Israel seen as major player as global chip war intensifies

With Intel's global chip hegemony being challenged, "Globes" surveys Israel's pivotal role in the battle, as high-tech salaries surge.

Recently, Google "poached" former senior Intel executive Uri Frank to lead its strategic chip development activity in Israel. Frank had headed Intel's semiconductor development for data centers and personal computers, responsible for some $30 billion in revenue each year. This expertise indicates he will very likely establish a similar activity in Israel, this time on behalf of Google.

Frank's recruitment is just a very small part what's happening in the semiconductor world - "an explosion" as one industry insider termed it. All of the major high-tech companies have chip development activity. Intel has always had a presence in Israel, but recently, Apple, Amazon, and Microsoft also began developing chips in Israel. Now Google is joining the party. "Globes" has also learned that Facebook plans setting up a chip development fab in Israel. Not only are the tech giants extremely competitive but Israel is becoming their main playing field. In fact, almost all chip developers have an Israeli presence, and for some, this activity is their most significant outside of their home countries.

Develop more, produce less

There are several veteran chip development operations in Israel. Intel develops its central processing units (CPUs) for personal computers, data centers, and networks, in Israel.

Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), a long-standing analog chip fab, is headquartered in Migdal haEmek. Israeli companies Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI) and Camtek Ltd. (Nasdaq: CAMT; TASE:CAMT) are world leaders in the development and production of machines that perform quality control - a critical step in the production process. About two years ago, testing colossus KLA of California acquired veteran Israeli company Orbotech for $3.4 billion. Applied Materials is another dominant testing company with significant operations in Israel, both in development and production. The two largest electronic design automation (EDA) software companies in the world - Synopsys and Cadence Design Systems - also have development centers here.

There are also others. Apple, for example, is developing its LiDAR sensors for iPhone and autonomous vehicles in Israel.

Amazon conducts most of its global semiconductor development for cloud-based machine learning in Israel. This week, reported that Amazon will begin developing a new networking chip for its server farms here. Microsoft's activity in Israel is smaller scale, developing networking chips for data centers. Unrelated to that, Microsoft is also expected to launch a data center very soon.

Cisco is developing its Silicon One chip, which enables data centers to meet the constant increase in data consumption, based on technology developed by Israeli startup Leaba Semiconductor, which it acquired in 2016. Qualcomm also has a development center here. Samsung is well represented in Israel. Sony acquired Hod Hasharon-based Altair (now Sony Semiconductor Israel), which develops energy-efficient cellular communication chips for the Internet of Things (IoT).

Cloud companies need specialized chips

Like Amazon and Microsoft, Google has long been more than just a major player in internet or software. These three are also the three largest cloud companies in the world. As such, in recent years, they have been working on developing proprietary chips that will either provide competitive advantages over other cloud providers, or be used for internal purposes. Even Facebook has tried its hand in collaborating with Intel.

The prevailing wisdom in today's tech world is that hardware/software integrations are a cheap way to gain more performance. The major players have concluded it's best to maintain control of critical hardware development as well as keep IP close to the chest. In-house development is important for providing better customer service and also saving on energy costs. Applied Materials forecasts that by 2025, data centers will account for 15% of global electricity consumption, up from a mere 2% in 2020. In essence, chip energy efficiency has become as important as performance.

In recent years, says Psagot Investment House analyst Shahar Carmi, "The global chip industry has exploded with a wave of increased demand and headed towards $400-500 billion [turnover] a year. I hear the CEO of Tokyo Electron predicts that by 2030-2031 it will reach a trillion dollars."

"Now, after a long consolidation process, the level of competition and profitability is encouraging new players to enter." Are we also on the threshold of an Israeli chip renaissance? "Maybe now, thanks to SPACs and the trend of investing in small companies, we'll see a wave of semiconductor investments."

"The biggest limitation - personnel"

Intel employs about 14,000 people in Israel and is considered the country's main incubator of high-tech not related to the IDF. Intel has operated in Israel since the 1970s and, over the years, many of the company's major developments have originated in Israel, including the very concept of the central processing unit (CPU).

