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Out Of The Desert, Into The Future


Science & Technology: GLOBAL STRATEGIES

OUT OF THE DESERT, INTO THE FUTURE

Benzion Landa of Indigo is the very image of a Silicon Valley success story. The 49-year-old native of Edmonton, Alberta --"Benny," to employees--has cultivated deep-pocketed partners for Indigo's digital-printing technology, from AT&T to Japan's Toppan Printing Co. Group. When he throws a press conference, it's in the plush Rainbow Room atop New York's Rockefeller Center. When he needs business advice, he calls his friend George Soros, an early backer. And to escape the August heat this year, Landa is taking his family white-water rafting on the Colorado River. He can afford to raft in high style: His family's 70% stake in Indigo, which went public on NASDAQ last year, shot past $2 billion this year before sliding back to a mere $1.8 billion on a recent earnings warning from the company.

Yet Landa has ridden to fame and fortune not in Cupertino or San Jose but in the quiet Israeli town of Rehovot, a bedroom community half an hour's drive from Tel Aviv--and 7,400 miles away from Silicon Valley. And he is not alone: Thousands of Israeli entrepreneurs are making themselves felt on technology's cutting edges, from advanced chip design and data-networking systems to medical imaging and encrypted communications. Says Landa: "We have become an atomic reactor of ideas, technology, and entrepreneurship."

The ideas and technology that Landa brags of have thrived in Israel for decades: What's new is the entrepreneurship. No doubt, progress toward peace in the Middle East has helped Israel's high-tech boom. So have 600,000 immigrants from the former Soviet Union, many of them highly trained in technical fields. Most important, though, has been a revolution in Israel's economic and business culture, from socialistic and inward-looking to entrepreneurial and international. Landa and others like him are fast learning how to combine homegrown Israeli technological strengths--many honed inside secret military labs--with U.S.-style financing and marketing.

MARKET FROTH. There's no doubt that a casino-like atmosphere surrounds some Israeli companies--and that at times, speculation in their stocks outruns reality. With Landa's Indigo, for example, shares ran up from $15 in January to over $60 this month. They retreated to a more realistic $45 after the company announced Aug. 8 that it didn't turn profitable in the second quarter, as was earlier projected.

Still, market froth doesn't obscure the real progress of Israeli companies in penetrating global markets. Using Motorola Inc.'s latest Lingo cellular phone? The core circuitry was developed at Motorola's R&D facilities in Tel Aviv--while the simulation software of an Israeli company, Emultek, enabled Motorola to design the phone in record time. Key parts of Intel Corp.'s 486 and Pentium chips were designed in Israel. And if you start using trifocal contact lenses in the near future, it will be thanks to the success of an Israeli startup, Holo-Or.

Israel obviously won't be a world-beater in every sector of high tech. With its population of only 5 million, it can't hope to challenge the combined research and manufacturing strengths of a United States or even a South Korea. What's more, Israel is rapidly losing the cost-of-labor advantage that has helped draw investors. Still, military research has given Israel a clear lead in vital parts of telecommunications and software technology (table). And Israel has carved out other niches that owe nothing at all to the military. For instance, Indigo's Landa claims that his and other digital-imaging companies "can dominate the world printing industry and move it from Germany to Israel."

The high-tech boom is boosting the entire Israeli economy, helping cut the jobless rate to under 7%, from 11% two years ago. Israel's 1,800 high-tech outfits, many clustered in neat industrial parks fanning out from top research institutions like Haifa's Technion and the Weizmann Institute of Science near Tel Aviv, will ring up exports this year of about $9 billion, nearly double the 1990 level. That's helping to push Israeli economic growth to around 6% a year, rivaling that of Southeast Asia.

IN THE RUNNING. Today, Israel is second only to Canada in the number of its companies quoted on U.S. exchanges, with 62. Of those, fully 57 are high-tech, and initial public offerings are running at around one a month. In the first big buyout of an Israeli high-tech group, Netherlands-based Madge Networks agreed in June to pony up $300 million to buy Lannet Data Communications, a leading networking firm. Britain's Cable & Wireless PLC recently bought a strategic 10% stake in Bezeq, Israel's telecommunications monopoly. Such deals are a sign of the new openness of the Israeli economy. "Israeli companies never used to be for sale," says Ron Lubash, managing director of Lehman Brothers Inc.'s Tel Aviv operations. "Now it's happening across the board."

