SEEKING US OUT - 09-May-95

(Article by David Lipkin, "Ma'ariv", May 9, 1995, "Business Magazine", pp.4-5)

SOMETHING IS HAPPENING TO THE ATTRACTIVENESS OF ISRAEL'S ECONOMY. IF, UNTIL NOW, ISRAEL'S BUSINESS LEADERS WERE DOING EVERYTHING THEY COULD TO GET MULTINATIONAL CONCERNS' EXECUTIVES' JUST TO VISIT ISRAEL, TODAY THEY ARE SEEKING US. THE LARGE CONCERNS NOW UNDERSTAND THAT OUR HIGH TECH FIRMS REALLY HAVE SOMETHING TO OFFER, AND EVER SINCE BROKERAGE FIRM MORGAN STANLEY INCLUDED ISRAEL IN ITS LIST OF EMERGING MARKETS, THE SITUATION HAS IMPROVED. CABLES AND WIRELESS IS JUST THE BEGINNING.

The acquisition of a bloc of shares in Bezeq by the well-known British telecommunications concern Cable and Wireless, is the beginning of a new era for the Israel economy. Foreign companies are becoming directly involved in the ownership of service companies, which in Western countries are thought to be stable, and promise high returns. The turning point for the involvement of well-known multinational concerns in the Israel economy, including financial services firms, puts an end to the hesitation that characterized these firms during the past few years.

America's Shamrock, which acquired 22% of Koor's shares, is currently busy putting together a group of investors to hold the shares in Israel's largest industrial concern. A number of well-known American investors are expected to join the group, which will, for the first time, make them direct owners in an Israeli concern. This is an important step before the planned offering of Koor's shares on Wall Street.

During the past few weeks, foreign investors have been increasing their activity on the Tel Aviv Stock Exchange. Until recently, foreign investment funds have been sitting on the fence and have prevented themselves from making massive investments in the Tel Aviv exchange. Yet analyses carried out by the funds' analysts a number of them Israeli have shown the bourse's prices are now attractive. Yet there is no doubt of the fact that the inclusion by the American brokerage house Morgan Stanley of the Tel Aviv Stock Exchange in its table of emerging markets exchanges (which is published weekly), has increased its interest to foreign investors. Quite a large number of American and European fund managers, who invest in emerging markets, have been walking around Tel Aviv the past few weeks and recording every sliver of information on the leading Israeli concerns, as part of a clear effort to include a number of them within their investment portfolios.

The Israeli economy has undergone a revolution in recent years. Not only has an unsurpassed "window of opportunity" opened to Israeli industrialists and entrepreneurs in a number of Arab countries, and especially in the Far East, as a result of advances in the peace process - - but foreign investors are also seeking interesting investments and are now ready to bet on Israel.

For years, Israel aspired to see multinationals investing and building factories here. To a certain extent, it was thought that as soon as we saw factories from General Electric, Philips, Siemens, Sony, and Westinghouse, and perhaps some Ford, Chevrolet, and General Motors car assembly plants, this would mean Israel's economy had taken a step up. However, this target has changed shape. Today, we are more right to seem them as strategic partners in Israeli initiatives. We already know how to open a factory. But to market the factory's products in sophisticated markets and to turn the products into success stories for that, we need to learn a lot more from the big boys.

Finance Minister Avraham Shochat also notes that what the Israel economy needs now is ten large companies like Indigo, Scitex, and ECI Telecom. Companies such as these will implement the needed revolution in Israeli exports. These are the types of companies which make the Israeli economy well-known, and attract the interest of investors on Wall Street.

"What has happened," explains Prof. Haim Ben-Shahar of the Tel Aviv University School of Economics and advisor to Israeli and foreign investors, "is not at all connected to the Arab boycott. At present, all companies have recently become open to open activity with Israel, but under the conditions of the 1990's, there is no longer any room to build factories based on cheap labor. Labor is not cheap in Israel. Israel is a country with only 5 million residents, with a work potential characterized by a high added value, and therefore salaries reflect this."

According to Ben-Shahar, "This is the reason why we are seeing that multi- national companies which are entering Israel are generally in the hi-tech fields. It would not be logical to build a factory in Israel to produce textiles or manufacture cars. It is logical for multinationals to form joint ventures with Israeli hi-tech firms."

