The Origins of Israeli Hi-Tech
To the Chinese and Indians Israel's agricultural progress and achievements during the first quarter century of the country's existence served as a model for its own development.
Today they look for electronic systems and software. They seek from Israel medical equipment and systems ranging from imaging to medical and aesthetic lasers. Airport security experts come to Israel to learn how its people are coping with the problems of terrorism and how its national airline provides safety for its passengers. Alternative sources of energy, such as geothermal applications or the use of solar energy for laser research, are either highly developed or at an advanced stage of research - again, a source of deep interest on the part of the developing nations and on the part of the international scientific and industrial community.
Diamond factories operated with automated equipment are maintaining a competitive edge for Israeli polishers who must compete with low-wage producers. Belgian diamond manufacturers have expressed concern about the advantage which the Israelis have gained as a result of this technological breakthrough.
And then to top it off, Israel has become the world's eighth member to join the exclusive club of nations who have successfully built and launched a satellite into orbit. Electronics, medical systems, software, Internet security, and multimedia are now high on the list of not only exportable items but world class products.
Stubborness, Resilience and Intellectual Curiosity
What is it that drives Israelis to reach this level of achievement? The answer is rooted in part in the tradition of intellectual curiosity and analysis, which is an aspect of Jewish culture. It is a tradition that emphasizes education and that has produced, out of all numerical proportion, outstanding scientists and inventors. This age-old reverence for education has found expression in the development of a good Israeli public school system and excellent universities and institutes of science and technology.
Even more likely, the technological accomplishments may be a result of the innate stubbornness, resilience, and creative drive of a polyglot people. Because of the multi-national mix of the population, many of the researchers have brought with them a variety of experiences and points of view acquired in different parts of the world. All are joined together by the determination to create a country which will become strong in spite of a lack of natural resources and of hostility on the part of most of its neighbors. This need for national security has led to the development of new defense technologies.
Ambition for a better quality of life and higher standards of living has led to the creation of an export-driven economy. And most Israelis are aware that the ability to sell and succeed in the international marketplace is dependent on their products being more innovative and better priced than those of the country's competitors.
Charles DeGaulle: One of the Fathers of Israel's High-Tech Phenomenon
Thirty years ago, just in the wake of the Six Day War it became apparent that Charles DeGaulle had effectively cut off the supply parts for the French made planes used so successfully by the Israeli air force. It was a bitter pill to swallow and voices of reason began to promote the idea that Israeli institutes of higher-learning must be weaned away from fundamental research to applied research. The country must produce its own electronics and smart systems and become independent of funky suppliers.
The adaptation of this concept marked the birth of Israel's high-technology industries which for the greater part dedicated itself to supply the critical needs of a country which needed to be always ready to defend itself. It was a slow go at first but once momentum gathered Israelis turned to technology in earnest.
In 1975, I undertook to provide broad English-language coverage on all topics related to Israel's science-based industries. The decision to do so, however, was easier to make than to implement. While Israelis are known worldwide for their bravado and chutzpah, their reticence in discussing their business activities was overwhelming. To get at the facts, to get to know the individuals who are key to Israel's technology, took many years of patience and, sometimes, frustration.
By 1988, a year in which Israel celebrated 40 years of independence, Israel's leaders of Israel's high-technology industries, had become aware of the problems of setting up strong industries when capital is not readily available. They became "more open", more willing to offer foreign investors equity participation and opportunities to fund profitable local ventures. This marked a radical deviation from traditional thinking, which postulated that "If you have something good, keep it to yourself."
The Current Wave: High-Tech Reaches for the Millennium
They are overexposed - Business Week, Der Spiegel, Newsweek, The Economist and other world-class publications focus on it and publish a stream of stories. The journalists, rarely having a background in science and technology, are exerting themselves to understand it and interpret it and expose it to their readers
A Primer on Picking Winners
They often are overvalued but continue to maintain their attractiveness for international companies who seek to buy the technology or become strategic venture partners or marketeers of the product, and for investors who pay many times the shares earnings so as to own them in their investment portfolio. The "they" are the Israeli high technology companies which, when lumped together, are a growing mass containing an expanding base of technological knowledge.
