Israel's Problem Is Too Few Intels, Too Many Wazes

The elephantine size and scope of Intel's planned investment in Israel, in local terms, shows just what a pipsqueak Startup Nation is.

Bloomberg News

The news that Intel will be expanding and upgrading its Kiryat Gat semiconductor plant is both good and bad news for Israel.

The good news is perfectly obvious: The world's biggest maker of semiconductors has chosen Israel of all the places in the world to make its next generation 10-nanometer chips. Intel is planning to invest $5.8 billion in the project, take on another 1,000 employees on top of the nearly 10,000 already on its Israeli payroll, boost production by 50% by 2016 to a value of $5 billion to $6 billion annually and buy hundreds of millions of dollars in local goods and services. It will even take on something of a social role – committing itself to help fund education and hire a certain percentage of Arabs and ultra-orthodox.

There was a time not long ago when the size and scale of such an investment would have been regarded as nothing short of amazing – that a multinational company would choose to commit billions to a production facility easily in range of Hamas rockets in a country not exactly renowned for its manufacturing prowess.

But the fact is that for Intel, operating in Israel has become business as usual - not just for research and development but for, of all things, manufacturing. And, this time around the government is only providing 5% of the total capital spending (in 1999, it provided 38% of Intel's investment).

In other words, Intel isn't in Israel because the government outbid other countries for the privilege.

Big manufacturing? Not in Israel

Now the bad news: Basing big manufacturing operations in Israel is a no-brainer for Intel, but for everyone else it's no go.

It's not that Israel doesn't produce anything. But it seems that the ability to successfully manufacture in this country, as against serving as a laboratory for great new innovations, is not a function of the country's a trained and efficient workforce or good transportation, communications and other infrastructure. Rather, it seems it is more due to the vision and drive of certain individuals -- Stef Wertheimer of Iscar and Eli Hurwitz of Teva both come to mind – or the rare decision of a multinational like Intel to bring its managerial assets to Israel.

An aspiring German or Chinese entrepreneur has no trouble thinking about going into a manufacturing business because he knows he lives in a country that enjoys a comparative advantage; in Israel, our advantage lies in thinking up something rather than making it and so that's our default option.

In the high-tech era, manufacturing has lost much of its economic glamour. It's no coincidence that we like to think we're living in the post-industrial age. Making things is what the Chinese do because they have literally hundreds of millions of people willing to work at unrewarding jobs for low pay. Advanced economies like our own deal in services, innovation, creative endeavors and the like. That is where the real money and glamour lies.

Big brains, small job market

But it's not where the jobs are, even for a small economy like Israel's with its highly educated population.

Compare Intel with Israel's high-tech hero, Waze. Waze conquered the world of navigation apps, had Google and Facebook among others salivating over it and finally was bought for close to $1 billion. Unlike many of his peers selling their companies to a foreign multinational, CEO Noam Bardin even won a commitment to keeping Waze's operations here in Israel.

But what did Waze yield for the Israeli economy, apart from nachas?

The government reaped $370 million in taxes collected from Google, Waze shareholders and employees. To Waze's credit, its employees got a collective $1.2 million chunk of the profits from its sale – an usually generous payout -- but most of the payout from the sale went to foreign investors.

At the time it was acquired nearly a year ago, Waze employed 100 people, just 1% of Intel's payroll. It didn't export anything since its service was free.

Late-night pizza vs. $450m in tax

Waze no doubt provides some knock-on effects for the wider economy, but they amount to little more than late night orders for pizza and airfare between Tel Aviv and San Francisco.

Now look at Intel Israel's specs. It counts 9,855 employees, with another estimated 30,000 owing their jobs to it because they work for companies doing business with Intel. The company has made some $10.8 billion in capital spending over the last decade and has piled up some $35 billion in exports or Israel since it began operations here in 1974.

Even though it hasn't paid taxes on its so-called "trapped profits," Intel forked over $450 million in taxes on retained earnings and dividends just in 2012.

More than any startup that is swallowed up within a few years after its founding, Intel is a business that year in and year out pays salaries, sells products and expands. It not only creates jobs, but rewarding ones in terms of pay and work satisfaction.

There's no reason to designate Waze Public Enemy No. 1. Startups also contribute to the economy, just not in the way big, industrial employers can.

That is why we need more Intels, whether foreign or homegrown. But the fact is that we're getting more Wazes. Startup Nation is booming right now, raising record amounts of venture capital and selling shares in New York and London, but you would have trouble identifying any other major foreign companies apart from Intel making big commitments to invest in Israel.

There might have been a time when Israel's political precariousness deterred that kind of investment, but today, it is hard to make that case. Intel has been merrily turning out chips in Kiryat Gat through an Intifada, a war in Lebanon, multiple conflicts with Hamas and an Arab Spring. Rather, our problems developing industry are more home-grown.

Amir Lang, the director general of the Economy Ministry, told TheMarker this week: Israel doesn't have a workforce trained for advanced industrial jobs. The bounty of natural gas is going to make it even tougher by keeping the shekel strong and making it harder for manufacturing companies to be price competitive overseas.

There's a lot of talk these day about growing income gaps and the struggling middle class. There are a lot of explanations for why this is happening and just as many remedies, most of them involving the government redistributing wealth, social services via tax policy and allowances. But the fact of the matter is that unless an economy can generate solid, middle class jobs, there is a limit to what the state can do to correct social imbalances.

For all its glories, Startup Nation can't create those jobs. What Israel needs is more Intel inside.