Global Economics

Israeli Companies Feel the Hot Breath of War


When Warren Buffett decided to make his first foreign acquisition in May, he may not have realized that the Israeli company he was buying was located less than eight miles from the border with Lebanon. But the Oracle of Omaha's $4 billion purchase of an 80% stake in Iscar Metalworking has undoubtedly given him a quick education in Middle East geography.

On July 17, a barrage of Russian-designed Katyusha rockets landed only miles from the company's headquarters in the Tefen industrial park, forcing a week-long closure of the highly profitable cutting tools company.

When the plant reopened on July 23, workers had to rush into shelters and other protected spaces as rockets continued to rain on northern Israel. A call to the company July 25 was answered by a harried operator who suggested—air raid sirens clearly audible in the background—trying back in a half-hour. Buffett's reaction to the events, according to Israeli press reports, was that he didn't regret the deal for a moment and that his investors in Berkshire Hathaway (BRK-A) weren't worried in the slightest.

CHILD CARE. Buffett may be sanguine, but plenty of business people in Israel—especially in the northern part of the country near the Lebanese border—are scrambling to keep their operations running and their employees safe as the conflict escalates. From multinationals such as IBM (IBM) and Intel (INTC), to local firms such as medical device maker Given Imaging (GIVN), managers are asking workers to stay home, moving offices to the south, and even transferring operations abroad.

Consider the situation at Given Imaging, which makes miniature cameras used to diagnose intestinal-tract diseases. To keep its staff intact, the company, based in Yokneam, near Haifa, is allowing workers to bring their children to the office. (Most summer camps and day care centers in the north have closed, leaving parents to look after kids all day.)

"Our operations have been largely unaffected, as 75% to 80% of our work force has been showing up," says Chief Financial Officer Yuval Yanai. Even so, the Nasdaq-listed company said last week that it will transfer inventory to the U.S. and Europe, and might even restart a backup manufacturing facility it established in Ireland during the Gulf War.

BOMB SHELTERS. The situation is worse for Frutarom Industries, a producer of flavors and fragrances for the food industry. The company employs 220 workers at its production facilities in Haifa and nearby Acre. "We've transferred some of our administration to Herzliya, others are working from home, and production workers are coming to work on a voluntary basis," says Ari Rosenthal, vice-president of human resources.

So far, the Haifa-based company has been able to meet all its orders—but at a heavy price. It had to install mobile bomb shelters near its production facilities and relocate all hazardous chemicals to a site south of Haifa. To meet export delivery commitments, the company has even resorted to air cargo because the city's port is closed. Israel's Finance Ministry has agreed to compensate companies for damages, but not all out-of-the-ordinary costs will be covered.

The war's disruption is clearly starting to affect the economy. The Israel Manufacturers' Assn. says that reduced activity in factories in Haifa and the rest of the north has already caused $500 million in financial damage. About 25% of the 1,800 factories and small manufacturers in the region are totally shut down and another 30% are operating only partially, the association says.

OFFSITE WORKERS. Israeli economists predict that if hostilities cease in a matter of weeks, Israel will lose up to 1% of GDP, leaving growth this year at around 4%. But "the longer it takes for a cease-fire to be reached, the more uncertain the outcome will be," says Leonardo Leiderman, chief economist at Bank Hapoalim.

One of the hardest-hit areas is Haifa, Israel's third-largest city, which has been targeted by dozens of rockets in recent days. The large number of high-tech companies in the area are managing because many employees can work from home via laptops and broadband connections. But the city's many chemical and petrochemical companies have been mostly shut down or forced to operate at partial capacity.

Chipmaker Intel, for instance, runs a large R&D center in Haifa that employs about one-third of the company's 7,000-strong Israeli workforce. "We've taken all necessary precautions to protect our workers," says spokesman Kobi Bahar. The company has moved many employees into protected spaces and asked others to dial in from home. As a result, Bahar says, Intel's operations in Haifa "are continuing normally."

ON SCHEDULE. The same goes for IBM, which employs 400 at its Haifa development center. Spokesman Joseph Shoval says the company immediately invoked a business-continuity plan it had drawn up in advance, which includes having many employees work from home.

Some companies may not be able to stick it out much longer. Only about half the 55 workers at medical device startup MediGuide have been showing up since the hostilities began. MediGuide had been planning to begin clinical trials for its new minimally-invasive surgical devices by the end of this year, and Chief Executive Officer Gera Strommer still hopes to stay on schedule. But he concedes he may soon be forced to move his software programmers to the south, out of the range of the missiles.

One way or another, managing the daily crises of missile attacks, frightened employees, and missed deadlines is taking a toll on executives—and on the region. Iscar President and CEO Jabob Harpaz has been adamant in public that the Buffett-controlled company will carry on, just as it has during previous wars. But Harpaz doesn't have time for press interviews, his secretary says. "He's too busy keeping the business on track."


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