Israel has put too many eggs in the Intel basket

Intel lab

Intel CEO Bob Swan's comments about outsourcing production provides Israel with an opportunity to examine alternative options for huge government grants.

Investments of $22 billion over the years, employing nearly 5% of Israel's tech workforce, 1.5% of the country's GDP and five big plants in Israel including outside of Central Israel - these are the numbers behind Intel's operations in Israel, where it is the country's biggest tech employer. The company has been in Israel since 1974 and over the years has become the most significant company in Israeli industry. Some even say that without Intel, Israeli high-tech would not exist. The knowhow gained at Intel has seeped through to other companies such as Mellanox, which was founded by former Intel employees.

Intel currently has 14,000 employees in Israel of whom 4,900 are involved in production. These are highly skilled employees who even include chemists, who cannot always find work in the tech sector. 53,000 others are employed indirectly by Intel as service providers. Intel's economic contribution does not end there. It includes procurement from suppliers building its plants and maintaining them, municipal taxes and huge exports and more.

All this begs the question, is Israel too dependent on Intel and is it right to carry on nurturing this dependence as Israel's decision makers have done time after time. The question arises every time that Intel demands a grant from the government to build a new plant, and Intel knows how to conduct tough negotiations. The question must now be asked because Intel is a corporation in crisis with a question mark over its future and status in the chip industry and if it will continue to build new plants. In addition to the grants it gets, Intel also receives tax benefits on the plants it builds outside of central Israel.

At the end of last week, Intel published good second quarter financial results, which had been boosted by the Covid-19 crisis. However, at the same time the company reported that it was postponing by one year the start of production of its 7 nanometer chip technology. In the conference call, Intel CEO Bob Swan went even further and said that the company was also planning outsourcing production, which in effect would mean abandoning the need for innovation.

The reason for this is that Intel is struggling to stay ahead of its rivals in terms of technology and maintain the lead it has had in recent years. Swan's comments were clearly not a slip of the tongue but may not necessarily be translated into deeds. But if Intel were to go ahead with this, it would be an earthquake for a company whose very DNA and one of its major advantages is the connection between the design and manufacture of its chips.

Intel is currently building a plant in Israel at an investment of NIS 40 billion, which includes a NIS 4 billion grant from the government. The plant is due to employ 1,000 people. Market sources believe that the factory will include 7 nanometer chip technology, although Intel has never confirmed this. At the moment it is not entirely clear what will be the fate of this factory although Intel continues to insist that it is business as usual. The existing factories are known for their high productivity so there is no reason to switch them to outsourcing, especially after Intel invested so much in their construction.

In order to understand the issue of grants, one needs to understand the dynamics between Intel and the Israeli government. Intel is well aware of its value to any local industry and exploits this value for its needs. The US chipmaker knows how to 'threaten' that the next factory won't be built in Israel, which would increase the risk that the factory after that won't be either. On the only occasion that Israel stood up to this threat, Intel built its factory in Ireland but it returned to Israel to build the factory after that. But now it seems there may be no new factories.

Until now Israel's decision makers have always feared that on their watch Intel would decide to build a plant elsewhere and it certainly never occurred to them that Intel's operation in Israel would be scaled back. The link between Intel, and employees in the most advanced technological settings, provided excellent photo opportunities for politicians and policymakers.

The returns from the government's investments have been positive but there has never been a serious and genuine public discussion here, including all the figures and calculations, about alternative investments - what would happen if the grants given to Intel were put somewhere else. Who are the Intel employees benefitting from the new factories and would they have found jobs anyway without them? Were these decisions to give Intel grants made automatically because they yield positive returns? Nobody invests just to get returns, rather they invest to maximize their returns.

Intel likes to stress its commitment to Israel. Part of that stems from its desire to justify the generous grants that it receives from the government, which is part of its genuine long-term connection to Israel. Intel, like every large US corporation, puts an emphasis on corporate responsibility and the activities that it develops do indeed have great value but the company also knows well how to market itself. It's possible to understand the reason for repeatedly investing in Intel and why we don't want to lose this asset whose importance cannot be underestimated.

But the question shouldn't be about Intel but about Israeli industry. What is happening now is an opportunity. If until now it was not possible to imagine that Intel would stop at some stage building plants in Israel, so that we had to maintain the connection with the chipmakers, today it is a real option that should preoccupy our policymakers. Already today they can begin to think about other options for investments that will replace the recurring investments in Intel plants.

Even if investments in Intel bring high returns, it is not possible to continue developing dependence on one company. History proves that tech giants rise and fall. The strengthening of Intel contributed very much to Israel but even though the chip giant was successfully able to reinvent itself several times, there can be no certainty that that will continue to happen.

Two things must be done: to examine the investment in Intel in a hardheaded way and to understand how it contributes to the current needs of the Israeli economy, while at the same time taking on board that one way or another, it is worthwhile that Israeli industry won't be dependent on one company. No CEO and no investor would put most of their eggs in one basket, and there is no reason for the Israeli government to do so. If once there was an explanation for this, even if it were justified by necessity, now there isn't - Intel might fall from its greatness and will not necessarily build any more plants. It is already today worth planning new engines of growth.

Published by Globes, Israel business news - en.globes.co.il - on July 27, 2020 © Copyright of Globes Publisher Itonut (1983) Ltd. 2020

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