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Creating a bargain position, the Israeli way A report by MAIT Bnagalore June 29, 2001 Executive Summary
It is the hugely successful start-ups that have put Israel’s on the global IT map. The incubators program devised by the Office of the Chief Scientist (OCS) at the Ministry of Industry and Trade in 1991 has been a huge success. Today, there are 24 incubators and out of a total of 800 projects initiated, 592 have already left the incubators; of these 308 are thriving – a success rate of over 50 per cent compared with the normal average of 10 per cent! But it is the Internet-related software that Israeli companies have made a global impact in, especially in areas of data security, internet service infrastructure, IP telephony, authoring tools, data retrieval & navigation, video compression, video conferencing, e-commerce and distance learning. A host of companies have also graduated to high-end support solution and testing for embedded systems. Israel is also a leader in cellular communications technology. Israel’s semiconductor industry is at the forefront of the country’s dramatic hi-tech growth with active involvement in design, manufacture and marketing of automatic and semiautomatic equipment for semiconductor manufacturing. With virtually no natural resources available, Israel had to turn to the only resource it had – the human resource. The nation’s institutes of higher learning not only supply thousands of graduates each year but are also actively involved in commercialising ideas, products and technologies that they develop. The country has over 10,000 computer scientists working for nearly 400 software houses. The electronics industry employs close to 50,000 people of which 60 per cent are engineers, scientists and technicians with a high output of US$ 187,000 per employee. Israel is a classic example of a country that has harnessed IT and has created a bargain position by focussing on technology and product development rather than services alone. India needs to pick up a lesson or two especially when we wish to be an IT superpower. As the IT industry evolves to embedded products, knowledge of hardware would become crucial and a necessary condition for product development and innovation, but with a withering hardware base India’s competence in IT could, forever, remain a dream. It is the need of the hour that our Government comes forward with generous grants for R&D for proactively developing new products. It is innovation that needs to nurtured, for without innovation, economic growth would remain limited by the available physical resources.
IT Industry in Israel: A Perspective Israel, over the years, has steadily emerged as a major international IT power with a strong reputation as a “hi-tech design house”. Known for its innovation and pioneering work in research and development, Israel’s Electronics Industry contributes over 40% of all industrial exports from Israel. Sales of the sector crossed US$ 8.5 billion in 1999 with over US$ 7.1 billion in exports. Software exports crossed US$ 3 billion in 2000 with an additional over US$ 1 billion software sales, to local high-tech manufacturers, which is again exported as embedded electronic products. Exports of electronic components grew by over 200% in 2000 and that of communications equipment grew by 44%. Israel also has the second largest number of start-ups, after the US, actively engaged in software, semiconductor equipment, electro-optics and medical electronics. Israel leads the Middle East with the highest PC penetration – 54 per cent. With well-developed domestic market for computing and telecommunication, it is way ahead of the so-called hi-tech tigers such as South Korea, Malaysia and Taiwan. Israel today has 2.8 million telephones - penetration 47 per cent; 4.8 million cellular connections - penetration 76 per cent; 1.3 million internet users growing at over 50 per cent per annum serviced by 4 large and 30 smaller ISPs and 30,000 local domain names. Dozens of Fortune 500 companies are among the clients of the Israeli software houses including Ford, Chrysler, AT&T, Philips, Siemens, Ericsson, Deutsche Aerospace, Samsung, Air France, Toshiba to name a few. Today, there are over 140 Israeli companies traded on the US stock exchange - the highest from any other country outside North America. In 2000, 22 Israeli companies made their IPOs in the US raising US$ 1.1 billion – a year ago, only 12 companies had their IPOs. Further, over 30 Israeli IT companies are traded on bourses across Europe. Over 100 VCs, with investments over US$ 1.27 Billion, are active in Israel compared to only one VC a decade ago. Communications Industry attracted 4 times as much VC investments in 2000 compared to that in 1999. 