The Israeli-Palestinian conflict is intensifying. As of October 14, 2023, the Palestinian health department stated that this round of Palestinian-Israeli conflict has resulted in 1,949 Palestinian deaths and more than 8,600 injuries. According to Israeli sources, the death toll on the Israeli side exceeded 1,300 and the number of injured reached at least 3,484.

The impact of the conflict has spread to the chip supply chain. It is reported that Intel and Tower Semiconductor's wafer factories in Israel have begun partial shutdowns, and the production and logistics operations of the Israeli electronics supply chain have also been affected.

Israel, this "small country" located in the desert of the Middle East, is actually a veritable "chip kingdom". There are nearly 200 chip companies locally. Giants such as Broadcom, Qualcomm, and Samsung all carry out R&D activities in Israel. Intel and Tower Semiconductor also have several wafer fabs in Israel. Intel even announced in the first half of this year that it would spend US$25 billion to build new factories.

01 Israel is not a "blessed land" for semiconductors

Israel is as small as one-third the size of Chongqing, has desert coverage of up to two-thirds, and has a population of less than 10 million.

Such a small country with harsh conditions has nearly 200 chip companies, gathering the R&D centers of giants such as Apple, Samsung, and Qualcomm. It has become the only developed country in the Middle East thanks to its high-tech industry.

How did Israel do it, and what has its semiconductor industry experienced?

More than 3,000 years ago, the prophet Moses led the Jews out of Egypt to the Canaan area from the Nile River to the Euphrates River. They believed that it was the "promised land" given to the Jewish nation by God, and that the land was full of milk and honey.

After being conquered by the Roman Empire, the Jewish people began to wander for more than 2,000 years. It was not until 1948, when the state of Israel was established, that a country whose main body was Jewish was finally established, and the Jews returned to their "promised land."

However, Israel did not have milk and honey.

It is the only country in the Middle East without oil and natural gas. It covers an area of only 25,700 square kilometers. It has barren land, lack of water resources, and unstable geopolitics. The conflicts with surrounding Arab countries have never subsided. It can be said that Israel has no innate conditions. Advantage.

However, Israel is the only developed country in the Middle East. Its per capita GDP will reach US$54,710 in 2022, ranking 14th in the world.

A careful analysis of Israel's industrial structure shows that the tertiary industry will account for as much as 70% of total GDP in 2022, and the high-tech service industry will be significantly higher than the traditional service industry. Moreover, Israel's high-tech exports accounted for 54% of its total exports in 2021. It can be said that the high-tech industry is the backbone of the Israeli economy. The semiconductor industry, which accounts for 16% of high-tech product exports, is a shining pearl.

Israel: Economic activity and labor market indicators in services; Source: OECD

The history of Israeli semiconductors did not start very early, but it developed rapidly and became the world's leading semiconductor region in a short period of time.

In 1964, Motorola established the first semiconductor R&D center in Israel, marking the beginning of the Israeli semiconductor industry.

In 1974, Intel was persuaded by its Israeli employees to establish its first R&D center outside the United States in Haifa, Israel. Since then, Israel's semiconductor industry has taken off.

In Israel, the world's first IBM personal computer 8088 processor based on Microsoft operating system, Intel's first Pentium CPU, TI's Bluetooth chip and so on were born.

Decades have passed, and today’s Israeli semiconductors have become a force that cannot be underestimated. With a population of less than 10 million, there are more than 30,000 chip engineers and nearly 200 chip companies. Apple, Broadcom, Qualcomm, Samsung, Huawei, Texas Instruments, LG, Hitachi, Marvell, KLA-Tencor and other giants all carry out R&D activities in Israel.

Israel Semiconductor Landscape 2022; Source: Intel lgnite, Cardumen C., UCT | 2022

Intel, one of the first batch to settle in, is now the largest "owner" in Israel.