Samuel W. Lewis, with The Washington Institute for Near East Policy and former US Ambassador to Israel, raised the issue of what are the unique characteristics which set apart the winners from the losers. The veteran diplomat spent the better part of an evening at a cocktail party with me, discussing Israeli high-tech companies.
Initially identified for Mr. Lewis some companies which are commercially successful, have high market capitalization and a growing niche of the market. "A company with software targeted for Internet access, its control, its use for faxes or with a solution to the "millennium problem" will find it easy, initially, to get commercial and media attention, not to mention investor enthusiasm," I suggested. VocalTec and its Internet telephony Gateway program and Crystal Software Solutions are two such cases. Clever ideas, aimed at vast markets but not based on heavily researched technology.
The commonly accepted wisdom is that identifying companies likely to maintain rapid growth and profitability and reward investing shareholders over the long term, is a near impossible task. Difficult yes, but perhaps not as difficult as most would believe. To begin with, identify companies whose underlying know-how has previously been the object of intense research and development. This profile fits only those companies which use an aspect of defense related technology. Only in recent years has defense formed less than 40% of the national budget. A healthy chunk of those funds, billions of dollars, was used in developing telecommunications, jet fighters, nightsights, pilotless observation planes and other not publicly revealed hardware.
Companies applying these technologies have a clear-cut advantage that may have a time and product advantage over competitors, providing them with a market edge. When they are managed by engineers and technicians who worked on them in the defense research establishment, preferably under the Ministry of Defense, the combination may increase the chances of the company becoming a "winner".
ECI Telecom bases its key product on Israeli Air Force pilots' use of speech scrambling techniques. ESC Medical System was the hottest Israeli share in 1996. Its CEO Dr. S. Eckhouse , spent part of his professional career with Raphael Israel Armaments Development Authority working on sophisticated laser systems. Geotek's advanced digital network was developed on licenses obtained from the Raphael Israel Armament Development authority. With sales only in excess of $100 million in 1996, the company's sales could multiply tenfold by the year 2000. Gilat Satellite's VSAT technology for providing communications links for isolated areas, is also rooted in IDF experience.
Small, unheralded companies in encryption, electronic closures, and night-vision, have the benefit of bringing to the business personnel, whose experience has been honed in working on advanced defense technologies. This is one key to identifying technology companies as winners well before they make their mark in the business world.
Investing in Israeli technology will likely yield the greatest profit to the individual or institutional investor by investing in a group of companies. Using the above criteria, and applying the diversified approach of venture capital companies should work out handsomely.
Be an Electronic Engineer, My Son!
The debate in high-tech circles is - can the growing high-tech sector find enough electronic engineers to man the continuously expanding industry? Since each electronic engineer in 1996 produced sales of $800,000, mostly exports, an additional 1000 engineers could lead to growth in exports of $800 million, suggests Zohar Zissapel managing director of the RAD Group of Companies.
At the beginning of the current academic year, there were 2,000 aspiring electronic engineering students, but they are still four years away from the market place. Presently Israel's institutes of higher learning are graduating about 1,300 engineers and computer specialists a year.
Or a Genetic Biotechnologist...
On Sunday, February 23rd, 1997 Dr. Ian Wilmut of the Roslin Institute in Scotland announced that his team had cloned an adult farm animal, a female sheep named Dolly which had been born seven months before. A year earlier the same team made history when it cloned sheep embryos. Two of the clones are now in their adulthood and one of them is pregnant.
With the cloning of Dolly the British scientists took a step closer towards mass production of animal herds which can be farmed for milk, blood and organs. The researchers stressed that the procedure opened the possibility of a more efficient production (cloning) of animals to grow health products.
In Israel the least surprised individual about the Wilmut cloning of Dolly is Professor Moshe Shani, a world class re-searcher in animal cell biology and animal skeletal muscle development, and the developer of a technology which rests on gene manipulation in goats to create the presence of human serum albumin (hsa) in their milk.