513 hi-tech companies raised US$ 3.1 billion in 2000, triple the US $ 1.1 billion raised the previous year by 338 companies and 18 times over that in 1995. In 2000 over US$ 20 million was raised by 35 companies each, six of which raised over US$ 40 millions each. Over 80 per cent of the companies have their own Websites and the Israeli B2B market is projected to reach between US$ 750 millions to US$ 1 billion by 2003. Israel’s global position in IT and Telecom is emphasised by the billions of dollars that have been invested in the local companies by major overseas corporations, venture capitalists and individuals. Infact, the acquisition of Israeli companies by international companies over the past three years totals more than US$ 13 billion. Some of the recent investments include: Acquisition of ICQ by AOL for US$ 407 million; Intel bought DSP Communication for US$ 1.6 billion; Lucent bought Chromatics for US$ 4.8 billion; Broad Com bought Vision Tech for US$ 1 billion; BMC Software bought New Dimension Software for US$ 675 million… the list goes on. At the same time, the larger Israeli software houses now have the confidence and critical mass to make their own investments in North America, Europe and Far-East as Amdocs recently did by acquiring ITDS – a US-based software company for US$ 182 million. Israel’s image world-wide as a highly competitive nation with technological and entrepreneurial talent has been largely due to the country’s start-up enterprises. The incubators program devised by the Office of the Chief Scientist (OCS) at the Ministry of Industry and Trade in the wake of mass immigration from the countries of the former Soviet Union in early 90s has been a huge success. The program is fostering product development among all Israelis - native or immigrants, turning bright ideas into practical solutions. Today, there are 26 incubators functioning across the country from Kiryat, Shmona and Katzerin in the North to Sde Boker and Dimona in the South, in big cities like Haifa and Jerusalem as well as in smaller towns. The incubators program provides support during the first phase of technological initiative including 85 per cent of investor’s approved budget, up to a ceiling of US$ 150,000 annually for two years. Out of a total of 800 projects initiated, 592 have left the incubators; of these 308 (52 per cent) are thriving. Compared to similar start-ups around the world, which have an average survival rate of only 10 per cent, a success rate of over 50 per cent is a remarkable achievement. Also of vital importance is the transfer of technology between Israeli start-ups and overseas enterprises. The OCS and its counterpart organisations overseas have signed agreements and have created funds to help nascent companies gain access to new markets through international co-operation. These include ISERD with the European Union, the USISTC and BIRD with the US, CIIRD with Canada, BRITECH with UK and SI-IRD with Singapore. Another added advantage to the industry is that Israel has Free Trade Agreements with both the US and The European Union. Traditionally, Israel has been strong in software defence products such as real-time applications, imaging, avionics, communications and command/control applications. But it is the Internet-related software that Israeli companies have made a global impact in. Local companies excel in areas of data security, internet service infrastructure, IP telephony, authoring tools, data retrieval & navigation, video compression, video conferencing, e-commerce and distance learning. A host of companies have also graduated to high-end support solution and testing for embedded systems. Israeli companies have also taken a leading role in technologies that merge data, video and voice. Local companies have developed products and technologies like XDSL modems for copper-twisted pair lines to support data transmission rates of 2 to 52 Mbps, multi-access platforms for last mile voice and data connectivity, LAN and WAN video conferencing products, wireless systems for integrated two way digital communications for high speed data, internet access, advanced telephony services and video programming, advanced optical switches, ethernet switching chips to name a few. Israel is also a leader in cellular communications technology and many companies are in the vanguard of mobile internet and m-commerce technology. Successful start-ups are focussing on cellular data communications applications, SMS/ Data on mobile phones, modular active antenna systems for cellular base stations etc. Some of the pioneering technologies developed by Israeli firms in wireless communications are digital radios and mobile/portable radio base terminals, plug-and-play wireless ethernet products, radio based digital networking solutions, broadband wireless technology etc. Israel’s Electronics Industry developed due to the strategic need for defence and electronic warfare systems. In the recent decades, there has been a shift from military to the civil sector as systems have been adapted to commercial applications. The electronics industry in Israel particularly excels in interdisciplinary areas and the ability to incorporate different industries and components through electronics. Consequently, Israel is a pioneer in incorporating electronics into textile, printing, agriculture and medical industry to name a few. Israel’s semiconductor industry is at the forefront of the country’s dramatic hi-tech growth. 