Last week, NBC dedicated a news item to global auto industry interest in Israel as it searches for new technologies. While the piece suffered from several prejudices common to the American understanding of Israel, it also shone a light on one of the more interesting transformations happening among Israeli businesses in the past few decades.
A senior tech executive in the local industry which we spoke to this week went as far as to designate the change as “the third phase in the life cycle of Israel's high-tech industry.” The first stage was the government defense companies, which developed a healthy and advanced technology defense sector. In the next stage, technology and manpower trickled down to less-lethal areas to create a thriving commercial sector in the space between startups and large conglomerates, in data security and systems, chip development, ICT, and biotechnology.
Now, he says, “We are on the threshold of a new phase which can position the knowledge-intensive industry in Israel as an innovation center for a significant portion of the global auto industry.”
Industry changes
When we talk about the ties between Israel and the auto industry, we immediately recall the recent successes of companies like MobilEye and Waze, which generated a massive wave of auto sector startups. If one chooses, they can also look at the heroic attempt by Better Place as one of the central catalysts which led to this state.
While the name Better place raises memories that many would prefer to forget, the company did focus global attention on the Israeli potential in the development of advanced vehicle technologies some which are significantly ahead of their time and are becoming strategically important to the industry.
But Better Place also served as an “incubator” for first-rate developers and professionals who later moved on to new startups or established vehicle technology companies.
The most important change, which is picking up steam behind the scenes, is the direct entry of automakers into the R&D space in Israel. To understand the significance, one needs to remember the traditional hierarchy according to which the global auto industry operates. The structure is built on a two-tier system: on top are the automakers, which compose the ruling class, while on the other are the external suppliers, which include technology firms, companies that develop and manufacture raw material, spare parts, and entire components.
The external suppliers play an important role during an era in which the entire auto industry is reliant on “outsourcing” to reduce expenses. But the automakers still treat them both with silk gloves and a hint of suspicion, meaning each manufacturer hopes to be given exclusive rights to the supplier’s latest developments or at least unveil them before their rivals while doing everything possible legally to lower the supplier’s price and reduce R&D expenses. They “tie-up” the suppliers within a stringent legal system and make them dependent on the automakers. It only takes one automaker cancelling a contract or delaying the development of a certain model to significantly reduce the revenue of a supplier.
But under the new conditions, in which “technology is king” in the auto world, and microchips and applications have the potential to change the rules of the game in the coming decade, the automakers are faced with a dilemma: the power order in the relationship is gradually reversing from the big manufacturers to the independent technology developers, who can “divide and rule” the automakers and may even quickly become public giants worth billions on paper.
And we haven’t even mentioned the IT giants, which also have their own aspirations for the industry. The changing power balance is in a major understatement uncomfortable for the automakers.
It has led many of them, especially the major players, to reduce their dependence on external technologies through two central methods. The first is to use their massive cash reserves to “swallow up” startups in relevant fields and integrate them into the company. The second is to significantly update their R&D centers.
And that’s where Israel enters the picture.
GM is paving a highway
The company to open the way for other players in the industry in Israel was General Motors, which established an independent R&D center in Israel nine years ago long before the massive buzz generated by MobilEye and Waze. For much of the period, the Israeli center worked quietly, under the radar of the global industry, employing only a few dozen employees mainly with impressive degrees.
Behind the scenes, the technologies developed at the center in recent years gave GM a competitive edge especially in its core US market and provided a new source of (much) revenue.
The technologies developed in Israel, including those developed in the Global Connected Consumer project led by the Israeli R&D division, will be integrated into millions of GM vehicles worldwide in the coming years. But it is likely only a “promo” for the next stage.
In a simple message at the beginning of the year, GM announced its intention to substantially expand the operations o its Advanced Technologies Center in Israel. The company will increase the pool of employees in Israel from 100 to 300 this year, a strategic investment both in local and global terms.
One of the key research divisions receiving reinforcement as it will draw much interest in the coming years is the autonomous vehicle technology section. GM told the development center in Herzliya this year that it will be the only GM center globally specializing in the field outside the US. GM’s experimental vehicles are already driving on Israeli roads equipped with various components of the future autonomous system, gathering both mileage and experience. In the future, Israel may also host specialized GM prototypes of autonomous vehicles.
As an aside, it is curious to ponder the future of the relationship between GM and MobilEye, which is also trying to take the lead in the autonomous sector and already conducts advanced trials with Tesla vehicles in Israel.
GM is one of MobilEye’s largest clients in machine vision and accident prevention technologies. Naturally, many experts assumed it would be the key future supplier of autonomous vehicle technologies to GM. But the issue is more complicated than it seems, and at least for now it appears their development tracks are parallel and not necessarily conflicting.
And we cannot forget the venture capital operations of GM Ventures, which is affiliated with the GM center in Israel. Under its auspices, the company has already invested and even bought Israeli startups in various fields; at a conference last week, it was hinted “many more interesting deals are on the horizon.”
Automakers incoming?
The Israeli gambit by GM has sent a shot across the bow of all automakers and its importance for the Israeli tech scene cannot be underestimated. While we have heard in the past few years about automakers using “scouts” to examine Israel, or investments in startups, or even major investments focusing on joint operations abroad like Volkswagen with Gett and more than few declarations of intent to establish local operations, few bore fruit.
But the GM gambit has paved a wide highway into the heart of the Israeli tech scene on which will arrive many others giants sooner or later and we feel confident betting on earlier. And these are not exits of companies, started by enthusiastic youngsters with brilliant ideas, but the entry of international conglomerates working in an industry with revenue totaling $2-$3 trillion.
These are industrial giants that do not seek tax benefits and incentives in the billions and their potential in bringing us closer into the global fold is critical. It should be an interesting ride.
“On Star” on the way to Israel
A major component of the Israeli contribution to the auto industry will only be seen in the vehicles in the coming years, but the impact can already be felt in some fields. In one example, General Motors is turning its European “On Star” service from basic navigation and location to an independent and profit-seeking division which will manage all its future vehicle mobility services from providing content and internet access to mobile applications connected to the vehicle which can provide diagnostics and maintain contact with the client.
The Israeli center has been behind the technologies which led GM to the move more specifically, the charge was led by former Better Place senior engineers. Last summer, the division began selling its products in 12 European countries and they will be available in GM cars in upcoming years with an emphasis on Opel cars, at a rate of a million vehicles a year.
An interesting twist in the tale, of course, is that Israel is also on the waiting list for GM’s “On Star” services, which will arrive after regulatory considerations are handled. A trial vehicle equipped with full On Star capabilities connected to the GM center in Israel is already driving on Israeli roads.
Published by Globes [online], Israel business news - www.globes-online.com - on June 5, 2016
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