"In the new reality that has been created," Ben-Shahar warns, "it is necessary to protect our interests. The foreign companies that want to be involved in Israeli hi-tech are interested in exploiting local Israeli brainpower for their purposes. In the wake of the reversal, terms of cooperation are now more beneficial for Israeli firms than ever before. Moreover, in hi-tech fields, we don't need the multinationals anymore; we are developing by ourselves."

The accelerated development of the Israeli hi-tech industry is not confined to the domestic scene either. "The leading companies like Indigo and ECI," Ben-Shahar notes, "are creating subsidiaries in Germany, the United States and other places. They are registered as foreign firms for tax purposes, and take part in international activity. If, for instance, IBM were to enter into a joint venture with an Israeli company, IBM would submit demands that would effectively ensure it a majority share of the profits. In such a case, the Israeli company would be weaker than IBM."

Over the past two years, efforts have been made here to attract the leading American concerns. Dov Lautman, whom Prime Minister Yitzhak Rabin appointed special emissary for the promotion of foreign investments, worked primarily in the United States together with outgoing Economic Attache Giora Meyuchas to convince prominent American business figures to make short "get acquainted" visits to Israel. With the help of banker Jimmy Wolfensohn (who was recently appointed head of the World Bank), the group managed to bring the presidents of General Motors, Westinghouse, Salomon Brothers and other firms on visits to Israel. There were no great expectations from the visits, since this was an issue of long-term investment. Nor does it appear that these concerns plan to invest in Israeli companies. Thus, the importance of these visits lies in the access that they created to these people who have begun to become acquainted with Israel's technological capabilities.

Last year, a few well-known German concerns opened offices in Israel. Daimler Benz and Siemens are represented here by offices whose job it is identify various projects in which the German companies have an interest in becoming involved.

Thus far, these offices have not lived up to expectations for the rapid integration of the German concerns in the Israeli economy. Daimler Benz is cooperating with the Federman family, which owns the Dan Hotel chain, in investments in hi-tech firms. Eurofund (owned jointly by the Federman family and Daimler Benz), together with the Gemini Venture Capital Fund, is investing in the creation of an Nanonics Lithography electro-optics factory in the technological park near the Malha mall in Jerusalem. During the first phase, the two groups will invest about NIS 3 million in the venture.

However, a significant number of the foreign firms are not interested in entering into joint ventures, or building factories, in Israel. The interest of these companies is now focussed on involvement in the large infrastructure projects in Israel like paving the Trans-Israel Highway, building the Carmel Tunnel, boosting the electricity production system, and purifying water resources. Israel is becoming attractive for investors because it is investing NIS 7-8 billion per year in these infrastructure projects.

Deputy Economics and Technology Minister Hermut Krebs of North Westphalia in Germany recently visited Israel with his prime minister, Johannas Rau, and a large group of businessmen. Krebs clarified that German firms are not currently interested in Israeli factories, because Eastern Europe has higher priority. The German interest, the Deputy Minister explained, is to create as many jobs as possible so as to reduce the danger of immigrant pressures on Germany.

Accordingly, the Israeli representative office to the North Westphalia Economic Corporation is concentrating on identifying projects which will interest German firms. They are prepared to initiate ventures, or to join them as partners. A large number of the companies are also ready to guarantee a funding package, including easy terms of credit.

But this is not a one-way street. Yisrael Gat, the head of the Israeli office, proposes that Israel Aircraft Industries be integrated into a project to develop an airport near Dusseldorf into a second German cargo airport (in addition to the one in Cologne). The intention is to invest tens of millions of marks in developing this airport, and it has been suggested that IAI build a center for upgrading and maintaining planes at the airport.

And we haven't forgotten the great interest of foreign investors in buying the banks. Some of the big names on the American business scene, like Larry Tisch, Charles Bronfman and Ted Arison, are contending for control of Bank Hapoalim. Foreign investors are interested in buying the Mercantile Discount Bank. What is interesting is that a number of well- known European banks are interested in being involved in the groups vying for these banks, something which has not happened before. In recent years, only the investment banks have operated here, having opened offices (and not made any substantial investments).