Israel Eyes Locally Built Warship
Drops LCS In Favor of German Design
By barbara opall-rome
Published: 29 June 2009
TEL AVIV - In a radical revamp of its surface fleet modernization program, the Israel Navy has shelved long-held plans to purchase Lockheed Martin-produced Littoral Combat Ships (LCS), as well as a fallback option involving corvetees built by Northrop Grumman.
Instead, sources say, the Navy is pushing to establish a combat shipbuilding industry through customized, locally built versions of a German corvette design.
Now in an exploration phase, the concept calls for a stretched, approximately 2,200-ton version of the Meko A-100 built by ThyssenKrupp Marine Systems (TKMS), the Hamburg-based consortium building two Dolphin-class submarines for the Israel Navy. Countries that are building or now operating the 1,650-ton German-designed corvette include Malaysia and Poland.
Defense and industry sources said Navy discussions with TKMS about a possible licensed co-production deal began in January and have steadily expanded to involve Israel's Ministry of Defense, Treasury, relevant lawmakers and industry executives.
Under the plan, at least two ships would be produced at Israel Shipyards in Haifa, with state-owned Israel Aerospace Industries (IAI) a likely candidate for lead systems integrator. Each ship, and anticipated options for follow-on builds, would be integrated "with the maximum amount of local capabilities specifically designed to our operational requirements," said an Israel Navy flag officer.
"One of the things we put on the table is how to vector our urgent operational needs into a project that can support local industry," the officer said. "We believe a strong case can be made for making this into a national project that fosters self-sufficiency and provides all the economic benefits that come with creating a military shipbuilding industry."
In an interview earlier this month, the senior naval officer said the revamped acquisition concept was driven by the prohibitive price tag of its preferred LCS-I (Israel) option.
Military, defense and industry sources here noted that since the Navy began pursuing LCS, unit costs surged from $220 million to $375 million to current U.S. Navy estimates, presented to the U.S. Congress in May, of $637 million. And while U.S. Navy and Lockheed Martin officials repeatedly maintained that rising U.S. costs for the full multimission system would have only a marginal impact on the Israeli program, which focused primarily on HM&E (hull, mechanical and electrical) equipment, experts here concluded otherwise.
10 Years of Study, No Deal
The naval officer acknowledged frustration at the millions of dollars and nearly a decade of study invested by Israel, the U.S. government and prime contractor Lockheed Martin to adapt the 3,300-ton system to local requirements.
"As much as we sought commonality with the U.S. Navy, it became much, much more expensive than planned. At the end of the day, we had no choice but to face the fact that, for us, it was unaffordable," he said.
When asked about the status of the Israeli LCS program, Fred Moosally, president of Lockheed Maritime Systems and Sensors, replied, "Israel decided they didn't need any more work in that area."
Similarly, Israeli naval experts concluded that a Northrop Grumman-proposed package for two Sa'ar-5Bs - an approximately 2,300-ton design based on the service's current operational Sa'ar-5 fleet - also exceeded projected budgets.
U.S. and Israeli sources said rough estimates for each Sa'ar-5B were about $450 million; but HM&E unit costs could have been reduced by more than $100 million had the Navy conducted a contract design.
"When Northrop Grumman makes a fixed-price offer, it's the result of an organized and serious process that allows the company to honor all of its commitments," a company representative said. "Without conducting a contract design - which eliminates most of the uncertainties that drive up price - NG couldn't offer the unit costs we all believed we could have delivered to the Israel Navy."
In a Feb. 12 letter, the director of naval procurement at MoD's purchasing mission in New York informed U.S. parties of the prospective change in acquisition strategy. "In the event this option turns out to be more suitable both in terms of our operational and budgetary requirements, the [multimission ships] will be built in Israel."
Despite widespread interest in the Navy-spearheaded effort, huge budgetary, political and technical uncertainties still threaten the ambitious program, sources here warn.
Assuming the customized Meko-100 meets naval requirements, and that MoD can conclude a deal with TKMS and the German government that allows Israel to leverage its investment beyond the planned domestic buy, it remains unclear how Israel intends to fund the program.
Unlike most major military acquisitions, which are based on U.S.-built platforms and funded through U.S. military grant aid, Israel will have to fund the bulk of the estimated $600 million program on its own.
"We're looking at all kinds of funding options, which do not necessarily have to come from MoD or [U.S. Foreign Military Financing] FMF accounts," another senior naval officer said. "If the political leaders determine that this is a critical national program, then it's reasonable to expect significant funding to come from the Treasury."
A Finance Ministry official confirmed that experts from the two ministries are examining how the establishment of a military shipbuilding industry would concretely contribute to the Israeli economy.
Once the two ministries can agree on benchmarks, he said, more detailed discussions will begin over how, if at all, the Treasury can contribute some advanced funding.
"The idea is to find a formula whereby the Treasury can provide upfront funding in the form of a no-interest loan to MoD," an industry executive in Tel Aviv said.
Merkava-Based Funding Model
Meanwhile, Navy and civilian defense officials have started to explore ways in which U.S. FMF funding can be applied to the program.
U.S. regulations allow Israel to convert some 26 percent of its annual aid into shekels to finance local projects. But most of those funds over the next several years already have been earmarked for high-priority programs, including the Barak-8 air and ship defense system and the MF-STAR multifunction radar planned for the new ships.
Sources here cite Israel's indigenous Merkava main battle tank as a prospective acquisition model. Although the tank is built in Israel from locally developed technologies and subsystems, hundreds of millions of FMF dollars have been used over the years to finance the program.
Items purchased with U.S. aid include steel, other raw materials and the German-designed diesel engine co-produced in the United States by General Dynamics Land Systems and MTU. MoD is exploring a similar U.S.-based co-production arrangement that would allow FMF funding of the Meko ship's MTU1168 engine, sources here said.
"It's doable," a Pentagon source said. "Direct Commercial Contract guidelines allow them to use FMF to fund U.S. content on non-U.S. platforms."
A U.S. export license official noted, however, that as with the export-restricted Merkava, U.S. content gives Washington control over export sales.
Christopher P. Cavas contributed to this report from Washington.