Nokia Revisited? The Dark Side of Israel Having 'Intel Inside'

The giant U.S. company has become as a major factor in Israeli high-tech and this week it presence looks to be getting bigger still. That’s not all good news

Intel's office in Jerusalem, April 20, 2016.
\ Ronen Zvulun/ REUTERS

Far be it from Israel to turn down a perfectly legitimate and well-deserved $16 billion. That’s what the U.S. semiconductor giant Intel has offered this week – to invest $11 billion (minus $900 million in government subsidies) to build a new plant in Israel plus a reported deal to pay up to $6 billion to acquire the Israeli company Mellanox Technologies.

No other multinational company, and certainly no Israel high-tech company, matches Intel for its size and scope in Israel. Unlike nearly all other international companies operating in Israel, which might employ at most a few hundred people in research and development, Intel actually makes things in Israel. That puts it into a different category than the other multinationals.

According to Intel's own figures, in 2017, it accounted for 1.5% of Israel’s gross domestic product. It directly employed 12,000 people and was responsible for another 40,000 jobs via subcontractors, suppliers and the like.

Over twelve years before 2017, Intel had invested $13 billion in Israel, and had come to account for 8% of Israel’s merchandise  exports.

Over the last year, the depth of its presence has expanded enormously, with the $15.3 billion acquisition of the Israeli auto-tech company Mobileye. It is also a major source of startup capital and serves as a training ground for many of Israel’s future entrepreneurs.

Also, Intel has shown that it is possible to do high-tech manufacturing in Israel.

Laptops the world wide sport a logo saying “Intel inside.” One can almost see in the mind's eye maps showing our little patch of the world showing the name Israel with the words “Inside Intel” just below.

Finnish disease in Tel Aviv

Israel has avoided the "Finnish disease", meaning an economy that becomes over-reliant on a single company. But Intel’s place in the Israeli economy is approaching that point, which should be as a red light to policy makers.

Finland is like Israel a small and tech-rich country, and in the 1990s and early 2000s, it was the proud and prosperous home of Nokia, then the world’s leading maker of cellphones.

At its peak in the year 2000, Nokia accounted for 4% of Finland's GDP, 21% of exports and 70% of the Helsinki Stock Exchange market capital. Nokia controlled more than 40% of the global cellphone market.

But the mobile market evolved and Nokia’s management failed to keep pace, most critically in not recognizing the iPhone/apps revolution. In 2013, Nokia sold its mobile phone business. Finland is still struggling with the fallout.

Nokia isn’t the only company seemingly too big to fail that did. One recent study by the management consulting firm Innosight found that the average life expectancy of a company listed on the S&P 500 share index had fallen from 33 years in 1964 to 24 in 2016 and forecast a further decline to just 12 years by 2023. It predicts that based on current trends about half of S&P 500 companies will be replaced over the next ten years.

Technology, and even more so technology fads, change quickly. Even corporate visionaries often miss the mark; the ones that succeed are as much lucky as prophetic.  Apple’s Steve Jobs initially conceived of the iPhone as just a phone with some cool add-ons. Luckily for him, the rest was history and he died Silicon Valley’s greatest business hero.

Thank you, pighead

As it is, Intel has had some close calls in its history and at least once was saved thanks to the pigheadedness of its Israeli engineers in defying management.

But Intel is a 50-year-old company sitting at the epicenter of a highly volatile technology industry. The odds are stacked against it going smoothly from one success to another forever.

>>Analysis: Has Israel Made a Good Investment Subsidizing Intel?

Last week, Intel reported weak earnings due to a slowdown in China and sluggish demand for its data center and modem chips.  That’s not to say that this marks the beginning of the end for Intel. But it does show that even the biggest, most experienced and richest businesses can’t control their fate. This is especially the case for a business that must commit to billions of dollars years in advance in expectation that tech will go in the direction it has forecast.  

If I were at the treasury, I’m not sure how I would address the challenge. On the one hand, Intel creates good, well-paying jobs on a scale that no Israeli company has – and can, given Intel’s massive resources and worldwide reach. The subsidies the government is providing are as good an investment as any.

Indeed, encouraging Intel to expand and develop is the only way Intel will stay in Israel – the semiconductor business is constantly changing and factories need to be retooled and upgraded to successive next-generation products. I don’t think you could employ antitrusts argument to say Intel has become worriedly big for the Israeli economy. Intel doesn’t dominate any local markets and doesn’t deter competition.  

The answer is not to discourage Intel from investing in Israel because of the macroeconomic risks. Rather, Israel should be creating the conditions to attract more multinational companies to manufacture in Israel, not just do their R&D here. It should also be doing more to help Israeli companies remain independent and grow.

Some progress is being made about attracting more giant companies. But the constant chatter about Israeli high-tech “maturing” and abandoning the startup sector’s penchant for bailing out when a foreign company makes an offer is unfounded. For the foreseeable future, our future is bound up in a single foreign company.