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High-tech makes Israel dream of other industries

Israel's economy has gone through several transformations since the country's founding, almost 70 years ago. Jaffa oranges symbolized the country's exports until the 1970s. Textiles played a large role and it is known internationally for its diamond trade and its strong position as an arms exporter.

Now the high-tech boom that Israel has been experiencing for some two decades has the potential to make it a player in many industries where traditionally it has not figured very prominently, says Avi Hasson in an interview with CNBC. He was, until April, chairman of the Israel Innovation Authority, as the Office of the Chief Scientist was rather pointedly renamed last year.

Israeli special combat soldiers conduct a training exercise using virtual reality (VR) battlefield technology to simulate Hamas tunnels leading from Gaza to Israel at an Israeli Army base in Petach Tikva, Israel.
Rina Castelnuovo | Bloomberg | Getty Images
Israeli special combat soldiers conduct a training exercise using virtual reality (VR) battlefield technology to simulate Hamas tunnels leading from Gaza to Israel at an Israeli Army base in Petach Tikva, Israel.

"Traditional definitions of high-tech and low-tech are out of date. Everything is getting technologized. There's not a single sector that's not being disrupted, or that doesn't benefit from innovation," says Hasson. He tells how, during his six-year term, he fielded daily visits from executives of multinational companies from all kinds of industries, seeking new technology.

Israel's edge in innovation is illustrated by the country's number two ranking on the subject in the World Economic Forum's 2016-2017 Competitiveness report. Israel's overall competitiveness ranking was 24th, ahead of some major economies, like China and South Korea but well behind most of Western Europe, the US and several Asian economies.

The relative health of Israel's high-tech industry is itself hotly debated among analysts and observers. The Innovation Authority's 2016 report, looking at Israel's relative drop in three leading indices in 2015, even sounded a warning: "It is difficult to ignore the overall picture indicating erosion in Israel's competitive situation."

The mood has considerably brightened since then, with the industry raking in record investments in 2016 and then in March this year seeing the biggest deal in its history with Intel's acquisition of autonomous driving technology company Mobileye.

Whatever the fluctuations in its relative global standing, high-tech remains leading in the Israeli economy. It makes up about half of the country's industrial exports. But, warns Hasson, it may not be enough.

"It's a tremendous achievement, world leading, high productivity etcetera. But it only employs about nine percent of the workforce and the other parts of the economy are not performing as well, for example in their productivity, in their connectivity to the global value chains," notes Hasson.

He says that macro-economic data shows that there is a big productivity gap between some traditional industry sectors in Israel and their peers in the OECD. Also, the ability of Israel's more traditional industries to access international markets is limited.

The Innovation Authority actively tries to address that problem. He says: "We've created several programs that are oriented toward the traditional industries, like food and steel and textile and plastic, really trying to ignite innovation in those sectors. The same goes for the services sector, things like financial and also construction."

Traditional industries have many different reasons for not always being able to innovate as quickly as they would like to. They have, for one, much less access to capital, both domestically and internationally than the high-tech sector.

"When you come and say let's do a high-risk R&D project that in three years' time, if successful, will take you to the international market, there's a leap of faith that needs to happen," says Hasson. The Innovation Authority has introduced measures to mitigate that risk.

Israel, "is never going to be a manufacturing powerhouse," like the U.S. and Germany, says Hasson. But that doesn't mean it cannot have its success in other industrial fields, helped by high-tech.

Michael Nagle | Bloomberg | Getty Images

"Textile used to be a huge industry in Israel, I'm talking thirty years ago, and then it all but disappeared," says Hasson.

"Today there are 15,000 people working in textile industries in Israel. But if you look into the companies, these are not low-tech companies. It's smart fibers, nonwovens, all sorts of pretty high-tech textiles. The same thing goes for food, and the same would go for plastics by the way, which has done remarkably well in terms of its global performance."

The innovation potential is not limited to fields Israel is already involved in. High-tech brings new industries to the country, says Hasson. This can happen when large international companies acquire Israeli high-tech ones.

He mentions Mobileye and other autonomous driving technology firms as an example of how Israel can gain access to entire new industries: "Ten years ago Israel wasn't a player in automotive, now I would claim it's a leading player. Why? Mostly because the car has become digital, connected and autonomous and that part we know how to do even if we're not automotive experts. The same goes for digital health and a lot of sectors where the players are looking for innovation. Today Israel stands out as at least a place to visit when you're considering expanding."

The same can be true within the high-tech industry. Acquisitions can actually help create new export opportunities, he says: "There are acquisitions that are now exporting billions of dollars outside Israel and employing a lot of people and I don't know if that would have been the case if the companies had remained independent."

Amid all these developments, Asia will play an increasingly important role for Israel, says Hasson. The Innovation Authority has made it a target, not only in terms of market but also as a place for collaboration in innovation. Asian interest in Israel over the last two to five years has been "staggering", he says.

There's a high degree of complementarity between Israel and countries such as China and Japan, even though these are very different, says Hasson: "Israel always supplies that cutting edge, out of the box innovation and there you have the scale-up, the manufacturing and, naturally, the understanding of the local market."

He counts making headway in the region as one of his achievements in office. "You can really see that happening for Israel in a big way, in China, India, Japan, Singapore, South Korea and so on," he says with evident enthusiasm.

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