Israel is Intel's biggest location outside of the United States.
And the American giant is the country’s biggest private employer.
Intel is investing billions of dollars into bulking up its manufacturing capacity and
technical prowess. Israel hosts one of the company's few leading edge
fabs outside of the United States, and plays a crucial part in their new corporate strategy.
In this video, we are going to look at how tiny Israel came
to be so important to the semiconductor giant.
I have been afraid of doing this video for a long time.
I am aware that the country of Israel and its people are involved in some controversial issues.
As well as more than a few groundless conspiracy theories.
This video is going to focus on Intel Israel. I am not really going to address or discuss the
country's other situations. I have never been to Israel, and I am not being paid by them.
I know that some people are going to be very angry at this.
Their feelings may be justified or not. But I ask that you all be civil in the comments section.
Let’s start with a brief overview of the country's economic history.
The state of Israel was founded in 1948 in the midst of war.
After the cease-fire agreements were signed in 1949, the country received nearly 600,000
immigrants. This essentially doubled the country's population and strained their resources.
Over the next ten years, the Israeli economy was defined by a low exchange rate, rationing,
and price controls. The country benefitted from large capital inflows due to US aid,
German reparations, and bond sales.
At this point, the government maintained a protectionist economic policy.
Like many other developing countries,
they focused on developing a domestic textile industry capable of substituting their imports.
And at the same time, they subsidized the exports of goods like citrus fruits and cut diamonds to
collect foreign currency. Cut diamonds remain a big part of the Israeli export portfolio.
Very slowly over time, the government liberalized the economy.
They lifted trade protections and gradually stopped managing the currency.
The Arab-Israel Conflict has deep historical roots. But it especially escalated in the
1960s and continues to this day. Though its intensity declined in the 1990s.
The Conflict forced the Israeli government to dedicate a large portion of its economic
budget to defense. At its height - during the Yom Kippur War of
1973 - the Israeli defense budget made up 30% of the country's GNP.
Throughout the 1980s and 1990s, the government decreased its involvement in the economy.
They also started traditional social welfare programs like healthcare,
old age pensions, and unemployment benefits.
The 1990s also saw the flowering of the country's high-tech industry. The country's close ties to
the United States allowed for its people to identify and fill gaps in the market.
Israeli companies have ready access to American capital.
Furthermore, they have successfully adopted its venture capital model to create a
mini-Silicon Valley of small start-ups. Many have been acquisition targets for
American companies looking to add interesting technologies or start operations in Israel.
The first major American semiconductor company to set up a design center in Israel was Motorola
in 1964. That center developed some of the company's most famous chips
like the 68030 - used in the Macintosh II and NeXt Cube.
Motorola still has a presence there to this day, though it is not all that large. Other companies
with substantial R&D centers in Israel include IBM, Google, Nvidia, Facebook, and Microsoft.
One of the major reasons why companies invest in Israel has to do with its plethora of human
capital. Their population of about 7 million people are highly educated,
with strengths in the life sciences, math, physics, and computer science.
Israel has more engineers per 10,000 employees than the United States,
Japan, and Taiwan. Israel has 135, while America has 70 and Taiwan, 34.
Note that this statistic is self-reported by the Israelis so of course take it with
a grain of salt. But the main point is clear: Lots of smart, educated people.
This well of human capital draws from three significant demographic and economic trends.
The first trend goes back to the military. Israeli society
is partly defined by its porous boundaries between the civilian and military spheres.
The Israeli Army regularly taps the civilian sector for resources and new skills.
All Israeli youth have compulsory military service. There, the army tries to identify
technically talented youth early and nurture their competencies.
Up until the 1980s, the Israeli military supported the country's electronics sector.
For instance, the development of the Lavi Fighter, based on the American F-16.
However, domestic military budgets have declined in recent years,
releasing substantial amounts of skilled human capital into the
labor market. Many commercial innovations thus have some form of military origin.
Like the United States, Israel is a country of immigrants. Jewish people
have the right to come and live in Israel. New citizens have generally come in waves.
The first wave of Israeli immigration at the end of the 1940s was quite significant.
