a unique digital printing process with special ink composed of particles tens of nanometers in size aimed mainly at the commercial printing market.

Collaboration

Tel Aviv-based Compugen and Johns Hopkins University’s School of Medicine have announced a multi-year collaboration on immune checkpoint candidates for possible cancer treatment. Compugen develops tools and technologies for post-genomic medical research.

Power to People

A subsidiary of smart energy solutions provider ET Solar Energy Corp., based in Nanjing, China, has been chosen to provide turnkey EPC service to a 40 MW PV power plant at Kibbutz Ketura, in the Arava Desert about 45 km north of Eilat. The project, owned by Israel’s Arava Power and EDF Energies Nouvelles Israel, one of the world’s leading electric utility companies, built in a desert land of 600,000 square meters, is expected to generate over 70,000 MWH of clean and renewable energy per year.

Aerospace & Defense

F-35 Order Trimmed

The ministerial committee on defense procurement cut Israel’s second-stage procurement of F-35 stealth fighter jets from the 31 the Air Force had requested to 14. Defense officials minimized the setback to their plans, contending that the additional 17 jets would be acquired in 2017, after additional consultations and an additional vote by the committee.

The 31 F-35s are to be added to 19 already purchased to form two stealth fighter squadrons of 25 planes each. The first group of 19 cost $2.75B, funded out of US military aid to Israel.

The vote to approve only some of the Lockheed Martin aircraft followed an argument in the cabinet. Yair Lapid, at the time still treasury minister, Strategic and Intelligence Affairs Minister Yuval Steinitz and Agriculture Minister, Yair Shamir, a former IAF fighter pilot, opposed the deal presented by defense officials. The committee’s decision, Steinitz said after the meeting, “proves that the government doesn’t have to be a rubber stamp for the defense establishment, and that the democratic principle that the political echelon considers and decides prevails in the State of Israel.”

An IAF officer identified only as Lt. Col. Yotam has been chosen to command the first squadron of stealth fighters. The first two planes in that squadron will arrive only in late 2015. The IAF is to take delivery of the remaining planes in the first group of 19 aircraft between 2016 and 2018.

Barak 8 Passes Test

The Barak 8 sea-to-air missile system passed a successful test in early November. Barak 8, an upgraded version of the existing Barak system, is due to be installed on both Israeli and Indian battleships, providing a defense against missiles, aircraft and unmanned aerial vehicles.

The test was conducted by Israel Aerospace Industries, which is developing the system with India’s defense R&D Organization (DRDO), Israel’s Authority for Development of Weapons and Technological Infrastructure, Elta Systems, Rafael and other companies.

The system, which incorporates the Barak Adir (Mighty Lightning) long-range radar system, is expected to be installed on Israel Navy vessels in about a year. The missiles have an interception range of around 70 kilometers.

Iron Dome Honored

Former defense minister Amir Peretz, Brig.-Gen. (res.) Daniel Gold, Rafael Advanced Defense Systems, Israel Aerospace Industries and mPrest Systems and the Iron Dome missile defense system, were honored at a December 1 festive Partnership for Democracy dinner of the America-Israel Friendship League in New York. Dr. Gold was the initiator of the highly successful project, which performed outstandingly during the recent Operation Protective Edge in Gaza, Peretz as defense minister pushed the project though the governmental approval process, the others are defense contractors involved in the system’s manufacture and design. The known Jewish leader, leading US lawyer, the honorable Kenneth Bialkin, chaired the event.

Elbit Contract

Elbit Systems of America, a wholly owned subsidiary of private defense contractor Elbit Systems, has won a five-year, $29M USAF contract for logistics support of the USAF heads-up display electronic module assemblies. The work will be performed by a Talledega, Alabama-based subsidiary of Elbit Systems of America.

Earnings Dip

Elbit Systems has reported third quarter earnings lower than those of the parallel quarter in 2013. Revenue in the third quarter of 2014 was $722.7M, down from $730.6M in the corresponding quarter of 2013. Net profit in the same period was $43.9M, down from 2013’s QIII $55M. At the same time, Elbit reported an order backlog $6.2B at the end of September, up from $5.7B in September 2013.

Students’ Solution

Maayan Harel and Gabi Yaniv, two students at the Afeka Engineering College, have developed a robotic “mole” that might be a solution to the threat raised by tunnels. The device, a little more than a meter long, consists of a kind of threaded screw that can burrow deep underground. Harel and Yaniv developed a prototype of the “mole” as a project for their engineering studies.

“The original idea,” Harel told Yediot Aharonot, “was to build a body that could move forward in the ground for all kinds of purposes, not necessarily military ones. When we began working on the mole, no one was talking about the tunnel threat.”

Flying High

A pilot identified only as Major Gal, her rank and first name, is the first female deputy commander of an operational Israel Air Force squadron. The promotion to second in command of the Nahshon Squadron at the Nevatim Air Base, announced in early December, makes her the highest-ranking combatant woman in IAF history. Since she completed a course for transport pilots in 2006, Maj. Gal has served as an instructor at the IAF’s flight school in Hatzerim and most recently, as deputy commander of the Air Kings support squadron, which operates out of the Sde Dov base in Tel Aviv.

Mixed IDF Combat Unit

The Israel Defense Forces has begun recruiting female soldiers for its second mixed combat battalion, which will be called, in Hebrew, Arayot Hayarden (Lions of the Jordan). The new battalion will part of the Central Command, which includes the West Bank. As is the case in Caracal, the first mixed battalion, women will make up about half the combat soldiers in Arayot Hayarden.

Space Incubator

Space appears to be the latest target for Israel’s highly-successful technology incubator system. Ofer Doron, head of government-owned Israel Aerospace Industries’ MBT division, announced at a mid-December business conference that his firm will soon open Space-Nest, an incubator to support early-stage space start-ups. Funding is due to come from the Israel Space Agency and private investors.

Ukraine Rifles

Israeli-designed assault rifles made under license are in service with Ukraine’s army, according to a report in Yediot Aharonot. The paper said the rifles are versions of the Tavor, called Fort 24 and manufactured by a Ukrainian defense contractor, the Galil and the Negev light machine gun.

IMI Privatization

Stifel, a U.S. Investment bank and Leumi Partners have been chosen to accompany the Government Companies Authority in the privatization process of government-owned Israel Military Industries. The goal is to complete the privatization process, based on a 2013 decision of a ministerial committee, during 2015. Value of the company has been estimated in the $400-$500M range.

More India Sales

Beyond the $535M sale of Spike anti-tank missiles announced in October, other Israeli-Indian arms transactions are in the pipeline. These include the sale of Barak naval missiles and negotiations on purchase of AWACS early-warning and command and control aircraft from Israel Aerospace Industries, as a follow-up to a former deal.

According to Anat Barenstain-Reich, a columnist in the Globes business daily, non-defense commercial relations with India have escaped the public eye, which is focused on Israel’s Asian business with China, and improved relations with India since the election of Prime Minister Modi. Modi, she noted, is a staunch supporter of Israel who prevented denunciations of Israel during Operation Protective Edge.

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