The NIS 40 billion that Intel plans to invest in a new fab in Kiryat Gat and the NIS 4 billion grant that it is requesting from Israel for the purpose are exceptionally large sums. At the same time, it is all part of a regular routine. Every few years, the company asks for a state grant to build a fab, with the threat (carried out once) to build fabs in other countries. Intel has received over NIS 7 billion in four decades and invested nearly NIS 80 billion in construction of production sites. Just last month, the Knesset Finance Committee approved a NIS 700 million grant for the company, which is considering construction of a fab in Ireland, Israel, or the US; or in all of them; or in some of them; pending negotiations with the governments.
Even if Intel gets only a third of the grant it wants, instead of the whole amount, it will receive NIS 2 billion in the space of one year. The state is playing poker with Intel - trying to figure out whether the company has already decided to build the fab in Israel and is merely trying to maximize its grant, or is nearing the breaking point, meaning abandonment of the fab in Israel.
Certainty isn't enough
Why should the state give Intel so much money? The US chip company is the largest employer in Israeli high tech, with 12,000 employees - nearly 4% of those working in the industry. The existing Kiryat Gat fab alone has 3,000 employees, although most of them are production workers. Intel is also Israel's largest exporter. Its activity increases GDP. Its major investments in construction and maintenance of its fabs affect the business of many suppliers. Intel transfers to Israel technological know-how that later reaches local startups. On the other hand, Intel receives exceptional tax breaks in addition to its generous state grants.
The investments and economic decisions are a choice from among alternatives. If you talk with people from the Ministry of Finance budget division, they will undoubtedly sketch for you the appropriate graph from an Introduction to Economics course. In the context of Intel, however, it appears that this choice of alternatives is not taking place. The Ministry of Finance is inserting the figures into a model and examining whether or not the return on the government's investment in construction of the Intel fab is positive. A positive return, however, can be large or small. No one will invest in a share if the return is 3% a year without thinking about what the return will be on a different share. Why were billions of shekels invested in Intel's fab over the years without considering the alternatives?
The certainty factor, of course, is also part of the equation. In every investment, the risk is weighed against the potential benefit. It is far easier and more comfortable to invest in one fab of a stable company that will probably not vanish off the technology map. Such a decision can be made, and is certainly legitimate, but should be compared with worthy alternatives. These can include investment in small and medium-sized businesses, grants to other Israeli companies, or employee training. Perhaps it is better to think about the longer term and invest in preschool education.
The alacrity with which the state approves grants to Intel is alarming, and raises questions about government decision-making in this context - both in this government and all recent governments. It appears that an easy solution is being sought, as if expanding the production site were the only way of improving the situation in the outlying areas and the state of the Israeli economy as a whole.
All the eggs in one basket
Late last week, Intel published its financial statements for 2018 and its guidance for 2019. The US chip company had an excellent year, but its guidance for the future is starting to generate anxiety. The trade war between China and the US, weakness in the personal computers and data centers sector, and weakness in Apple Computers (whose supplier is Intel) are the main sources of worry.
When the global picture is considered, it is hard to avoid thinking about the effect of Intel's activity on the local economy. It can be treated as a reminder of Israel's great dependence on the company. Intel already missed out on the mobile communications sector, and is now doing its best to avoid missing out on the coming innovative areas (e.g. Intel's $15 billion acquisition of Israeli company Mobileye). Intel relied on one sector and got burned; Israel should learn the same lesson.
Published by Globes, Israel business news - en.globes.co.il - on January 29, 2019
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