"The biggest limitation on companies is manpower. Quality personnel are more valuable than cash," explains Oppenheimer & Co. analyst Sergey Vastchenok. "Companies will make every effort to access the 'talent pool', and the only places to find it are Silicon Valley and Israel. Intel built a large technology incubator with a lot of knowledge, and everyone wants a piece of that know-how. Nvidia is recruiting 600 programmers in Israel. Where will they get them? From Intel."

Nova CEO Eytan Oppenheim believes Intel won't be the talent hunters' only victim. Nova is one of the world's leading provider of metrology devices for advanced process control used in semiconductor manufacturing and, as such, has an inside perspective on industry events.

Oppenheim says the requisite industry skill sets for hardware engineers are so alike that virtually all local chip companies, and even biotech companies, can be headhunting targets for the tech giants.

And this is apparently just the start of a consistent pattern. It happened in 2000, when Marvell Technology bought Avigdor Willenz's Galileo for $2.7 billion and turned it into a development center that currently employs about 600 people, and again in 2015, when Amazon acquired another Willenz company, Annapurna Labs, this time for $370 million. Annapurna co-founder Nafea Bishara - now Amazon's Vice President of AWS - told "Bloomberg" that the company's workforce at Amazon's chip development center in Israel is now 10 times larger than it was during the acquisition.

These selling prices bear no relation to chip quality. A company may be acquired without having sold a single chip and even if development is incomplete. Instead of creating something from scratch and wasting precious time, buy an Israeli startup as the basis of a local development center and then continue to grow it.

The same thing happened with Mobileye, which - autonomous vehicles aside - is also a chip developer. Mobileye is currently building a new campus in Jerusalem, which will house hundreds of new employees - a total of 2,700. Habana, Intel's subsequent acquisition in Israel after Mobileye, has grown from 170 to about 650 employees (including internal staff shifts within Intel) in about six months.

Nvidia, the chip company with the highest market value in the world, completed the acquisition of Israel's Mellanox for about $7.36 billion almost a year ago. Covid-19 restrictions were eased in Israel only recently, and already last week Nvidia announced its intention to recruit another 600 engineers. Intel and Microsoft also competed over the acquisition of Mellanox at the time, but lost.

Big money also breeds egoism. When Amazon launched its artificial intelligence chip last December, it was at the same event where, together with Intel, it announced the launch of Gaudi AI training chips for its cloud offering, and almost stole the whole show from Intel.

Gaudi was developed in Israel by Habana Labs which was sold to Intel for $2 billion. Like Annapurna, Habana was founded by Avigdor Willenz.

Back to Microsoft - Today, another Willenz company, Xsight Labs, is in the advanced stages of developing a chip for data centers. Industry sources say that after failing to acquire Mellanox, Microsoft might possibly soon buy an Israeli chip company and add it to its already existing activity: developing processors for its Surface computer line.

Electronics engineers or computer people?

Since its inception, Israeli high-tech has been biased towards semiconductors, whether CPUs/GPUs, memory chips, sensors, network processors or other. Yair Snir VP and managing director at Dell Technologies Capital in Israel and Europe, says, "We are now witnessing two mega-phenomena. First, the major players are already very active in Israeli industry. Second, Israeli industry is playing a leadership role."

However over the past decade, he adds, electronics engineers have been drifting towards computer science. The result is that new employers may now be battling for talent. Snir says that employers and the government should be doing their part to train workers for these professions. "Most people with technological backgrounds in the last decade have tended towards software and not electrical and electronics engineering. That's because the learning curve is faster, salaries are higher, and development cycles are shorter. Because the tech giants are themselves software developers, we'll have to shift gears and direct more students towards electronics and electrical engineering, not software".

Nvidia VP chip design Ido Bukshpan thinks the task is possible. "Migrating employees from professions like chemistry, biology, mathematics and even medical engineering to high-tech creates diversity and generates more ideas."

Who'll finance the billion-dollar chip fabs?

