Israel's Defense Dilemma: When Algorithms Outpace Ammo

At stake is Israel's place in an emerging global order where computing power rivals nuclear capability as a measure of national strength.

The Iron Dome’s Silicon Ceiling

Israel’s defense exports reached $19.5B in 2024 – a 50% surge since 2020 – but its technological crown jewels now face an existential threat. While missile-defense systems dominate a $68.4B order backlog, 25% of defense industry activity is in R&D, and much of that R&D relies on imported AI chips.

Trust Deficit

The US' January 2025 chip export quotas, relegating Israel to Tier 2 alongside Saudi Arabia and India, expose a strategic vulnerability: dependence on foreign computing power in an era where the algorithms powering weapons systems increasingly rely on computing infrastructure the country neither owns nor controls.

This recalls Israel's ammunition dependency on the US in 1973 during the Yom Kippur War. Now, 52 years after that war, Israel once again finds itself almost completely reliant on the US for chips that power its guided missiles and many other weapons systems.

The dissolution of Israel's National Security Council tech division in June 2024 couldn't have come at a worse moment, leading to a fragmented capacity for Israel to engage in US-led tech dialogues. As Chinese acquisitions of Israeli firms like Infinidat, and unmonitored academic transfers between Israel and China, raise US concerns about technology transfer, Israel lacks the institutional framework to address these fears. The previous Bennett-Lapid government's strategic technology dialogue with Washington has withered under Netanyahu's administration.

Lean Together

Israel faces a paradox: Its startup culture –responsible for 51% of exports, 20% of GDP, 25% of taxes – contrasts starkly with the state-led infrastructure scaling required for AI sovereignty.

While the US and its partners commit $500B to AI data centers and China slashes training costs, Israel's modest 240M-shekel ($65M) national supercomputer project remains stalled. The tender's failure—despite interest from Google and Amazon—reflects a deeper tension: Israel's historic preference for nimble software innovation over heavy infrastructure investment.

The country's defense research and development (R&D) historically generated returns of seven times the investment in the national GDP, but this advantage is under threat. As South Korea and Turkey develop advanced military technologies like the K2 tank and indigenous drones, they are building self-sufficient supply chains. This shift could undermine Israel's innovative edge, as reliance on imported technology grows, highlighting an urgent need for Israel to strengthen its own defense production capabilities.

Strategic Choices

Three paths forward emerge, each with distinct tradeoffs:

1. Leverage Existing Assets: Israel hosts data centers for every major cloud provider. Expanding these through strategic partnerships—as with Intel's chip fabs—could bridge the sovereignty gap without massive state investment. It's unclear how this would work in practice times of need, in terms of contracts with these private companies.
2. Gulf Cooperation: Saudi Arabia and the UAE have earmarked significant resources into AI infrastructure, which Israel could tap into, though geopolitical complications abound, including, but not limited to, normalization with Saudi Arabia contingent on a Palestinian peace process.
3. American Reset: Formalizing tech-security agreements with Congress could restore Tier 1 status—but requires rebuilding trust and more clarity on Israel's China posture.

The Stakes

For a nation that learned the price of ammunition dependency in 1973 and again in 2023-24, the parallel with computing power is stark. As Turkey captures 40% of the global drone market using locally-controlled supply chains, Israel's $68B defense order backlog assumes continued access to foreign chips—a strategic vulnerability in an era where algorithms define military advantage. If other countries develop similar or superior technology, and the means to produce them, Israel's market share could be eroded.

Israel's ability to innovate, maintain technological superiority, and defense self-reliance will be crucial in adapting to global technological and political shifts. Israel’s slow progress in establishing sovereign AI infrastructure and delayed national initiatives could jeopardize economic, technological, and security interests.