A Little Bit of Knowledge Is Not Enough

Technological knowledge and manufacturing capacity are not enough to conquer an unknown market.

In 1992 Elbit Systems, a large manufacturer of electronic warfare systems, decided to leverage its technological knowledge and skills within the company to develop a civilian side for the business.

It was a different era. The Soviet empire had just collapsed, and unprecedented hopes for world peace were on the rise. Many predicted a drop in demand for weapons systems, and Elbit had a good reason to start worrying.

The company decided to build a television set manufacturing plant. Managers explained to journalists that the firm had the technology for the displays that it had developed for weapons systems, and that Elbit would be able to utilize this knowledge - at a very low cost - to manufacture television screens that would be no less advanced than the finest ones manufactured anywhere in the world.

The end of the story was preordained: After only four years, Elbit was forced to close the factory and to sell off most of the televisions at fire sale prices. Adding to its embarrassment, the company also got itself into trouble with the tax authorities when it tried to sell at cut-rate prices locally and improve its competitive position vis-a-vis imported televisions. The affair ended in a plea bargain.

The television affair did not bankrupt Elbit: World peace did not come to fruition, and the huge arms exporter is doing very well with hundreds of millions of dollars in orders - and its managers learned a very important lesson: Technological knowledge and manufacturing capacity are not enough to conquer an unknown market.

I remembered Elbit's television adventure after hearing the short announcement from the Israel Corporation on its intentions to invest $100 million in an enterprise to build electric cars in conjunction with internationally successful - and famous - software entrepreneur Shay Agassi.

The Israel Corporation, controlled by the Ofer brothers, is a holding company whose major businesses are Israel Chemicals and shipping company Zim.

The Chinese automobile industry, the putative central partners of the Ofers and Agassi in the initiative, is expanding at a dizzying pace of 17 percent a year, mostly in the growing Chinese market. However, it is very far away from the technological level of auto manufacturing in Europe, the U.S. and Japan. None of the partners has any experience worth mentioning in the automobile manufacturing business.

It is, of course, possible that the brilliant software engineer has found an original idea that will leave the engineers at Daimler, Toyota and General Motors speechless and impotent. Maybe the combination of Agassi's genius and Chinese efficiency will send the Ofers' pile of cash skyrocketing ever higher. But the story of Elbit's televisions seems to forecast a much more reasonable conclusion.