High-tech companies find answers in Israel

RA'ANANA, Israel — For supermarket companies trying to rise to the Wal-Mart challenge, Israel might have an answer. Companies seeking data-storage solutions also might look here.

And multinationals such as Texas Instruments? They're looking for answers in the suburbs of Tel Aviv, too, making this a stop to work out technology problems they face around the world.

Israel has burgeoned into a global capital for high tech — home to Intel's latest microprocessor fabrication factories and Applied Materials' advanced silicon work, as well as operations for Microsoft, Electronic Data Systems and Comverse Technology.

Information technology represents a crucial part of Israel's economy, accounting for $16.2 billion of $122 billion in gross domestic product. The government hopes high-tech will generate $30 billion by 2010.

Still, by the standards of Silicon Valley and other American tech centers, Israel is a small hub. Information technology accounts for $1 trillion of America's $12.4 trillion GDP.

An emphasis on math and sciences and a global outlook are frequently cited as keys to Israel's success in the high-tech sector, which employs 60,000 Israeli scientists, engineers and technicians.

"The only treasure we have is between the ears of our people, and that means close connections to the outside world," said Daniel Kutner, a senior economics analyst with Israel's Ministry of Foreign Affairs. "Luckily, today the outside world has opened to us."

Also cited are the nation's vaunted military, known for its expertise in sophisticated electronics, and the kind of ingenuity that comes from coping with life in a small, volatile corner of the Middle East.

Retalix, for example, got its start in 1982, when Barry Shaked, then a student at Bar Ilan University, joined a professor in writing software to help retailers cope with the rapid price changes of 400 percent inflation.

Now, Retalix, with 1,400 employees, largely divided between Ra'anana and Plano, Texas, makes software for supermarkets, convenience stores and gas stations.

Customers include Britain's Tesco supermarket chain, Albertsons' gas stations and Hy-Vee supermarkets in the Midwest. A Norwegian convenience-store chain uses the software to sell lottery and train tickets, prepaid phone cards and airfare.

"Retailers understand they can't out-Wal-Mart Wal-Mart," said Shaked, Retalix's president and CEO. "We have software that can help them at least level the playing field with the same efficiencies.

U.S. investment

Much of the investment in Israel comes from companies based in the United States.

The largest is chip maker Intel, with more than $4.4 billion invested here in three fabrication plants employing 4,000 people.

Texas Instruments (TI) has 380 employees in Israel who work on wireless phone and cable-modem systems.

"Our products don't go directly to consumers," said David Shamir, general manager for Texas Instruments Israel. "The people we support are engineers. Their problems are very complex and very detailed."

TI bought two small Israeli companies in 1999 to obtain access to short-distance wireless radio and cable modem technologies and engineers that would enhance its global portfolio.

Christian DuPont, who directs the Israeli team from TI's offices in Nice, France, said the companies fit a need for systems solutions in specific technologies.

"We had the semiconductor expertise and needed systems expertise in several areas, he said. "In Israel, because of their advances in the telecom industry, we found those two companies very promising and very complementary."

TI's Israeli engineers are helping the company put video, Internet telephony and global positioning systems on cellphones.

Engineering salaries in Israel are half those in the United States but double those in India.

With TI having a substantial presence in Bangalore, India, that keeps the Israelis on their toes.

"Bangalore does several tasks much better than our teams," Shamir said. "You look where your team can bring more value.

"We are today part of TI. We look at a problem, ask where can we get it solved within TI, and if we can't, then we start working on it."

Israel's sophisticated military industries have been a solid contributor to the high-tech sector from the beginning.

In the 1960s, when France halted military sales and before the United States stepped in to become Israel's main arms supplier, Israelis built up their own technical prowess.

Slowing defense sector

Universal military service drew many young Israelis into technical work that carried them into government-subsidized startups. Defense now accounts for less than 18 percent of the high-tech sector.

Most of the business is now in civilian software and telecommunications, with medical technologies and nanotechnologies growing fast, according to the Israeli Association of Electronics and Information Industries.

"There are already 250 companies involved in nanotechnologies," said Moshe Hillel, TI's regional sales manager for Israel.

Like other information-technology hubs, it's becoming harder to put a national stamp on the work done in Israel.

Diligent Technologies, a small startup based in Framingham, Mass., has created software based on algorithms for data storage developed by Israeli engineers.

The company has 75 employees, including 48 in its research-and-development facility in Tel Aviv.

Doron Kempel, the company's CEO, was born in Israel but now runs the company from Massachusetts as a spinoff from storage giant EMC.

"I wouldn't start a project with engineers 7,000 miles from our customers unless I had to," he said in a videoconference link to Diligent's Israeli labs. "But we had a unique opportunity to acquire EMC's research-and-development facility in Israel ... and we wanted the talent."

Diligent works on giant-scale storage solutions with software that filters out redundant information and reduces the volumes required for archives by a factor of 17.

The technology allows companies to continue using disk storage rather than magnetic tapes, which are far more difficult to search.

Diligent's Israeli employees said U.S.-style cultural changes needed to fit into Diligent's ambitions. Innovative technologies had to be marketable, and project management was tightened considerably.

There are still Israeli touches in the lab, including a casual dress code that goes all the way to barefoot engineers in T-shirts and jeans.

"If it helps them innovate, we don't care if they wear their hair in ponytails," said Sarit Gana Melamed, Diligent's director of operations in Israel. "But we always start our meetings on time, and that's not usual in Israel."

Education first

The future of high-technology here depends on education, just as it does in other parts of the world.

Israel hopes to produce 10,000 engineers a year by 2010, up from today's graduation rate of 4,900 — small numbers by the standards of China, India and the U.S., but a big challenge for Israel.

"The government is doing its best, but we are not happy," Hillel said.

"To compete with India and China, we need more and more innovation."