The Origins of Israeli Hi-Tech
by Joseph Morgenstern
For many developing countries, Israel's agricultural progress and achievements during the first
quarter century of the country's existence served as a model for its own
Today, these same countries look to Israel 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
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 & Intellectual Curiosity
- Charles de Gaulle: Father of Israel's High-Tech Phenomenon?
- High-Tech Reaches for the Millenium
- Be an Electronic Engineer, My Son!
- ... Or a Genetic Biotechnologist
- Wall Street Beckons; Investors Smile
- High Visibility International Investors
- Development & Growth
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
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
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
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
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
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
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
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
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
"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
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
High Visibility International Investors are "Buying" into
John Sculley, former Apple Computer CEO, invested in OLiVR, a
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
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
Development & Growth
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."
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.
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