Whence the pessimism? A look at Israel's economy and innovation
September 18, 2003

It is no secret that the news often makes Israel rather than the other way around. Coverage of Israel is nearly limited to its conflict with the Palestinians, obscuring a more thoroughgoing picture of the country. Yet despite all this, every once in a while something else pops up in the papers – a medical advance, an environmental breakthough – and reminds us that there is another Israel, characterized not by conflict and reproof but by unremitting progress and success after success. Here, we can look at two things: Israel’s economy, and Israeli hi-tech, medical and military innovation.

The case of Israel should be so dreary! Numbers temper our gloom. In terms of total GDP, Israel’s has the world’s thirty-third largest economy – 110 billion annually – just behind Greece, Finland, Portugal and Ireland, and in front Argentina and South Africa. Then, you recall that Israel is just fifty years old, has fought five wars and decades of terrorism, and remains a semi-parched stretch of land the size of New Jersey with negligible natural resources. The population of Israel is six million – Argentina and South Africa have 39 million and 42 million, respectively. Yet despite its youth, size and war, it has become one of the few countries outside the West to achieve Western standards of living.

And far from being nestled in a vibrant trade region like Europe or East Asia, the economies of its neighbors are among the world’s leading exemplars of clique cronyism, market-crippling corruption and choking despotism. Former Nasdaq chairman Frank G. Zarb visited Israel a few years back, and revealed that there are 91 companies from Israel that trade on Nasdaq, more than any other country except Canada.

Israeli companies do thirty billion dollars in trade with California alone, especially in the area of hi-tech – centering around Silicon Valley and Israel’s homegrown incarnation, the Silicon Wadi. In fact, after Silicon Valley, Israel probably is most in-demand market for technology investing in the world. The trophies of Israeli hi-tech are limitless. One example – familiar no doubt to the majority of this listserv – is the technology that has brought into our lives, and to the detriment of all our GPAs, the instant message.

Medical technology is the second area of Israeli distinction. In terms of technology used to cope with the SARS virus that has struck twenty-one different countries, Israel leads the world. One Israeli company, System Application of Advanced Technology, has received orders for its digital thermometers from a number of East Asian countries, one quarter of a million from China alone. Another Israeli device allows patients to breathe more comfortably. (Palestinian lives are continuously saved by Israeli medical innovation, and the Israeli army regularly provides medical care and aid to Palestinians, often airlifting them to Israeli hospitals for world-class treatment.)

And then, of course, there are the Israeli advances in counterterrorism, born of necessity and in a class by themselves. To many leaders worldwide, the threat of the twenty-first century seems less and less likely to come from armies in traditional battlefield war, but from smaller, hidden networks of terrorists, and no one knows how to deal with them better than Israel. For instance, Boeing and Airbus are considered integrating new technology into their planes that allows planes to execute emergency evasive maneuvers during missile attacks (like the one attempted by al Qaeda affiliates on an Israeli passenger airliner in Kenya not long ago). Police officers from America, along with medial personnel, travel to Israel for special training. Here’s one example.

In order to avoid civilian casualties when dispatching Hamas terrorists, Israel has developed a special invisible paint that can be smeared on the side of a car, allowing it to be tracked by Israeli helicopters; the helicopters fire missiles with attached cameras to verify the target, and which can be deactivated seconds before impact. Pilots say they can see the face of the target before the missile hits. As a testament to how far it has come, besides the United States, the top customers of Israeli military technology and hardware include Turkey, India, Brazil, Canada and Germany.

The question, “Why is this the case?” is the same question “What makes some countries rich and prosperous and others not?” No one knows the answer, but it surely has something to do with liberal democracy, open markets, a highly-educated populace, an independent judiciary and an institutionalized rule of law. (The Middle East is the land of obscurantism, and yet Israel boasts one of the world’s most impressive ratios of academics, scientists and professionals, second only to Switzerland in terms of publications per capita in science, engineering and medicine. That’s why it’s said that Israel’s natural resources are its people.)

It’s hard not to notice that these touchstones of modernity – the forces of history, really – are precisely those that Israel has chosen to embrace, while at the same time those with which its enemies seem so at odds. If the future is to be based on democratic governance, free trade, technological innovation and integration, rather than primordial hatreds, dictatorships and closed societies, it seems self-evident that Israel is on the right side of history, while it works daily against Israel’s enemies, many former clients of the Soviet Union and the lingering inheritors of its failed model, who seem more and more anachronistic in the 21st century.



Looking Forward: The Investment Potential in Israel
By Leonard Rosen
Managing Director
Lehman Brothers

Good evening. My name is Len Rosen, and I'm a Managing Director at Lehman Brothers in our investment banking unit. There I have a few roles: I am head of our Israel business, and Lehman Brothers has for a long time been the predominant investment bank in Israel , and I am also a technology industry banker.

Usually, I am asked these days to talk about the Israeli economy. Tonight, as part of this forum on investment in, as opposed to divestment from, Israel, I am being asked to talk about the companies themselves, which I will enjoy a lot more. Now I think I should stress, and can't stress strongly enough, that I am not a research analyst, I am an investment banker, and I work with every Israeli company to some degree, so please treat everything I say that reflects on a company's merits in that context...in other words, not as unbiased. I also am not making any investment recommendations at all here. OK?