Currently, Intel has 4 R&D centers and 2 wafer fabs in Israel:

Intel R&D centers are located in four cities: Haifa, Yakum, Jerusalem and Petah Tikva, employing more than 10,000 people. Since then, the first computer processors, Pentium, Celeron, Core, SNB, Ivy Bridge and other major CPUs were completed in these R&D centers in Israel. The new fab is expected to begin operations in 2027, operate until at least 2035, and employ thousands of people.

Tower Semiconductor, which was almost acquired by Intel, owns the second largest wafer fab in Israel after Intel. Its factory has a production capacity of 200 mm and a 150 mm diameter wafer.

Under its huge layout, Intel has created direct and indirect employment for more than 50,000 people in Israel. On average, nearly 6 out of 1,000 people in Israel have a direct or indirect relationship with Intel.

Intel's exports to Israel in 2022 will reach US$8.7 billion, accounting for 1.75% of Israel's GDP and 5.5% of its total high-tech exports. Some people even commented: "Intel is Israel, and Israel is Intel."

This shocking hegemony seems familiar in East Asia. Intel is to Israel what TSMC is to Taiwan.

02 The startup kingdom of semiconductors-no local giants

Israel is a small country with vast deserts and poor resources. 

It is not a resource-rich country and cannot produce semiconductor materials. Restricted by geographical conditions, Israel's semiconductor industry has unique characteristics: first, it is mainly based on chip design; second, it is mostly small and medium-sized enterprises, with no local giants; third, it plays both sides between China and the United States and concentrates on doing business.

The reason why chip design is the main focus is easy to understand, as it is difficult for a clever woman to make a meal without rice! The land of Israel has no resources, so we can only rely on the smart minds of the Israelis to take the high-end design route.

Chip design is the soul of the Israeli semiconductor industry. According to statistics, Israel has about 8% of the world's chip design talents and R&D companies. In addition, in 2021, a total of 37 multinational companies in Israel are operating in the semiconductor industry, and large companies such as Apple, Broadcom, Qualcomm, Samsung, Huawei, and Texas Instruments are conducting R&D activities in Israel.

There are relatively few manufacturing plants in Israel, but not none. Israel currently has five wafer foundries, which are basically covered by Intel. In terms of semiconductor equipment, there are also multinational companies including Applied Materials, Kulicke & Soffa, and local companies such as Orbotech, Sela and Jordan Valley.

Therefore, the current Israeli chip industry chain mainly consists of fabless chip design companies, multinational company R&D centers, semiconductor equipment companies and a few wafer factories.

However, with so many chip giants located in Israel, why has no such giant been born in Israel?

This is mainly related to the operating model that Israeli companies are accustomed to.

Israel is a country that loves entrepreneurship. Israel has more than 7,000 innovative technology companies and is the region with the highest concentration of startup companies in the world. It is equivalent to 1 entrepreneur for every 1,400 people, and the per capita entrepreneurship ratio is basically unrivaled.

In the semiconductor industry, in 2020, the number of Israeli semiconductor startups ranked second in the world, second only to the United States.

Because they like innovation and "new adventures" too much, after establishing their own semiconductor companies, Israel's semiconductor elites looked at so many local chip giants and thought not of becoming or surpassing them, but of seeking acquisitions!

Therefore, the path of most Israeli semiconductor companies is this: establish a start-up company - make a breakthrough in a certain field - be acquired by a giant - start the next round of entrepreneurship.

Because of this, most of Israel's hundreds of start-up semiconductor companies focus on polishing technology rather than business and operations.

In addition, take a closer look at Israel’s semiconductor market. Storage accounts for the largest share of the Israeli semiconductor market, followed by power management ICs, logic chips, OSD (On Screen Display), and analog chips.

Source: reogma

In terms of downstream markets, the largest market for Israeli semiconductors is data processing, followed by communications, industry, consumer electronics and autonomous driving.

Source: reogma

After Israeli semiconductors found their own way, they have grown steadily every year. It is expected that the Israeli semiconductor market revenue will reach US$1.14 billion in 2023. It is worth mentioning that China is the largest consumer market for Israeli semiconductors. Speaking of which, Israel also knows how to do business. In today's geopolitical instability, it chooses to "play both sides" between China and the United States to make money in harmony.

