What’s in It for Israel to Help Intel?

Intel Corporation appears to be eyeing Micron's Israeli plant as a good candidate for the location of its next 10-nanometer-chip fabrication plant. But it won't be an easy sell.

While workers demonstrated outside Micron Technology's microchip plant in Kiryat Gat on Thursday, Intel Corporation CEO Brian Krzanich declared his commitment to the local operations of Intel Israel. His reference to the Micron workers and the possibility of Intel reacquiring the plant could be good news for the Israeli subsidiary.

The readiness of Intel's world headquarters to buy Micron's Israeli plant is an indication that it considers Israel a good candidate for the location of its next 10-nanometer-chip fabrication plant. Using the Micron plant's existing infrastructure will apparently reduce the overall investment required. This is a good sign – but for sometime in the future.

Intel Israel has a very intricate relationship with its local environment. On one side of the coin it's an exterritorial U.S. concern in which 8,500 Israel workers are cheerfully swallowed up every morning. On the other side, however, every three or four years – whenever the need arises for upgrading its Israeli production facilities – Intel is forced out of its protective shell to deal with Israeli public opinion.

It is never easy to convince the finance and economy ministries to provide a $300 million, $400 million, $500 million grant to a profit-generating global giant like Intel. But in the current round, Intel Israel will run a dual campaign: one in the ring of Israeli public opinion and the other in the offices of Intel's world headquarters. On neither of these fronts will Intel Israel have a strong opening position.

The international arena

It's hard to see from the outside, but the greater task confronting the people at Intel Israel is convincing the parent organization to invest here rather than in Ireland, Oregon, Arizona or China. Intel now finds itself at a major crossroads on a global as well as a local level. The business model that carried the company through the PC revolution is running out of steam. Meanwhile the company hasn’t managed to catch the mobile processing wave of smartphones and tablet computers.

Intel is still expanding and building new plants, but for how long? As users' focus switches to mobile computing, Intel's financial incentive to continue investing enormous sums grows weaker. Among its competitors, however, it still remains a frontrunner in pushing the outer limits of microchip technology. Its fabrication plants are the most advanced, and it is still the world's largest semiconductor chip company and the biggest investor in research and development in its field. Krzanich knows he'll need to take risks if he wants Intel to continue growing on his watch.

The uncertainty faced by the global corporation won't make the going any easier for Intel Israel. On the plus side, Intel will acquire a skilled workforce in Micron employees, a building that will save it part of the investment, and extremely competitive production know-how – the Kiryat Gat plant numbering as one of Intel's most efficient facilities worldwide. But Kiryat Gat's location, within missile range of Gaza, adds a substantial risk to any investment in Israel.

The local arena

Intel Israel has also found itself in an uncomfortable position with regard to Israeli public opinion. The issue of trapped profits and the low rate of taxation enjoyed by global giants operating in Israel have aroused public indignation at a time of budgetary cutbacks. But Intel Israel has an enormous asset working in its favor: Average salaries for employees at its development center in Haifa and at its production centers in Jerusalem and Kiryat Gat are double or triple the average national wage. The microchip producer also holds potential as a producer of middle-class households.

Expanding the high-tech industry is the healthiest way to raise productivity in the economy, as well as the standard of living. Israel's technology industry doesn't just need brilliant engineers or creative entrepreneur types: It also needs many modern production workers like those functioning in a global work environment and bringing in crucial expertise from abroad, driving new leased cars and providing their families a good livelihood. While developed countries like the United States, Japan and Germany can boast of huge industrial sectors – cars, microprocessors, aircraft, pharmaceuticals and more – this sector in Israel is comparatively weak.

Modern industrial workers constitute a middle class that is terribly lacking in Israel, and Intel can become the largest employer in Israel of such workers. Doubling its production and workforce at Kiryat Gat will have a significant impact on the business environment. Intel estimates that, on top of the additional workers employed there, the plant's expansion will also create 25,000 jobs indirectly.

Would a $400 million grant to Intel generate the optimal payback for the economy? The answer will likely be similar to the responses given by Finance Ministry economists the previous three times a cumulative $1.3 billion in grants to Intel were approved. The Finance Ministry and Prime Minister's Office need to look past the short-term budgetary conflagration for a moment to attend to the long-term future of the middle class.

Eliyahu Hershkovitz