Several weeks ago, senior General Motors executives visited Israel. Not so long ago, such a visit would have been accompanied by major fanfare, an official ceremony, with enthusiastic media coverage, a helicopter tour over Israel and much more besides.
But this visit received zero media attention and, other than a short meeting with Prime Minister Benjamin Netanyahu, had no official dimensions. It was a practical, business-oriented trip, after which the visitors boarded the corporation's executive planes and returned to Detroit. In fact, such visits to Israel have become routine in the past few months. If past years have seen only low-ranking regional directors visiting Israel, you can nowadays find senior international automaker executives visiting Israel at almost any given time - sometimes several at the same time. They all wish to gaze at 'the miracle' - a tiny Middle Eastern country with almost no history of local car development and manufacturing that has in the past few years turned into a global development hub for future technologies which are critically important for the future of the industry.
An avalanche of M&A proposals
In the past two years alone, Israeli car industry companies, or at least companies with Israeli managers and entrepreneurs, have closed deals and signed contracts worth hundreds of million dollars. Since our last industry review several months ago, these figures have soared. And this is only the tip of the iceberg. There are further deals with a potential value of billions of dollars. Unlike many Israeli startups, which are initially oriented towards making a quick exit, many of the new companies in the field of car and auxiliary technologies stay cool in the face of the avalanche of merger, acquisition and investment proposals they receive.
Most of them strive to adopt the business model of Mobileye (NYSE: MBLY), which maintained its independence and reliance on 'local' financing until the international offering which has turned them into a corporation of multi-billionaires. It is possible to replicate Mobileye's model, but temptations are becoming greater. International car manufacturers have deep pockets and local startups have been subjected to heavy pressure by financial institutions to forego that image of an 'heavy industry' which provides investors and shareholders with small, unstable returns, and to position themselves as tech-rich 'dream companies' such a Tesla, producing fantastic returns, whether they report profits or not.
Car industry sub-contractors and large component developers, those so-called "Tier 1" companies, also seek - and have to get - a slice of these operations. In an era in which the future of cars is emerging as electric, autonomous and electronic - and mainly uncertain - gaining exclusive control over technology is the key to business survival. Both sub-contractors and component developers are threatened by cash-rich IT and chip giants, who see advanced cars moving into their 'backyard'.
Estimates are that at present, electronics already constitute 30% of the cost of modern cars and the market is expected to reach an annual $100 billion turnover in a few years. Earlier this month, in the most recent 'blitz deal', Samsung acquired Harman corporation, an important global player in the field of car infotainment and audio, for $8 billion in cash; it only provided further proof of the external threat to 'traditional' players in this industry.
Catch them while they are small
Since competition for buying established Israel companies in this industry has started becoming fierce and expensive, some potential investors have adopted a strategy of 'catching them while they are still small' - scouting for seed companies, building R&D centers and incubators and identifying ideas and products before they fully materialize. As a side note, the prestige of Israeli development capabilities in this field has extended beyond Israel's borders a long time ago. In New York, the US investments capital and possibly the most advanced area in the world in the application of advanced transportation solutions, three of the companies in this field have Israeli roots. The global autonomous car development of online transportation giant Uber is also at present managed by two Israelis.
If we return to the General Motors example, technologies currently being developed at the corporation's R&D center in Herzliya are starting to play a pivotal role in the company's global product plan. The GM executives who visited Israel were provided with a live on-road demonstration of cars equipped with autonomous drive systems, developed here. There were also presented with the future generation of the online car information system OnStar, developed almost exclusively by an Israeli team.
While GM's R&D center has become a role model for many automakers, their level of commitment has varied. For example, Renault and recently also India's Tata and DaimlerChrysler have established 'knowledge centers' or 'technology accelerators' in Israel, that cooperate with academic entities and focus mainly on scouting for talents, early business opportunities and financing projects. Other manufacturers use the network of connections of their official importers to scout for and develop business opportunities and technologies. This is the model currently adopted by Toyota, together with Union Motors. A joint incubator will also be opened in Tel Aviv in the near future by Mayer Group, Honda and possibly also Volvo. Similar models are employed by many key car industry tier 1 suppliers.
Connecting the Israeli driver
The average Israeli driver, who is not part of high tech and venture capital cliques, might ask "what is all the fuss about?" Other than a few buyers of last-generation cars, most of them luxury cars with active safety systems, the familiarity of most Israeli drivers with top-notch local technologies is limited to Waze, which has been owned by Google for ages, and Mobileye's veteran and loud driving alert system, generously distributed by local car importers. One of the key differences between cars currently marketed in Israel and their global counterparts lies in the field of infotainment, bidirectional online driver services integrated in the vehicle at the production line.
Although most imported cars come with original multimedia systems initially designed to provide the car manufactures' advanced online services and for the download of designated applications with a voice interface, in Israel most of these options have been disabled. The default, for the up-to-date driver, is to download a relevant third-party mobile application, with the grave safety effect of these 'improvisations' being evident on Israel's roads on a daily basis. The same goes for original or local multimedia screens able to 'blindly' display the mobile phone's interface.
But this situation is starting to change. One of the pioneers is Delek Motors, which at present works with BMW experts to 'import' to Israel the BMW-Connected service, which is already operational in many countries. This is a bundle of bidirectional entertainment and communications services, developed and supported directed by the manufacturer, connected to a manufacturer-standard car service call line, which includes cybersecurity, and is supported by BMW. Other than 'customary' services (abroad) such as downloading and uploading entertainment content, applications, navigation service, and real time road information, the system enables turning the mobile phone into a bidirectional terminal of the car's computer. This enables routine input on the car's location to the smartphone (for example, when another family member is driving the car) as well as input on its technical condition - malfunctions, oil and air pressure, driving range until refueling and etc. when the driver is not is in the car. Moreover, it enables remote phone activation of various car functions, such as heating, lights and horn and even remote parking. These functions are hardwired in advance with safe operating interfaces. or example, the recent and most advanced development unveiled by BMW is the link to remote control systems with advanced voice activation (natural speech), such as Amazon's Echo and Alexa.
In addition, the manufacturer overseas can remotely connect to the system, install vital software updates, improve performance and more. Many of these systems, currently offered in the industry, contain Israeli software and hardware components. In Israel, it is possible to find aftermarket systems with similar capabilities, but without the support of automakers. We can assume that other importers will follow the example set by Delek Motors and by Colmobil, which was the first to activate online driver services for private drivers in serially-produced cars (even if these services were locally installed and developed) and integrate the manufacturers' online services.
At present, at least, these are customer-support operations which are vital derivatives of the complex technology of new cars due to arrive in Israel in the future. However, it is possible that later on such services would also become new sources of revenue and profit for car importers, at the expense of current market specialists, such as car detection and theft-protection or fleet-management services. On the bottom line, if once Israeli car technology resembled the fine vegetables grown in the Arava Desert - in order to taste them you had to visit Europe - at present we are on the threshold of an exciting new era, not only for investors but also for drivers.
Published by Globes [online], Israel business news - www.globes-online.com - on November 28, 2016
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