The innovative technology allows for the introduction of foreign genes and targeting them into goats' mammary glands. Commercial viability starts with the resulting milk containing more than one gram of "hsa" per liter of milk. In a recent discussion with Professor Shani, he said that the project using his technology has now 11 transgenic goats, all second generation females, whose milk is expected towards the end of 1997.What makes the milk so precious? It contains human serum albumin for which there is an annual global market demand of $500 million.
The separation and products. Time consuming and costly clinical trials are prerequisites for the granting of marketing approval by the Food & Drug Administration. Israel's hospitals are approved for clinical trials by the Federal Drug Administration. Multinational companies count on getting clinical trials done here and they take advantage of the world class reputation that these hospitals enjoy in the international medical community.
Merck, Bayer, and Hoffman LaRoche are among the many companies conducting clinical trials here. Small companies, taking advantage of Israel's medical strengths, are prospering as well. An American company named Angiosonics researched and developed at a Tel Aviv Hospital a unique system that virtually explodes plaque into harmless particles in arteries. The development was cited recently in professional publications and in the international press as a major "breakthrough" in the treatment of heart disease.
The patented system that has undergone extensive trials in Israel and in other international medical centers. Angiosonics is poised for commercial success as are other commercial companies such as Spegas, Combact and Myriad. They are just some among scores of companies which will make their mark positively on the commercial scene.
Moreover, the speed at which new projects surface will accelerate as the country's hospitals increase their research activities. Hospitals have the advantage of an existing, highly valuable infrastructure and the availability of researchers and experienced medical practitioners.
A further advantage is the quality of its medical staff and researchers, recently grown in size as a result of the Russian immigration. "Israeli geography" namely the sheer smallness of the country itself, is another positive factor as it allows for easy interaction between researchers in different disciplines. Six leading hospitals are located within 90 minutes driving distance from Tel Aviv.
Dr. Martin Lapidot, deputy general manager of the Rabin & Golda Medical Center, (formerly Beilinson), points out that sponsored medical research and development and pre-certification trials are a growing specialty. These activities have resulted in a number of outstanding medical developments including a procedure for the relief of prostate cancer and a highly popular treatment for the removal of kidney stones with a non-invasive system which crushes the kidney stones so that they can be removed naturally by the human body. I have recently undergone such a procedure at Tel-Aviv's Ichilov-Sourasky Medical Center. I underwent the non-invasive stone crushing procedure at 6 p.m. and was released the next morning.
"Clinical trials are a tool for creating funds for research and development. The large companies like Bayer and Roche have budgets greater than that of Israel and it is a substantial business for the hospital. Working with these companies exposes our staff to international expertise," says Gad Gilat, Professor of Science and Coordinator of Clinical Trials at Asaf Harofe Medical Center, a large Government hospital. The trials can turn out to be very profitable for the hospital. "A department head may organize trials which earn a profit for the hospital of 40-50% of the budget," says Gilat.
However, is the expansion of clinical trials an unmixed blessing? Far from it. "The medical researchers running the clinical trials have to move within a narrow range of activity prescribed by the sponsor. It tends to suppress creative research," says Dr. Hylton Miller, head of the catheterization department and a researcher whose advice is sought by commercial companies. Miller looks ahead to establish, in the foreseeable future a $2 million research center at Ichilov-Sourasky.
The research and development at all levels in the medical field is becoming widespread but this new, powerful trend will be felt fully only as the projects yield products, result in sales and, in due course, big dollar exports.
Wall Street Beckons and Investors Smile
By the end of 1997 the number of Israeli companies on Wall Street will almost certainly exceed 100. The Israeli companies form the second largest foreign representation, after Canada. The sheer number puts them well ahead of Germany and Japan.
Over the years we have been studying what are the compelling reasons for Israelis to seek an American listing. Some of the reason are generally accepted by all who understand the US markets but some are related to internal Israeli considerations. Our list of considerations includes: The US capital market is the biggest/most sophisticated/ most professional/ most efficient and certainly most widely reported market with the exposure provided for these companies helping them to build product images and investment loyalty. These companies are reported on not only on television, in the printed media but also on Internet sites. Recently companies such as NICE Systems, Gilat Satellite and ESC Medical have tapped American investors for "secondary" financing of up to $100 million per deal.
