In 2010, in a landmark deal with a U.S.-based defense contractor, Israel agreed to outsource production of a variation on its famed Merkava main battle tank to General Dynamics (NYSE:GD). Over the course of eight years, General Dynamics would produce "kits" for assembling 386 Namer heavy armored personnel carriers at a cost of $730,000 per unit -- $281.8 million in all.
Lacking a Merkava's gun turret, a Namer is still a formidable beast. Each APC weighs some 60 tons and sports a battery of machine guns, grenade launchers, and even a mortar -- and carries a crew of three, and a squad of eight infantry within its steel hull. It boasts self-contained air-conditioning, permitting the vehicle to operate in areas contaminated by chemical weapons.
This contract marked the first major mass co-production effort between the U.S. and Israel. Ultimately, the parties anticipated that General Dynamics could win more than $800 million in orders for Israeli Namers.
But now, it looks like the contract will be cut short at just $150 million and change.
Thanks, but no (more) tanks
As reported by DefenseNews.com over the weekend, Israel has drastically reduced the number of Namers to be purchased under its new five-year defense budget. So far, General Dynamics has delivered only seven Namers. At most, a total of 170 of the APCs will be produced, with production ending as early as 2017. Under the terms of the contract, General Dynamics will probably demand payment of a $17 million penalty for reducing the volume of the order, raising the per-unit cost to about $900,000. The bigger cost, though, may come to American jobs.
General Dynamics produces the Namer chassis at its Abrams main battle tank in Lima, Ohio. At one point, the plant employed 1,200 American workers. Reductions in Abrams production, however, have cut that workforce about in half. Layoffs could increase if the U.S. Army ceases Abrams production in 2016, as planned.
The Israeli Namer contract offered General Dynamics a chance to keep the factory open and operational until the U.S. Army begins placing orders for the next generation of the Abrams in 2019. Now it looks like the plant may have to close down after all, and those workers will be laid off -- at least temporarily.
In perhaps the cruelest cut of all, U.S. taxpayers will be paying for the higher per-unit cost of the Namers, necessitated by the lower level of production, and for the $17 million in contract penalties -- all of which is funded out of the $3.1 billion in foreign military aid the U.S. gifts to Israel annually. In addition, if the production cuts force the Lima plant to close for some years before it reopens in 2019, the U.S. Army estimates the cost of shutdown and start-up could exceed $800 million.
That's more than it would have cost for the entire anticipated production run of the Namer, before they cut it.
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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.