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Israel Export Institute | IDE Technologies | Aladdin | Lannet | Cardguard | Check Point

As Israel moves into the next millennium, the pioneering country that has turned plowshares into software solutions and high-speed ISDN telephone lines is looking to see where it needs to take its next steps. Will the companies of the Silicon Wadi, named for the dry riverbeds running throughout Israel, continue to merge with and be acquired by global, multinationalcorporations? How many Israeli companies will be added to the over-100 already listed on NASDAQ? What innovative technologies will lead Israel's high-tech industry into the next century?

For the most part, Israeli technology and entrepreneurship has grown out of the Israel Defense Forces and the wave of Russian engineers and scientists who immigrated to Israel in the early 1990's. Israeli army graduates gain technical and management experience in their three to five years of army service, and often partner with several army buddies, selling their motorcycles to
buy computers and set up shop in someone's garage or grandmother's apartment.

The beginnings may be humble, but many successful high-tech company executives echo one another in commenting that what enables Israel's high-tech success is the width, breadth and availability of its human resources.

As of the end of 1996, Israel's population of over five million included close to 40,000 engineers and software technicians. According to Mira Richman, head of the electronics division at the Israel Export Institute, that number of engineers helped Israel reach $7.2 billion in high-tech sales in 1997, including $5.7 billion in exports. That's approximately $137,000 in sales per employee.

"We're looking at constant growth," says Richman who estimates that Israel exported $4.9 billion in 1996 from $4.3 billion in 1995.

Electronics includes software, communications solutions, teledata equipment and software and industrial systems. Israel's main export market is the United States, where it exports 49% of its products. The European Union follows with a 28% share and the remaining 23% is divided up among the rest of the world, including Latin America and Southeast Asia.

One of Israel's oldest technology companies is IDE Technologies, founded in 1965 by the government to research and develop seawater desalination applications. It was then bought out by Israel Chemicals, one of the country's largest industrial corporations and now supplies desalination technology for drinking water and refineries to over 300 companies worldwide.

"We produce all of the drinking water in the Virgin Islands, as well as in parts of the Canary Islands, Latin America and India," says Phil Elovic, marketing manager for IDE in North America.

While IDE is involved in chemical treatment, it's considered a technology company because desalination technology is, in essence, the product being sold. Using metal alloys, composite materials and other metal sources, IDE offers a cost-effective desalination process that operates under low temperature and is quite unique, says Elovic.

"We're high-tech in that we design and create hardware in a field where there are competing technologies but nothing identical to ours," he says.

Aladdin Knowledge Systems Ltd., a leader in the software security market, is a typical example of the successful Israeli high-tech company. With 25,000 customers - including Hewlett-Packard, IBM Corp., Siemens, and Toshiba -- in 100 countries and subsidiaries in the United States, Germany, Japan and the United Kingdom, the company sells 50% of its
products in Europe, 30% in the United States and the remaining 20% in Israel and other countries worldwide.

The software security company was established in 1985, with the idea of protecting companies' software with a hardware key. In other words, solving the problem of software piracy which cost software companies $11.4 billion in revenue in 1997. By 1993, when the company went public on NASDAQ at a valuation of $30 million, Aladdin was already looking into related
revenue streams, including smart card technology, an important issue when discussing information security, says Yanki Margalit, Aladdin's chief executive officer.

"We diverged to deal with varying types of hardware keys to hide more than just software protection," he says. "Software protection is only one part of the triangle."

Aladdin earns about $40 million from the $200 million software security market. The company is planning to expand into electronic software distribution (ESD) and also extending its application for its general security solutions for distribution and licensing. The ESC niche alone is expected to grow from a $250 million market to about $4.6 billion in 2000.

Aladdin CEO Margalit says he's seen some major changes in the Israeli business and high-tech scene in his 13 years in the industry. "The industry has matured," he says. "The next challenge is for Israel's high-tech companies to build up their management skills, to enable us to create long-term, sustainable companies."

According to Israel's Office of the Chief Scientist, about 2,000 start-up companies and government-sponsored incubators fill Israel's industrial parks and industrial areas, receiving government subsidies as well as the necessary dollars from American, European and southeast Asian venture capitalists. But, says Margalit, young companies and start-ups are built with one
clever idea and targeted toward a quick, easy exit. He's looking for a mix of both companies being sold to larger, more well-established organizations as well as companies that can make it on their own.

The potential number of start-ups is "almost infinite," according to Eliezer Manor, chairman of IVA, the Israel Venture Association. In the next ten years, there will be "more start-ups developing new products, more multinational companies coming to look for new products and acquisitions," he says.

Until about two years ago, most of Israel's venture capital funds were able to raise $10 to $40 million, and most of the money went toward earlier stage companies. That's changed, with larger funds raising $70 to $120 million for investment in later stage companies. Another change is that while most of the money is from the United States, there's more coming from Europe and
Japan as well.

Everything that happens in the industry is positive, whether it's a company going public on a foreign stock exchange, merger or acquisition activity or more venture capital money raised. "It's all a catalyst for more activity," Manor says.

Some Israeli companies are in the right place at the right time when it comes to successful mergers. Lannet, a pioneer in data communications with its multi layer switching and switch monitoring technologies, was recently bought out by Lucent Technologies Inc. for $117 million. The company now operates as a research and development center for Lucent in Israel, with Lucent handling marketing and distribution of the Lannet-produced technologies and solutions.