5 per cent of the Israel’s Venture Capital investments have been in the area of semiconductors. Local subsidiaries of global companies are involved in a wide range of R&D and production. Intel’s plant at Kiryat Gat produces US$ 1 billion worth of chips annually, while DSP communications, acquired some time back by Intel, develops innovative chips for wireless and mobile phones. Other large semiconductor companies include Motorola and Tower Semiconductors. Local companies active in the semiconductor business are involved in design, manufacture and marketing of automatic and semiautomatic equipment for semiconductor manufacturing. Israel has had virtually no natural resources but for some minerals from the Dead Sea and so it had to turn to the only resource it has – the human resource. Israel leads the industrialised nations with over 140 scientists and technicians per ten thousand people and ranks third in the world in number of patents filed after the US and Japan. The country has over 10,000 computer scientists working for nearly 400 software houses operating out of 19 hi-tech industrial parks spread across the country. The electronics industry employs close to 50,000 people of which 60 per cent are engineers, scientists and technicians. The output per employees has grown continuously reaching over US$ 187,000 per employee in 1999 compared with just US$ 46,700 in 1984. The Government spends 10 per cent of the GDP on education alone. The typical Israeli high-tech electronics executive would not only have a university degree, but would have served as an officer in the Israel Defence Forces, acquiring the ability at a very young age to make real-time decisions under pressure. The success of the industry is also rooted, in part, in the tradition of intellectual curiosity and analysis, which is an aspect of the Jewish culture. Because of the multinational mix of population, many of the researchers have brought with them a variety of experiences and points of view acquired in different parts of the world. Another positive factor has been the sheer smallness of the size of the country, which allows for easy interaction between researchers in diverse discipline. Creating the most essential success factor – the human resource, are the nation’s institutes of higher learning that supply thousands of graduates each year honed in basics of science and technology. But above and beyond their educational role, each of the universities is involved in commercialising ideas, products and technologies that they develop. This is accomplished through licensing agreements, technology transfers and also by launching start-ups. The universities have floated separate companies to focus on commercialisation of technology. The Yissum Development company of the Hebrew University is sought after by American companies for contractual research, an estimated 130 such contracts were signed in 1999. Yeda Research and Development Centre at the Weizmann Institute of Science, the Bar Ilan Research & Development Company at the Bar Ilan University, The Technion Research and Development foundation at the Israel Institute of Technology, Haifa University and Remot, Tel Aviv University’s Technology Transfer company are other such commercial wings of the universities. Supporting the industry is the conducive
and congenial business environment. The Government of Israel is committed
to be an IT driven economy and is aggressively pursuing reforms for an
open, liberalised and modern economic system. Similarly, there is an across-the-board
commitment regarding the Government incentives for continued technological
developments including Government grants for labour training and skill
upgradation, for R&D activities and for Market development and also
tax holidays upto 10 years. The Israeli GDP is a strong US$ 110 billion,
exports account for 28 per cent of the GDP and Foreign exchange reserves
are well over US$ 22 billion. Israel is a classic example of a country
that has harnessed IT to its advantage and created a bargain position by
focussing on Technology and product development rather than services alone.
India needs to pick up a lesson or two especially when we wish to be an
IT superpower. As the IT industry evolves to embedded products, knowledge
of hardware would become crucial and a necessary condition for product
development and innovation, but with a withering hardware base and slack
focus of the Government towards the industry, India’s competence in IT
could, forever, remain a dream. The Government must now come forward with
generous grants for R&D for proactively developing new products. It
is innovation that needs to be nurtured, for without innovation, economic
growth would remain limited by the available physical resources.
DATA TABLES 1. Country Data:
2. Software Exports from Israel (1997-2000):
3. No. of Successful Hi-Tech deals in Israel and other IT centres in US :
4. Hi Tech Capital Raised in Israel (1995-2000):
5. Select Acquisitions of Israeli Companies (1997-2000):
6. Scientists and Technical Workers in Israel and other Nations per 10,000 people:
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