Israel will rue failure to woo Intel

Shmulik Shelach

There is no way to explain the failure to create an extensive Israeli electronics industry except as the want of a suitable government policy.

In the late 1980s, Intel Israel's management thought about how to turn its operations into Intel Corporation's (Nasdaq: INTC) leading design and production center for key products. The strategy was clear: even at a well-oiled machine like Intel, gaps sometimes open as technologies are superseded, which creates opportunities for thinking outside the box.

This is precisely the crack Intel Israel's management had been seeking for years. Hundreds of Israeli engineers attended seminars at Intel development centers around the world, returning home with vast knowledge about the geographic space on silicon wafers which are turned into computer processors. Slowly, more and more design territory on electronic circuits and functions were conquered by the Israeli center, and everything was ready for a breakthrough.

The big chance came in the early 2000s, when Intel's Haifa development center led the awareness revolution at Intel with the transition to the Centrino technology, which became the basis for the company's product lines of the last decade. The importance of Intel's development center in Silicon Valley fell proportionately. Technology generations come and go, while simultaneously a geographical center becomes more central before being pushed aside.

A similar effort was made on the production side. Intel established its first Israeli fab - Fab 8 - in the early 1980s, which was one of the company's top production centers at the time. Intel Israel realized that future manufacturing leadership required greater effort, including substantial government support. Intel's next two fabs, established in Kiryat Gat - Fab 18 and Fab 28 - were from the outset described as the company's flagships. The captains at Intel Israel ought to have been pleased; for two decades, hundreds of employees were trained to optimize costly automation at the fabs, which turned Kiryat Gat into the natural candidate, behind only the US, for the production of state-of-the-art products.

As each new generation of technology requires more know-how and investment, starting at $5 billion, the gap between each generation becomes critical for Intel Israel to prove that Israeli production has no peer.

But Intel decided to return to Ireland, bypassing Israel, for the production of next-generation 14-nanometer technology processors. Israeli manufacturing has lost a technology generation before, but this loss is more painful. The next-generation fabs will be more important than before for Intel, and will generate tens of billions of dollars in annual revenue in the coming years.

Over the years, Intel's policy has clearly shown the importance of government grants in the decisions about where to locate its fabs. Intel did not invent this. For the past four decades, wherever a semiconductor industry developed, there was intensive government support.

For example, Taiwan's semiconductor industry became a global leader thanks to a government decision made in the early 1970s. This industry will contribute $56 billion to Taiwan's economy in 2012, from hundreds of enterprises and companies. The figure in Israel is far smaller - less than a tenth - although Israel's starting point was much better.

Israel invested heavily in opening the door for Intel, but instead of leveraging the know-how and resources that arrived to create a thriving industry, Intel has remained almost alone. The manufacture of sophisticated electronics is not for us, as many in Israel's high-tech industry will tell you. But why? Why should Taiwan, Singapore, Japan, China, the US, and Germany be considered as proper places for the production of semiconductors, but not Israel?

There is no way to explain the failure to create an extensive Israeli electronics industry except as the lack of a suitable government policy. The irony is that this failure is what rendered the heavy investment that Intel wanted from the government less relevant. Without a clear government decision, we will not see a manufacturing base develop here, so the alternatives for this money become more attractive in both high tech and low tech. The cost of investing in an Intel fab includes a growing list of worthy alternatives.

The risk is not that Intel will leave Israel; it has too many assets and capabilities here. We will not see thousands of laid-off employees swarming the streets of Kiryat Gat. But just as Israel became an important strategic center, it can revert to become just another location. Beyond the economic repercussions, there will be morale consequences. Is there any other company of this scale that will try to establish in Israel such essential operations as Intel did?

Former Intel CEO Andy Grove once said that only the paranoid survive, also holds for the future of the Israeli government's relations with the company and for the future of Intel Israel's relations with headquarters and the Israeli public. For over a decade, Intel Israel has been the spearhead of Intel, and the presence of Israelis is stronger than ever, accounting for 10% of Intel's workforce, or 8,000 employees, and a senior Israeli executive, David Perlmutter is a contender to succeed Intel CEO Paul Otellini.

It is possible that the drama over the location of Intel's next fab is a story of punishment for Israel's sin of hubris. It is hard to know the mood in Intel Israel's corridors, but a few months ago, we got a glimpse of them when Mooly Eden was parachuted in to serve alongside Intel Israel managing director Maxine Fassberg.

As for Intel's relations with the Israeli government, the Ministry of Finance and Ministry of Industry, Trade and Labor depicted the company as a near-violent lobby. Things should be put in proportion, but it is hard to avoid the feeling that the campaign for the latest government grant changed the balance of power.

Published by Globes [online], Israel business news - - on June 19, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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