A year ago, it was the Internet shares that caught the imagination and attention of American investors. The two most outstanding Israeli representatives in this sector are VocalTec and CheckPoint.
This year, the magic words are "the year 2000". Crystal Solutions is a company dealing with millennium software solutions. That is why it has become the most successful Israeli flotation on Wall Street, providing its investors with a 290% return.
Computer communications and telephony are also enjoying an unprecedented investment appeal, and the shares of companies in the sector respond accordingly. 18 Israeli companies have been floated on Wall Street since the beginning of the year. Ten of them are new companies.
The new issues have produced a stunning 54% return. Many of these have handsomely outperformed the Russell 100 or the Russell 2000 indices which track technology issues.
Now in line for an American listing are Super-Sol, Elbit Systems, Tefron, RADcom and others, which expect to raise hundreds of millions of dollars. Is the wellspring for new Israeli issues drying out? Not at all. While the exact figure is not known there appear to be between 1,000 to 1,500 start-up companies in Israel for whom an American listing is a sine qua non.
Why do the Israelis avoid their own market in preference to the United States? Not enough exposure, a stock exchange which does not afford comparable liquidity and perhaps its smallness and being known as an emerging growth market, only recently listed on the Morgan Stanley World Index.
High Visibility International Investors are "Buying" into Innovation
John Sculley, former Apple Computer CEO, invested in OLiVR, a multimedia Jerusalem based software developer, Ephyx an interactive video producer and Zapa Digital Arts, an electronic advertising firm. More than 50 venture capital firms with $2.0 billion under management are active today while six years ago there was only one venture capitalist fund with $30 million under management. Finance Minister Yaacov Neeman put the icing on the "welcome and invest in Israel" policy by exempting foreign investors from Israeli capital-gains taxes. The high-tech sector has attracted some of America's best know investors: AT&T pension fund, Massachusetts Institute of Technology Endowment Fund, Boston's Hancock Ventres and Chase Capital.
ESC Medical Ltd. a manufacturer of novel and laser systems for cosmetic surgery and treatments, Galileo Technology Ltd. maker of advanced digital chips were the big hits of 1997. The Nitzanim Fund, whose investors include Japan's Kyocera Corp. realized a paper profit of $52 million from its $1.0 million investment in ESC Medical and in Galileo a paper profit of $89 million.
Another huge deal has been added to the series of investments by US companies in Israel. In one of the largest deals of its kind to date, Cordis Corporation, a wholly-owned subsidiary of Johnson & Johnson, announced the signing of a definitive merger agreement with Biosense, Inc. based in Haifa, Israel with corporate headquarters in Orangeburg, N.Y. The company develops catheter-based interbody navigation and location systems used in cardiology and neurosurgery. Biosense's shareholders will receive a sum estimated at $400 million in Johnson & Johnson shares.
Germany's Siemens paid $30 million for Ornet, a developer of data communications software. The American Applied Materials. Inc. a world leader in semiconductor production equipment purchased Orbot Instruments and Opal Ltd., developers of measurement systems for the semiconductor industry, for $285 million.
World leader Intel developed, at its Israeli research center its new Pentium Processor with MMX Technology, which an Intel executive described as a "processor which will reach every PC-owning household in the world."
Protected from Economic Vagaries
Most Israeli companies export and as such are generally well-protected from any buffeting from Israel's economy which currently is struggling to emerge from recessionary conditions.
High-Tech Export Growth
The past decade has seen a dramatic change in the composition of
Israel's exports. As of August of last year high-tech exports represented
35% of the total and software another 3% per cent. In 1988 high-tech exports
represented 24% of the total and software merely one per cent. Exports are
growing and should total $16 billion or more for all of 1997. A 40% rise in
high tech-exports in 10 years if unmatched, certainly ranks among the top in
the world and is indicative which direction the trend is taking.
Sources: Israel High-Tech & Investment Report and Israel at 50.