However, the biggest and most valuable wave of Israeli immigrants would be
the ones coming after the collapse of the Soviet Union in the 1990s.
From 1990 to 2000, more than a million people came to Israel.
The country's population increased by 20%. Furthermore, 60% of those people were
university educated and the country doubled its population of engineers and doctors.
24% of Israelis have university degrees. And 12% of the workforce have advanced degrees.
Israel hosts seven major universities, all of them
are world-class research institutions. The computer science department at the
Technion-Israel Institute of Technology is one of the largest in the world.
It is not enough to just make new discoveries. You also have to successfully commercialize them too.
Each university has a Transfer of Technology Office that patents and
commercializes university research. Stanford and MIT have similar offices.
These universities play a big role in fostering Israel's high-tech economy.
But they also have a much more direct role in founding Intel Israel.
In 1974, a senior researcher at Intel - and I am
going to butcher this poor man’s name - Dov Frohman - decided to return to
Israel to accept a professorship at the Hebrew University in Jerusalem.
He had left Israel in the 1960s to get a PhD in electrical engineering, but long wanted to return.
Frohman is a very early Intel employee and the inventor of the erasable programmable
read only memory (EPROM). Before Intel became a microprocessing giant,
the company manufactured memory. EPROM was its most profitable product well into the 1980s.
Thus, the company did not want to lose him. So they decided to spend about
$300,000 in 1974 dollars to open its first overseas design and development center
outside the United States. This center was located in Haifa.
Intel Israel chose to establish in Haifa mainly because of the presence
of the Technion Israel Institute of Technology. Haifa however was far from the country's big
urban centers - Tel Aviv and Jerusalem - which made recruitment a bit of a challenge.
Later on, Intel Israel would expand to cover much of the country.
Frohman served as Intel Israel's first general manager. They had five
engineers and started with small, relatively insignificant projects.
This overseas design center turned out to be very successful. They were quickly
tasked with designing very complex chips. For instance, Intel Israel was assigned the task
of implementing the design of the Intel 8087 in 1980, notable for its math co-processing.
Notably, Intel Israel continued running even during a series of
Scud missile attacks during the First Gulf War in 1990.
Some 80-85% of the employees showed up to work despite the threat of missiles. Admittedly,
the actual risk of someone getting hurt was relatively low. But it helped send a message to
upper management back home that the division delivered regardless of geopolitical risk.
Intel Israel's success encouraged other foreign high-tech multinational
companies to follow the same model. Soon thereafter, other senior R&D managers at
National Semiconductors and Applied Materials came to Israel to found R&D centers there.
In 1984, Intel Israel would expand its operations to include manufacturing.
In 1978, Intel CEO Gordon Moore visited Israel to tour the facilities there and returned impressed.
Frohman visited Santa Clara and pushed then-COO Andy Grove to consider putting
a semiconductor manufacturing fab in Israel. At the time,
the company's American facilities were going through some output shortages.
Andy Grove saw two presentations - one on Israel and the other on
Ireland. He chose the former. Fab 8, situated in Jerusalem,
was the company's first outside the United States. Production began in 1985.
During the 1990s, the Jerusalem plant produced 75%
of the company's super-successful Intel 386 microprocessors. While it did well,
it was too small to scale up and was eventually converted into a die preparation plant.
By then Intel had expanded its manufacturing facilities to the southern city of Kiryat Gat.
Fab 28a opened in 1996. Fab 28, producing chips using the 45nm process, opened in 2008.
The latter cost $3.5 billion. Like is so often the case in the semiconductor industry, Intel
negotiated a $525 million encouragement investment from the government to help seal the deal.
Recently, Intel announced a brand new $10 billion expansion to the Kiryat Gat facilities.
Backed again, as always, with a healthy dose of government money.
The goal for Fab28 would be to produce chips using the 22nm and 10nm nodes.
That latter node is now referred to in Intel marketing as Intel 7.
This makes Israel one of the few countries in the world to host a
leading edge semiconductor manufacturing node. You can count them on one hand.
Intel's fabs in Ireland and the United States, Samsung's in Korea, and TSMC's fabs in Taiwan.