In recent years, the high-tech pendulum has been swinging back towards hardware. The change comes alongside an increase in the volume in data generation, streaming services consumption, and AI-based services. All have created a growing demand for storage, processing, and networking capabilities. Over time, however, there has been a decline in software capabilities for improved performance. At the same time, there is an ever-increasing need for hardware that will make significant strides and meet the incessant demand. But there have been some barriers to hardware improvement.

The first, which has always been pertinent, is the high cost and length of time involved in setting up a chip fabrication plant. Most such facilities, the world over, benefit from government support, including the Intel fabs in Israel and Ireland, which were granted tax breaks.

Taiwan began investing in the field as early as the 1980s, founding Taiwan Semiconductor Manufacturing Co. (TSMC), now considered the world's leading chipmaker. The Taiwanese also established United Microelectronics Corp. (UMC) as competition to TSMC, again with government support.

Government backing for this industry is necessary even today, and not just outside the US. TSMC is about to set up a $12 billion plant in Arizona and has already received approval for government subsidies. As an example of the huge investment required for a fab: in 2020, TSMC's budget for production infrastructure upgrades alone was some $16 billion. In addition, US government subsidies for TSMC are estimated in the hundreds of millions of dollars.

All that pales in comparison with the planned volume of US investment in semiconductors. As part of the infrastructure upgrade program recently approved by the Biden administration, $37 billion was allocated to the chip industry.

Intel, the US's most strategically important technology infrastructure company, last week announced not only its intention to invest $20 billion in setting up two plants in Arizona but also stated that it would be announcing additional investments later this year. Intel, however, did not name the target country - US, Israel, or Ireland.

Intel already plans to invest some NIS 40 billion in its Israeli fabs, not to expand manufacturing activities with existing technologies, but to develop future advanced manufacturing capabilities.

The world of microprocessors has undergone quite a few upheavals. Like oil in the 1970s, chips recently became the focus of a geopolitical conflict, in this case between the US and China. In this trade war, discussions regarding intellectual property (IP) are not over movie and TV show copyrights, but about technology patents, mainly Internet infrastructure - and chips.

Chinese investment and US pressure

The US administration has imposed restrictions on the sale of chips to China that also apply to US allies, chiefly Taiwan. Unlike Internet services, for example, China's semiconductor sector still lags behind the West, especially in performance and sophistication. But China never rests. In response to restrictions placed by then US President Donald Trump, the Chinese stepped up their efforts to achieve independence in the field.

China has clear goals on this matter. In its multi-year plan for 2015-2020, it laid the groundwork for chip development capabilities of networking equipment and mobile devices, and in its current five-year plan for 2021-2025, it plans to expand on that. In 2019, the import volume of chips to China was about $300 billion, the country's largest imported product. In fact, China is currently able to produce only about 30% of the chips needed by its industries.

Although China has achieved excellent results in terms of design with Huawei Technologies' Kirin processor, it is finding it hard to catch up with the West as regards chip production.

SMIC is China's main chip fab. It too has been subject to US restrictions, similar to those imposed by the US administration on Huawei. About two weeks ago, the company announced it would set up a new $2.25 billion plant, with government assistance. And that's not all.

Tower Semiconductor SVP and General Manager Sensors and Displays Business Unit Dr. Avi Strum saiud, "Their government is investing lots of money, meanwhile, in many other fabs in many other districts. The Chinese want to not only lead the world but also be independent of the Americans. True, Huawei was hit hard, but set up a massive organization for chip design, something it used to procure from outside. "

Israel's advantage: Good US relations

Global events - Covid-19, competition with China, record-breaking demand for devices and accessories on the part of consumers, businesses and technology companies - are linked to the heaps of cash these international technology giants have for investment.

Israel is a US ally and considered a relatively safe place - a condition necessary for success, certainly when the competitor is Taiwan, which lives under threat by China.

Israel also has one of the most developed tech ecosystems outside the US; it is understandable why this brings a huge influx of investments.