That said, there has been a program going on advocating "buying Israeli"...buy Osem noodles or snacks, Tnuva cheese, Yarden or Carmel wines, Maccabee beer, Jaffa Oranges. And that is great, and very important, but I think perhaps it doesn't go far enough, so let me tell you about a few more ways to buy Israeli:

1. When you make a cellphone call, and the call doesn't go through, leave a voicemail. That's it. Or make calls just to leave voicemails. How is that buying Israeli? Because an Israeli company, Comverse Technology, main operations in Atidim, Tel Aviv, is the world's largest producer of voice messaging systems worldwide . Or send Text messages, SMS, or pictures, or send movie clips through your cellphones, OK, we can't do that yet, but they can in Korea, and Comverse's systems make that possible. And Comverse earned over $700m in revenues last year from those products, and their stock is up almost 50% so far this year.

2. Use more drugs. No, not what you're thinking. I mean prescription drugs. And when you do, have your doctor check the box that permits dispensing a generic version. Teva Pharmaceuticals of Petach Tikva is the world's largest manufacturer of generic pharmaceuticals. One out of every 16 prescriptions filled in the United States is for a Teva product made in Israel (or outside Israel but by Teva , an Israeli company). And they earned over $2.7 billion in revenues last year, and their market cap, at $15 billion is at an all time high.

3. What else. Try to hack a computer system, and it is more than likely that the firewall that will keep you out is developed by Checkpoint, market cap $5b, of Ramat Gan. Spend too much time talking on the phone and you will touch on the products of Amdocs, the world's largest provider of complex billing systems software for communications service providers, market cap $5-1/4 b, also of Ramat Gan. All buying Israeli.

4. The next time you are stuck on the phone with customer service somewhere, and you get a message that says "to insure proper service, this call is being recorded"? The two largest companies providing the systems that monitor those calls are Verint Systems of Tel Aviv and Long Island and NICE Systems of Ra'anana. And the way the systems work is that if they hear your decibel level go up, or the call goes on too long, their systems will detect that and shoot the call over to a manager the next morning to figure out what went wrong. So buy Israeli by yelling at a customer service rep.

More on Verint: If you are a bad guy, and I know you're not, and you are communicating with other bad guys over your phone or cellphone or email, and the FBI figures out that it's your voice or that you've been talking about doing bad things, that's Verint's communications interception products. Its primary business is analytic software for homeland security. When they talk on the news about picking up chatter, that's Verint's products, When you are walking through the airport and the cameras are following you, the software that determines whether there is something suspicious going on and alerts the guards to look at that camera: Verint's digital security surveillance products.

5. Given Imaging. Traded on Nasdaq. Anybody here ever had an endoscopy? No please don't raise your hands. But if you ever do, think about asking your doctor to use Given Imaging's product. The company has embedded a tiny camera in a pill that, when swallowed, examines the large intestine the way an endoscopy would - but without the discomfort associated with that procedure. Believe it or not this is derived from Military Technology...guided missiles. I'll leave that to your imagination.

These companies and over 100 other Israeli companies are traded in the United States on Nasdaq or the NYSE, and in addition to buying Israeli you can buy their stock.

Israel, as I am sure you have heard numerous times, has more companies traded in the US than any foreign country except Canada.

Why is that? A little history:

Part of the reason is governmental: Israel fueled its high-tech boom in its infancy, when capital was hard to come by, by providing a unique assortment of state-funded R&D grants and investment benefits. However, the most important reason for Israel's extraordinary economic development is not related to the government but to the country's people. Israel's population is the most highly educated in the world, with 135 engineers for every 10,000 people in the work force. In comparison, the U.S., which ranks second in this regard, has 70 per 10,000. In addition, the 700-800,000 new immigrants who arrived in from the former Soviet Union contributed an enormously talented pool to the local work force.

These are what you buy when you buy Israeli. These "natural resources". Israel's people.

And it isn't just stocks. Of course we all know about Israel Bonds. But if you are an institutional investor, you can also buy the Government of Israel's 10-year bond, which Lehman Brothers issued $750m of in June. Yield 4-5/8 pct., priced at 153 bps. over the 10-year Treasury, rated single A. Israel approached the market for the first time in 3-years and the deal was a blow-out. Or on the corporate level: Israel Electric Corp's 100-year bond, maturing in 2096....yields over 7%.

But my talk is supposed to be about looking forward. So let me point out another statistic: In 1999-2000, Israeli entrepreneurs raised $5.5b in venture capital, or $1,000 for every man, woman and child in the country. That was during the tech bubble of course, and since then investment fell off a cliff. But all those companies I mentioned earlier, Checkpoint, Amdocs, Comverse, came from that environment, Israel's entrepreneurial culture, the human capital that at its height had 26 companies out of Israel traded in the US worth over $500m, that created an environment where an optical equipment start-up called Chromatis sold to Lucent in 2000 for $4.5.billion, making a few very young people very very wealthy.

Or funds. First Israel Fund, traded on the Amex, tracks Israeli companies. Up 50% so far this year. Or invest in Markstone Capital, following Mr. Hevesi's lead, in capturing the inflection point and sharing in the growth of Israel's old economy companies, its banks, its infrastructure. What's the minimum investment again?

Anyway, one more way to buy Israeli: watch a lot of TV. And get one of those cool flat panel display televisions. Because the leading company that makes the inspection equipment used to produce those displays is Orbotech, traded on Nasdaq, based in Yavne, Israel . Mkt cap $550m. There is an old Midrashic story about how during the siege of Jerusalem, the emperor Vespasian told Rabbi Yochanan ben Zakkai that at his request he would save one thing, and Yochanan answered "Ten Li Yavneh V'Chachameha", give me Yavne and its wise men. And that because of that the Jewish people were saved. Well, you can invest in these wise men of Yavne. And you can buy Israeli by watching the flat screen TV's that they help produce. And while you're at it, on your couch, snack on some Osem pretzels with Maccabee beer or Yarden wine.