In March 2017, Intel announced that it would be paying $15 billion to acquire the Israeli company,
Mobileye. The company provides technology for self-driving cars.
They are seen as Intel's bet on the massive future benefits of autonomous vehicles.
Despite making relatively little revenue, the company has struck
some interesting partnerships with various large companies like Nissan,
Volkswagen, and BMW. In recent years they have been trying to turn their technology
into more of a platform accessible by a variety of system integrators.
Intel recently acquired the transit web service Moovit for $900 million.
They then added within it an experimental autonomous taxi service powered by Mobileye.
Then in April 2021, they announced a deal in which Mobileye would
provide the autonomous drivers for self-driving delivery vehicles.
Acquisitions like that of Intel and Mobileye have been
an underrated entry point for expanding a multinational’s presence in Israel.
Few countries are so open to having some of their best acquired by foreigners.
Today, the division employs some 10,200 people.
In 2020, it produced $8 billion USD for the company. In over 40 years of their time there,
Intel invested $14 billion into Israel and received over $40 billion of exports.
The presence of the Intel giant - and others like it - have contributed to a spillover effect.
First in the form of purchases from local firms. Intel self-reports that they sourced supplies and
raw goods from some 200 Israeli firms - three quarters of which are small or medium sized.
And second, the company trains skilled workers and managers who leave and bring their skills into the
surrounding local economy - joining or starting small semiconductor businesses of their own.
However, the presence of a fab or design center in a particular city is not game changing to many of
its residents. For Kiryat Gat in particular and its working class population of 50,000.
Many of its unemployed are former textile workers laid off in the 1990s.
In the mid-2000s when Intel was building their $4 billion Fab 28,
one might expect massive trickle-down effects on the surrounding population.
But most of those billions went into capital expenses for fabrication hardware.
The nature of modern semiconductor manufacturing means that much of the process
is automated. Much of its technicians are from out of town. For the local residents,
hosting a fab has all the economic trickle down effects of hosting an alien spaceship.
Governments dole out millions of incentives to build fabs for a multitude of reasons.
Many of them very legitimate. But revitalizing the local economy should probably not be one
of those reasons. Kiryat Gat still has one of the country's highest unemployment rates.
Intel Israel is not the only semiconductor manufacturer in the country.
Tower Semiconductor is a significant niche manufacturer
and I thought their story interesting enough to warrant a small sidebar.
The company was founded in the early 1990s when it acquired a 150-millimeter wafer fabrication
fab from National Semiconductor. They went public on the NYSE in 1994
and have since then added facilities in Japan and the United States.
In 2020, they cleared over a billion dollars in annual revenues. Their fabs
are nowhere near the leading edge, but their specialization in niche products
like optical transceivers and mobile radio frequency chips keeps them in business.
In a previous video, I discussed Skywater Technologies in the United States. They have
a similar founding story and business strategy focusing on niche and specialty processes.
While fabless semiconductor firms have a lot of great points about them, one should not forget
the manufacturing piece as well. Over time, that has shrunken even in high-tech Israel.
Most recently, Micron the memory-maker sold their chip-making facility to Intel in 2013.
The Israeli government, recognizing the importance of having domestically
located semiconductor manufacturing facilities, has been quite involved.
They have given Tower subsidies and tax breaks, and use them as a customer.
You want to strike a balance when it comes to inviting large multinationals into your
developing country. You can learn and gain a whole lot from them. But
there is a risk that they take advantage of what you have to offer and give little in return.
For instance, look at the situation of Intel in Malaysia.
The country hosted one of the company's first locations outside of the United States.
But their semiconductor industry soon found itself caught in the middle - challenged by
others on cost but without enough skill to ascend the value chain.
The Intel Israel situation seems to be one where things are working out right.
The partnership between the two has yielded incredible benefits for both parties.
The key difference between Intel in Malaysia and Intel in Israel seems to have to do with
the activities being off-shored. In the case of the former, Intel needed only its workers'
hands and fingers. In the case of the latter, Intel was looking to tap its workers' minds.
Alright that's it for tonight. Thanks for watching. If you enjoyed the video,
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