Today, the big tech giants can invest in almost anything they want, whenever they want, and wherever they want. This includes recruiting expensive talent from Israel, and if microprocessor industry talent already exists - even more so.

Meanwhile, Israeli startups are not concerned, despite the competition. AI server-on-a-chip company NeuReality CEO Moshe Tanach admits, "The pool is getting smaller" and "It's hard to compete with Apple, Amazon and Nvidia, which after acquiring Mellanox raised wages by 10%-15%". On the other hand, he asserts, "They don't stand a chance of competing with us".

"An engineer at Intel and Mellanox finds himself working on the same thing for three years. When I sit with an engineer and describe the amount of things they'll be responsible for, it's like throwing a kid into the most interesting playground in the world - plus the attraction of an exit out there."

Avi Bakal, CEO of startup Trieye, which develops all-weather sensors for autonomous vehicles, and collaborates with automakers like Porsche and BMW - has intimate knowledge of production line woes. He says he is slightly more frustrated by the situation. "For smaller companies, there's a serious problem in the fight over talent and non-talents, too. Even junior employees at Apple earn up to NIS 50,000. That's a fortune. When we recently managed to recruit someone from Apple, we needed to open a bottle of champagne."

Supply fails demand: chip shortages and price hikes

When the Covid-19 crisis began, one initial fear was over the lengthy semiconductor supply chain. The pandemic and lockdowns raised concerns that electronic components would not reach their destinations on time, creating backlogs. For a moment, there was concern that empty shelves would be a serious consequence of the crisis.

In the end, supply chains did not collapse but in many sectors - vehicles, computers and gaming consoles, for example - shelves remain empty. Why did this happen?

Even before Covid-19, the data revolution had commenced and with it, increased consumption of streaming services and AI-based services - all heavy CPU/GPU consumers. At the same time, the Internet of Things revolution had begun, connecting devices, previously unconnected, to networks, each of which now had several, if not dozens, of chips. All have created a growing demand for storage, processing, and communication capabilities.

Then came Covid-19, sending the world's population to study and work from home, and disrupting all of the global semiconductor industry's plans. Shelves emptied not only due to the damaged supply chain, but also because of skyrocketing demand for chips to power new home computers, upgraded appliances, stronger modems, televisions, and more.

The semiconductor industry is built on long-term planning, based on consumption forecasts. A simple example: for chip manufacturers to meet demand, they need new machines to make the additional chips.

But the companies that make chip-making machines, or process control machines, have structured their multi-year plans around anticipated demand. The result: a shortage of components and rising prices already being felt by industries such as the automotive industry.

"The whole chain is built on anticipated versus actual demand. But when demand rises, or when reality is bigger than what we imagined, there's no way to fix it instantly, and then everyone starts fighting for priority in the supply chain," says Orr Danon, CEO and founder of startup Hailo Technologies, which has developed an AI processor for edge devices. Hailo's chip is already in the testing stages for devices like surveillance cameras at security companies and retailers in the US, Germany, Japan, Korea and Taiwan.

The second reason for the shortage is the result of the US-China chip war. The US imposed restrictions on the sale of chips to China. The result was - fearing the pandemic and out of concern for the supply chain - stocks of chips were either depleted or, conversely, chips were stockpiled, preventing other companies from stocking up.

Strum says, "In the first half of 2020, all of the manufacturers preferred not to take the risk, and did not stockpile. For their part, customers tried to get rid of inventories they already had, to the point where they were left without. As soon as there was hope, suddenly everyone started ordering chips. But then it wasn't possible to supply everyone." As a result, he says, "People got more pressured, and began ordering surplus quantities. At the moment, it's unclear whether demand is due to increased market need, or increased inventories."

The electronics sector is already affected, especially the chip-intensive automotive market. Bear in mind that the shortage of even a one-cent chip can delay supply of an entire thousand dollar product.

Bakal says, "In production plant deals, you need to reserve a year in advance. They have no ability at all to support the amount of demand. Prices are rising in the free market, making it more difficult for small companies to access manufacturing processes."

Published by Globes, Israel business news - - on April 8, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

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