In 2018, when the game between China and the United States broke out, Israel's semiconductor exports to China surged by 80%. Semiconductors suddenly became an important part of the economic relationship between China and Israel. The latest data shows that China will still be the largest exporter of Israeli chips in 2021.

What should the United States do if it has objections to China's chip business? Don't ask, asking is the "periphery" of the Wassenaar Agreement, which is true but not entirely. Israel may test the boundaries of some regulations, but it is not considered to be against the United States.

As long as both parties don't offend, the business will be done.

03 Sufficient talents and funds

Supporting Israeli Semiconductors

Israel’s “innate conditions” are so poor, why can Israel still develop into a chip kingdom?

A simple summary is: money and people.

No matter what industry. Funding is always an important factor in enterprise development, especially in the semiconductor industry.

Semiconductor is an industry that requires continuous money-burning, and spending a lot of money may not necessarily yield results. It is an industry with high returns and high risks. It is not easy for a start-up semiconductor company to survive. One mistake may cause all previous efforts to be wasted, and the error tolerance rate is very low.

At this time, the role of venture capital becomes very important. Venture capital refers to investments in which investors with financial strength finance entrepreneurs who have specialized technology and good market development prospects but lack start-up capital, and bear the risk of investment failure in the entrepreneurial stage.

The cradle of global technology - Silicon Valley in the United States, the key to its success lies in its mature venture capital ecosystem, which greatly improves the fault tolerance rate of startups. It has a big tree at its back to provide shelter for startups.

As a gathering place for venture capital, Tel Aviv, the capital of Israel, has extremely high activity in technology deal flow (project flow in the innovation and technology ecosystem), second only to Silicon Valley. A report points out that 11% of global VC investments in the entire Industry 4.0 field have gone to Israeli companies. In 2021, the amount of venture capital investment in Israel reached US$10.8 billion, and per capita venture capital was 28 times that of the United States. In 2022, the amount of venture capital investment in Israel reached US$8.1 billion, although it declined.

In addition to the massive influx of capital, the Israeli government has also provided protective laws and funding for startups.

As early as 1984, Israel passed the Encouragement of Industrial Research and Development Law ("R&D Law").

Under this law, R&D projects that meet certain criteria and are approved by the Office of the Chief Scientist (OCS) Research Committee are eligible for funding of up to 50% of approved expenditures. In exchange, the recipient pays OCS royalties. The recipient must submit periodic reports on royalties payable to OCS, and OCS has the right to inspect the recipient's books.

In terms of taxation, Israel also provides preferential policies to high-tech companies. In 1985, Israel's corporate tax rate was 61%, and by 2022 it had dropped to 23%. Israel also has a special "Angels Law" that provides tax incentives to private investors in young companies, especially those with R&D capabilities.

Israel has special laws to encourage R&D and innovation, and also supervises the whereabouts of funds and the effectiveness of projects. If you give money generously, you can spend it wisely and get twice the result with half the effort.

The government's "generous" subsidies and the large-scale venture capital industry make Israeli semiconductor companies "not short of money."

In addition to having money, someone also needs to do it.

More than 70% of Israel's population is Jewish. Speaking of Jews, the "stereotype" of their superior intelligence immediately comes to mind.

It’s hard to say whether Jews really have outstanding genes, but it’s a fact that they have many highly educated people.

According to data from the Ministry of Commerce of my country, Israeli scientific researchers account for 6% of the country's population, with 135 scientists and engineers per 10,000 people, surpassing the 85 in the United States, ranking first in the world. 77% of the people in Israel have received more than 12 years of education, 20% of the population has a college degree, and there are nearly 200,000 college students in the country.

The ancient Canaan region, the legendary "Promised Land", and the reality of Israel have almost "nothing."

In the cracks of the desert-filled Middle East, tiny Israel relied on innovation, capital and other strategies to make up for its natural disadvantages and inherent deficiencies, and in a short time it became the focus of the world's semiconductor industry. Obviously, behind Israel’s semiconductor “myth” is not God’s promise, but thousands of Moses and his descendants.

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