Lannet, originally a subsidiary of the RAD group and then a unit of Madge Network NV, always competed with the giants, including 3Com and Cisco. "We were always much smaller but in terms of technology and products we were always a leader," says Michal Preminger, head of Lannet's marketing division.

The idea behind data communications is to speed up and make communication more reliable between computer users in a local area network, that is, a computer network used by a company or organization. "It's the ability to use basics like e-mail, file-sharing and multimedia on a desktop," she explains.

Being part of Lucent offers Lannet an "inherent opportunity to grow and create a significant research and development center," Preminger says. "We can also become the seed for additional acquisitions in Israel in the high-tech industry, as wells as new industry and marketing trends."

Lannet's formula for success can be boiled down to its resources. With several hundred technicians and engineers working to create innovative and creative solutions, Lannet's founders endeavor to make the company one of Israel's best workplaces, Preminger says.

That includes significant time and effort spent looking after employee welfare, which has helped since the beginning. "It allows us to compete in the job market and the quality of our engineers is reflected in the success of our research and development," she adds.

The intense growth in Israel's high-tech sector has led to a serious engineer shortage and companies scrambling to find ways to attract them. Many local and multinational high-tech companies with Israeli offices are importing engineers from as far away as India and as close as Ramallah, a city in the neighboring Palestinian Authority.

Its also generated responses similar to Lannet's, which is creating better benefits and work environments for companies' most valuable resource, its employees.

"It's an insane job market but we've created job loyalty," says Lannet's Preminger. Lannet's employee retention rate is higher, perhaps because they are an international company.

The human resources factor has also played a large role at Card Guard, a leading developer and manufacturer of telemedicine and monitoring equipment, or medicine through the telephone lines as Dan Gazit, executive vice-president and chief financial officer, likes to describe.

Card Guard, once a small start-up, is now operating in new company headquarters in Rehovot, a suburb of Tel Aviv, with 25% of its 50-person workforce in research and development; 15 members of its research staff are from the former Soviet Union.

"The environment in Israel is such that we have very good access to people, which allows us to take projects and bring them to market in an efficient way," says Gazit. "We're not a big monster company that needs a lot of time to bring products to market. Our strength is taking an idea and bringing a total solution in a relatively short period of time."

Established in 1990 as a government subsidized start-up, Card Guard now has a marketing alliance with Hewlett Packard's Health Telematics division, providing medical devices for hospitals. The company also has sales and marketing subsidiaries in Atlanta and Amsterdam, an affiliate office in Japan as well as Brazil.

Card Guard's products focus on the necessary reduction in hospitalization, partially due to budget cuts in health care organizations worldwide. The company's monitors allow patients to screen themselves at home on a regular basis and the monitor transfers the patient data to a hospital or center. At present, cardiac patients represent Card Guard's main stream of revenue, but the monitors are also available for asthma and obstetric patients.

The company's product line combines software, hardware, and transmitters with a $20 billion worldwide market. Market expectations include 136 million telemedicine visits in 2001. Gazit says he believes Card Guard can capture 40 % of the United States market, 30 % of Japan and 30% in Europe and other parts of the world.

The FDA-cleared monitors measure the electricity of a patient's heart, lung function, fetal progress for high-risk pregnancies. Card Guard's software sends the data to the local service center, usually run by a service provider or hospital, which acts as a diagnostic service provider.

"It's a compact device that patients can use every day, every couple of hours, at the office or at home," explains Gazit. "It's the medical way of measuring."

The two engineers who founded Card Guard had a vision when they started the company, but the first buyers in 1992 were also pioneers, says Gazit. "It's not an easy thing to try and sell medical products. There are regulatory issues and registration and you have to comply with all these requirements. Now we're experts in that."

Finding a niche at the right time has often been the key to success for Israel's top companies. At Check Point Software Technologies Ltd., the three founders developed a shrink-wrapped piece of network-security software, FireWall-1, suitable for companies using the Internet for business to business communications.

"The Internet was moving from the academic world into the business world and it was just the right time for this kind of product," says Limor Bakal, vice-president of sales and marketing at Check Point. "FireWall-1 secures the link between a trusted network and an untrusted one, such as between a company's enterprise network and the public Internet."

Check Point's Fire-Wall-1 defines the policy of a company for what is allowed into a network. The company has also developed a line of virtual private network (VPN) products, which include encryption to ensure communication between networks is private. VPNs are typically implemented between a company's main office and its remote offices or between companies such as business partners and customers to conduct secure electronic business.

Take Mondavi Winery, says Bakal, whose customers and business partners can check inventory or order additional shipments over the Internet and Check Point's VPN-1 secures their communications.

FireWall-1 has become one of the biggest brand names in security software, holding about 25% of the market and distributing its products through a network of partners including Sun Microsystems, Hewlett-Packard, IBM, Bay Networks, and Nokia/Ipsilon which bundle FireWall-1 with their products. It's up against some formidable competitors, such as Cisco and
Network Associates, but with 50% of its sales in the United States and the other half in Europe and southeast Asia, Check Point's Bakal says the company is "selling everywhere."

The company has its subsidiary headquarters in Redwood City, California and regional offices worldwide, and thinks of itself as an international company, according to Bakal. But it wouldn't have reached that point without access to good people and resources.

"We have access to experienced engineers and people that would be difficult to find elsewhere," says Bakal. "That's what makes the Israeli high-tech industry so successful."

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