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Israeli high-tech firms compete with Silicon Valley
Journal of Commerce / May 11, 2000

By Larry Luxner

TEL AVIV -- In an earlier life, Israeli electrical engineer Ami Amir -- an expert on radar-jamming defenses -- was running a sales and distribution center in New Jersey for a small telecom equipment manufacturer. After boosting the company's sales from $1.5 million to $30 million in just five years, he decided to move back to his native Tel Aviv.

Today, the 56-year-old entrepreneur is the CEO of Radvision, one of the world's leading developers of industry-standard "building blocks" needed for enabling voice and video calls on packet networks like the Internet. Radvision's top customers are Cisco, Nortel, NEC and Siemens. Two years ago, the company moved into a fancy glass office building in an industrial park named Qiryat Atidim, Hebrew for City of the Future; Radvision has grown so fast that it's already looking for new headquarters.

"Earlier this year, we had an IPO and it was great," says Amir. "We initially priced the company at $200 million, but went public at $380 million, and our market cap on Day 1 reached $1 billion."

Such success stories are nothing new in Israel.

In an industrial park only 15 minutes from Amir's office is Orckit, a manufacturer of Digital Subscriber Line (DSL) devices that let phone companies around the world offer high-speed Internet access and other value-added services over existing copper wires in the local loop. Orckit has contracts with telephone companies from Poland to Peru.

Liora Bar, director of corporate marketing at Orckit, says her company grew from $12 million in sales only four years ago to $90 million today.

"Like a lot of Israeli telecom companies, we started with two people who graduated from the army, got together with an idea and decided to start a business, thinking they could improve the existing copper wire laid by the telephone company," she said. "They developed a technique called DSL. As opposed to other companies, Orckit owns the algorithm, the core of the technology. The others buy chip sets and develop solutions around it."

Over the last decade, Israel -- a resource-poor nation of 6.2 million inhabitants -- has evolved into the Silicon Valley of the Middle East, with over 2,000 high-tech companies in operation and hundreds more popping up every year.

"There are three main reasons for this, starting with the Mideast peace process and the end of the Cold War," says Daniel Bloch, director of international media at the Israel Export Institute in Tel Aviv. "The demand for arms dropped, and the Israeli weapons industry was forced to trim down. A lot of manpower was suddenly free to move. Some companies themselves moved to the civilian market, using techniques like lasers and fiberoptics that were originally developed for defense reasons.

"Secondly, Israelis who studied abroad and worked in Silicon Valley wanted to come back home, and in many cases convinced their parent companies to open up subsidiaries in Israel," he said. "The third reason is immigration from the former Soviet Union. Over 700,000 people came to Israel, including many engineers, technicians and scientists."

Most of Israel's outstanding achievements have been in markets with high levels of uncertainty, risk and competition in core businesses. The top successes are in telecom, data communications, semiconductors, Internet applications and e-commerce, business software, electronic printing and biotechnology.

Clearly, Israel has had a lot of help from the government. According to the Central Bureau of Statistics, Israel spends proportionally more on R&D than any country in the world except Sweden and Japan. In 1997, R&D accounted for 2.8% of Israel's GDP, higher than comparable figures for Switzerland (2.7%); the United States and Germany (2.2% apiece); Holland (2.1%); France and Denmark (2.0%) and England, Canada, Norway and Belgium (1.6%).

Education levels in Israel are also way above the world average, as are language skills, which give Israeli firms a distinct advantage over U.S. competitors in their ability to converse with European customers and relate to their customs.

Bar says 60% of Orckit's 600 employees work in marketing and R&D. "The Israeli market grabs any student in any high-tech university," she said, estimating that 10% of her company's workforce are students.

Israel's high-tech success is also explained by its willingness to adapt to world markets, says Radvision's Amir. "The fact that the Israeli market is very small has forced us to make products that are not country-specific. U.S. and French companies, for example, design products to meet their own local standards, while our products are designed to be ubiquitous."

Yet that success is drying up the market for middle-level managers in this country where everyone wants to be the boss.

"One of our main problems is a shortage of manpower in high-tech," said Bloch. "We don't have enough engineers with specific training, and we need more programmers. So we outsource to Jordan."

Because Israeli law bans foreign computer programmers from working here, say industry experts, many Israeli companies have also begun bringing English-speaking programmers from India to the nearby island of Cyprus. There, affiliated companies subcontract these workers in an effort to circumvent Israeli law.

Despite the glitches, Amir says the prognosis for Israel's high-tech future is "very good" -- especially in anything having to do with the Internet.

"It took the telephone companies 90 years to put phone systems in place," he explained. "You can now establish the same level of functionality on the Internet in a few years. That's what people expect, and that's what people are willing to pay for."

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