Even the Japanese are jumping in. "Israel is a treasure house of technology," says Takuro Isoda, chairman of Nippon Investment & Finance Co. With more than $800 million under management, Isoda's NIF has recently taken the plunge with a couple of Israeli high-tech investments, including a stake in Haifa-based DSP Communications, a maker of digital signal-processing chips.

The trick is to land such deals without surrendering too much intellectual property. Indigo's Landa, a role model for Israeli entrepreneurs, has assembled a slew of powerful partners--after building a tall fence of patents around his technology for short runs of color printing, which allows for customization of printed products such as brochures, menus, and labels. Says Landa: "Without technology you can defend, a Hitachi or a Kodak will eat your lunch."

The success of nimble companies like Indigo stands in contrast to the experience of Israel's vaunted defense contractors, hit by the downturn in defense spending. Typical was a failed attempt by Israel Aircraft Industries Ltd., maker of the Kfir fighter, to upgrade East Bloc passenger planes.

Military technology is reaching the civilian market all right, but it's mainly through people leaving defense manufacturers and elite units of the IDF to form companies, bringing with them top technology and entrepreneurial zeal. For instance, Rafael's pioneering work in spread-spectrum wireless broadcasting technology, allowing Israeli army units to avoid detection while communicating, is being commercialized for cellular phone calls by Geotek Communications, which has offices in Montvale, N.J., but does all its R&D in Israel.

HIGH-SPEED RACE. The Israeli government, while more market-oriented than in years past, prods along the nation's technology sector to a degree that's hardly imaginable in the U.S. The office of Chief Scientist Yehoshua Gleitman is doling out half a billion dollars this year to high-tech companies, double the amount of just two years ago. The Chief Scientist's Office also targets technologies, such as superconductivity and high-speed gallium arsenide chips.

To be sure, Israel is gradually losing one of its early advantages: cost of labor. In the 1980s, the pay gap between Israel and Silicon Valley was so great--around 40% for top programmers--that big U.S. investors like Intel, IBM, and Motorola quickly recouped their investments. Now, graduates of Haifa's Technion are snapped up at $45,000 a year, not much lower than counterparts in the U.S. The average pay differential has narrowed to around 20%--and many Israeli engineers can command Silicon Valley rates.

Still, Dov Frohman, general manager of Intel's huge Israeli operations, thinks labor costs are less important than the flexibility and speed of Israeli companies. What's more, "for the next five or ten years, Israel still has a tremendous availability of people coming out of the military and wanting to make it in high tech," says Efi Arazi, an Israeli who founded Scitex and went on to start San Mateo (Calif.)-based Electronics For Imaging Inc. With its law firms, banks, and venture-capital groups underpinning its entrepreneurs, says Arazi, "Israel now has a critical mass in high technology that is far ahead of anything in Europe."

Israel amazed the world when hardworking Jewish settlers made the desert bloom with orange groves. Now, a new generation of Israelis is making the desert bloom again by building a new Silicon Valley--in a country that has all the silicon you could ever want.

Israel's Hottest Civilian Technologies

High-tech operations in Israel range from military industries to Silicon Valley-style startups.

TELECOMMUNICATIONS Israel is a world leader in wireless technology, thanks to systems developed for military aircraft and guided missiles. Startups include Nexus Telecommunications Systems (two-way paging), Geotek Communications (cellular), and Gilat Satellite Networks (small satellite dishes).

SEMICONDUCTORS Motorola, Intel, National Semiconductor, and others founded Israel's chip industry. Now, Israel has its own chipmakers--led by contract-manufacturer Tower Semiconductor, a National Semi spin-off.

DATA NETWORKING GEAR Israel's top player, Lannet Data Communications, is being snapped up by Netherlands-based Madge Networks Inc. for $300 million. Others: RAD Group, LanOptics.

DIGITAL PRINTING Scitex, which automated pre-press operations, was an early success. Indigo, a specialist in short-run color printing, is the latest star in this unlikely Israeli specialty.

ANTIVIRUS AND ANTIPIRACY SOFTWARE Military research aimed at secure communications helps make Israel a world leader in this hot field. Top names include BRM, Checkpoint Software Technologies, Aladdin Knowledge Systems, and Microguard.By John Rossant in Rehovot, Israel, with Neal Sandler in Jerusalem


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