Investing in: Israel

US draws on Israeli cyberpower and sells to Saudi Arabia

Ferry Biedermann, special to
Key Points
  • Cybersecurity is one field in which Israel has carved out a niche.
  • Israeli Energy Minister Yuval Steinitz says the U.S. should make sure the deal "will not, by any means, erode Israel's qualitative edge."
Saudi Arabia's King Salman bin Abdulaziz Al Saud (2nd L) welcomes U.S. President Donald Trump to dance with a sword during a welcome ceremony at Al Murabba Palace in Riyadh, Saudi Arabia May 20, 2017.
Jonathan Ernst | Reuters

When President Donald Trump announced an arms deal worth billions of dollars with Saudi Arabia last week, one item stood out among the hardware: cybersecurity technology. And there was one regional ally, more adept than most at dealing with a cyber threat, that raised an outcry against the package: Israel.

Energy Minister Yuval Steinitz said the U.S. should make sure the deal "will not, by any means, erode Israel's qualitative edge, because Saudi Arabia is still a hostile country," according to Reuters. It was a time-honored invocation of one of Israel's main defense mantras: Since it is small in size and population it needs to maintain qualitative and technological military superiority in the region.

While Israel depends on the U.S. for quite a few weapons systems, for example for its air force, cybersecurity is one field in which it has carved out a niche. In fact, the prowess of its military and security services in that field has spawned a whole new industry for the country, now worth billions of dollars in exports per year. It is second only to the United States in terms of market share.

"Today we provide something like 10 percent of the global market in cybertechnology products, [and] 20 percent in total global investment in cybertechnology is invested in Israel," said Isaac Ben Israel, a former general who founded the National Cyber Bureau in the prime minister's office and now heads the program for science technology and security at Tel Aviv University.

Trump: Israel a symbol of the message of hope

Some other estimates come out slightly lower, but the numbers are impressive either way. Ben Israel is clear about what has made Israel so advanced in the field: the fact that it has been under cyberattack for many years.

But the country has also been associated with offensive cyber capabilities. The Stuxnet cyberworm that was revealed in 2010 and said to have struck Iran's nuclear program, is widely thought to be a joint U.S.-Israeli project. Ben Israel makes the somewhat ironic point that the attack was what first alerted the wider world to the potential of cyberweapons and gave a boost to the cybersecurity industry.

"Until 2010, the potential of cybersecurity was only known to experts," he said. When actual machinery, Iranian nuclear centrifuges, experienced real damage, the importance of cybersecurity started to sink in.

Israel's status as a cyber superpower is not likely to be threatened by the sale of some U.S. technology to Saudi Arabia. Chances are that at least part of it was designed in Israel to begin with.

Steve Morgan, whose firm Cybersecurity Ventures specializes in the global cybermarket, notes that even the U.S. relies partly on Israeli technology. "Why engineer something that already exists? We don't have the time to do that. We see some of that in the U.S. Our military is Israel's number one customer," he said.

Global spending on cybersecurity is expected to reach $1 trillion over the next five years, Morgan said. And Israel is well placed to get a significant part of that.

Trump: Committed to peace between Israel and Palestine

Cybersecurity Ventures publishes a list of the top 500 computer security companies; it features 36 Israeli ones, the largest number after the U.S. Even that number does not represent the whole picture, since many Israeli companies are acquired by American firms or move to the U.S.

And that's not all: "You now see the phenomenon of start-ups here wanting Israeli teams. So you see a whole new American company with an Israeli mindset," Morgan said. In fact, personnel is key with an estimated shortfall of 1.5 million to 2 million engineers in the sector.

That's where Israel, despite its small population of just over 8.5 million, has a relative advantage.

Yoav Leitersdorf, whose Silicon Valley-based YL Ventures invests in Israeli start-ups and helps move them to the U.S., calls the Israeli army "the world's most important supply for cybersecurity professionals. And many of them start new companies."

YL's previous seed capital fund, launched in 2013, was all invested in cybersecurity companies. A new fund, of $75 million, was announced just a few weeks ago and Leitersdorf expects three-quarters of it to go toward cybersecurity.

Israel's leading venture capital firm, Jerusalem Venture Partners, which has invested $1 billion since it was founded in 1993, also puts a lot of trust in cybersecurity. Managing partner Gadi Tirosh says that about one-quarter of JVP's investments goes toward cybersecurity.

Trump focuses on diplomacy in Israel joint press briefing

But that's an increasingly broad field, he said. "These days that extends from endpoint security to cloud security to fraud detection, anti-money laundering measures and so on," he said. "As the whole space evolves, the definition of what is cyber expands as well."

JVP's investment in start-up CyberArk paid off handsomely when it had, as Tirosh puts it, "the most successful IPO of 2014, worldwide."

Tirosh sees Israel maintaining its competitive edge in cybersecurity for some time to come. Not only because of the country's current strong position and ongoing advantages but also because it has gained the trust of its customers, a precondition in the field of cybersecurity.

"I think it's going to take a while until corporates will feel comfortable enough buying cybersecurity solutions from high-tech hubs like China or even India, and Russia, too," said Tirosh. "There are even some doubts around the world about whether U.S. software-based solutions are entirely innocent."

Follow CNBC International on Twitter and Facebook.