From Renault to Skoda, Big Carmakers Are Flocking to Israel

European journalists flown in to cover an event in Petah Tikva by Czech carmaker Skoda were confused: Why had Skoda, part of the Volkswagen group, brought them to Israel to unveil its new compact model, Scala?

During the press conference at the event, in early December, Skoda executives explained why the launch took place in Israel: They described Tel Aviv as the second-largest high-tech startup center in the world, adding that Israelis have “a drive for change” that Skoda seeks to join via its innovation center, Digilab.

In recent years, carmakers have begun to flock to Israel. Not long ago, the market here consisted solely of local importers who sold vehicles developed and manufactured abroad. But now, international companies have their own offices here, which deal not with sales, but with research and development.

Volkswagen, Renault, Hyundai, Skoda and Seat are just a few of the companies that have opened such offices, which they term “innovation centers.” These facilities invest in and collaborate with local startups in an effort to learn about their innovations and apply them in the production of cars overseas.

Only two international carmakers have full-fledged R&D centers here: General Motors and Daimler. GM's is the oldest and largest center; it opened in Herzliya in 2008 and employs 300 people.

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The center initially concentrated on improving the human-automobile interface: Like other manufacturers, GM sought to bridge the gap between the increasing amount of information drivers demand and the growing number of options the car gives them, on one hand, and the need to keep drivers focused on the wheel while keeping the vehicles relatively simple to operate, on the other.

But in time, the center’s focus expanded and today includes autonomous capabilities, connectivity and information services for the driver. The user interface installed in the Bolt, Chevrolet’s electric car, and in many late-model Cadillacs was developed in Israel.

Since Opel was sold to Peugeot-Citroen two years ago, Chevrolet’s only R&D centers have been outside America – here and in China. The Israeli center survived the stormy period when GM entered receivership, at the height of the global financial crisis. Even today, when the U.S.-based corporation may be facing new problems, executives at the local center say there’s no plan to reduce its operations, since it deals with areas important to GM, among them autonomous, electric and connected vehicles.

Two years ago, GM expanded its center significantly, but to date, the multinational company hasn’t invested in any Israeli startups. Its center did, however, recently hire an innovation director, which will make it easier to explore local startup technologies.

For its part, Daimler, the parent company of Mercedes, launched its R&D center in Tel Aviv a year ago.

“Mercedes is making an enormous change in its products and services, and has to do things differently now,” said Adi Ofek, the center’s director. “Twenty years ago, the development director of a given model knew what user experience he had to provide to the customer. Today, no one person can provide the full picture. You need managers from different fields working together.”

Unlike GM, Daimler has many development centers, including in America, China, India, Great Britain and, of course, Germany. Asked why it opened another in Tel Aviv, Ofek said, “Israel is a center for smart transportation. Almost all the members of Daimler’s management have traveled here, and they are very familiar with startups and have seen them virtually all over the world, but their responses to the Israeli startups were exceptional.

“One executive returned with shining eyes from a tour here and told me the technology and innovation really run deep. Startup entrepreneurs come with experience from the Israel Defense Forces," noted Ofek, "and there’s a special way of thinking here. Mercedes is turning from a car company into a technology company. It’s not rushing to install entire systems developed by an outside manufacturer: It wants to acquire technological knowledge itself, so it will remain unique.”

Entering the digital era

Investments by car manufacturers in startups and new technologies show the profound change the industry is undergoing. The companies still make the chassis but many components, including the electrical systems, come from outside suppliers like Continental, ZF and Denso.

For years, the carmakers’ R&D focused mainly on engines and on testing new models before they hit the market. Much of their investment went into branding and differentiating themselves, and the digital revolution caught them unawares. Whereas electronics, computer software and applications are rapidly developed and often burst onto the market before they are fully ready, the car industry has traditionally operated at a very different pace.

For example, Apple puts out a new iPhone model every year, but a new model of the VW Golf, for example, comes out only once every eight years, and planning for it begins at least four years beforehand. Throughout that time, and until it hits the road, the car is in a completely closed environment.

Consequently, one can say that vehicles are much more reliable than software or smartphones – but by the time they leave the factory, they are also practically obsolete to some extent. For that and other reasons, carmakers are now focusing on the R&D of information technology. Some are pursuing several tracks simultaneously – autonomous driving, electric propulsion, connectivity with other cars and the environment, shared transportation.

One challenge people in the industry mention frequently is the gap between a startup’s short lifespan and the long period that's needed to install new technologies in vehicles.

“We have to decide today exactly what will be in the car that will hit the market in 2022, and everything has to be at a high enough standard to pass quality control and integrate well with the vehicle’s architecture,” says Daimler's Ofek.

Nevertheless, she added, there are ways to bridge the gaps: “We have to help the startups bring their technologies to a stage of readiness so that their developments will reach our products.”

For the realm of automotive tech to be more firmly entrenched in Israel, it’s necessary to expand testing. But large-scale experiments with smart transportation are not being conducted in the country at present. Mobileye did test its autonomous cars here, and so, apparently, did the Russian firm Yandex. But more comprehensive testing efforts will start only in 2020, with an autonomous ride service by VW, Champion Motors and Mobileye.

Meanwhile, the new service that the Israeli ride-sharing startup Via – in which Daimler has invested $250 million – and the Dan bus company are offering does qualify as a kind of test of smart transportation.

Still, autotech and smart transportation is a very young field in Israel and is, therefore, vulnerable. Carmakers contribute to its development when they purchase companies and their technological knowledge, but they could also quickly strip these companies bare by transferring their know-how to the manufacturers' own established production centers. Consequently, it’s encouraging to see that major players in the international industry are choosing to develop their own technology here in Israel.

Nevertheless, investment here has limits. For instance, when Ofek was asked about future expansion of the local R&D center, she replied, “There are fields where it’s possible to grow, but we always ask ourselves if there’s an added value to such growth. Growth will come when new products are developed, but before that, we’ll always ask if there’s already something in the local ecosystem. We prefer cooperating on product development, because if something exists and works, why should we develop it from scratch?”

Until the start of this decade, the Haargaz factory was building buses on the lot where the building housing Daimler’s development center now stands. The local car industry has come a long way since then, but vehicles still aren’t being manufactured here, and it will take time for the smart transportation sector to become firmly established.