In recent years, the Israeli manufacturing industry has been eroding, and it will not survive without fundamental paradigm shift and a technology revolution in the sector. The Israel Innovation Authority is leading the change in national priorities, and is currently developing a range of tools dedicated to facilitate this industry’s needs
This chapter was written in collaboration with the Technology division of Israel Innovation Authority.
It is customary to say that there is “dual economy” in Israel – an economy that has two types of industries. The first is the thriving and sophisticated hi-tech industry that is leading in the world. This industry is characterized by its high-quality skilled workforce and high productivity rates. The second is, well, everything else.
Although it is common to compare the hi-tech industry to the low-tech industry, in fact, it is compared to almost all other industrial sectors: the low technology, the medium-low technology, and even part of the medium-high technology industry. Among these are food and textiles (low); plastic and metal (medium-low) and chemicals and electrical equipment (medium-high). We group these together as the manufacturing industry.
The problem: a steady erosion of the manufacturing industry
In the technological world of software, apps and smartphones, manufacturing industries are considered by many as outdated and not innovative. Indeed, the data suggest that, like in other developed countries, the manufacturing industry in Israel has been eroding in recent years. While advanced, sophisticated and leading enterprises can be found here, the overall picture is quite bleak. As the following data demonstrates, this industry suffers from low added value, stagnating export and thinning of skilled manpower:
The low and medium-low industries are labor-intensive, but low in output: although approximately 56% of those employed in the industry are low-tech workers, these account for only about 38% of the gross added value in the industry, and 22% of industrial exports.
In general, the labor productivity in Israel is low in international comparisons and is about 77% of the average productivity rate in the OECD, and about 55% of that in the United States. The productivity differentials are due mainly to a lower rate of capital investment and the low rate of technological development. Productivity rates in the low and medium-low industries are significantly lower than productivity in the same industries in the OECD.
While hi-tech industry sectors speak to the world, take part in the global competition and increase their volume of exports each year, the low and medium-low tech sectors have a lower share of export volume that has been flat for years.
Due to a continued decline in investment in machinery and equipment in the industry, the annual investment rate of these elements in Israel over the past decade was 4.7% of GDP, while the average investment rate in the OECD stood at 5.6%. According to the Bank of Israel, the low rate of investment in Israel can explain about half of the gap in the labor productivity level between Israel and the OECD.
There is an increasing trend in factory closures, alongside the downward trend in the construction of new plants. This trend is linked to the lingering effects of the economic crisis of 2008-9, as well as to an increase in the number of manufacturing plants opening abroad, often at the expense of manufacturing in Israel. From 2005 to 2013 the number of factories in Israel decreased in 534 factories.
The hi-tech industry is very attractive for engineers: it provides its employees with comfortable working conditions, high salaries, professional challenge and prestige. Therefore, many graduates of universities and colleges prefer to work in hi-tech firms and not in the manufacturing sectors. At the same time, the vocational-technological education suffers quantitative and qualitative degeneration, and consequently increases the lack of technicians and practical engineers.
National programs throughout the world, dealing with similar trends
Many countries in the developed world have long recognized the ongoing erosion of the competitiveness of their manufacturing industries, in the face of rising competition from the east. The problem became fully apparent during the 2008 crisis, when many factories closed and unemployment rates shot up. Therefore, the emphasis on the upgrading of the manufacturing industry comes, in part, due to the necessity to create more jobs for the entire population, as well as facing the deterioration of the once-strong industrial-manufacturing tradition, which still present a certain competitive advantage. Both the United States and the EU are seeking to restore their manufacturing base and competitiveness, and have invested significant resources in renewing and upgrading their manufacturing industries.
The US is promoting the renewal of its manufacturing industry's leading position, which is based on three major pillars: (1) establishment of research institutions for innovation in manufacturing (NNMI), based on the collaboration between industry, academia and the government, while making their outputs accessible to the industry; (2) extensive investment in applied research in breakthrough manufacturing technologies, especially in the fields of advanced materials, advanced sensors and digital manufacturing; (3) upgrade of the training of personnel required for advanced production, as well as professional retraining of older employees for advanced manufacturing sectors. At the same time, the EU announced a target to increase the manufacturing sector's contribution to GDP from 16% to 20%, based on products and processes with high added value, and workers with advanced skills. In addition, the EU allocates substantial resources for public-private industrial R&D in areas, such as future factories and robotics, as part of the Horizon 2020 program.
The challenge: Changing the DNA of the manufacturing industry
The manufacturing industry is caught between ‘a rock and a hard place.' On the one hand, it is very difficult to contend with Eastern competitors on the basis of price. On the other hand, the Western competition for product quality and sophistication is increasing. Therefore, a “business as usual” approach will result in the continued erosion of the Israeli manufacturing industry.
But must we put up with this situation and be content with a limited number of leading innovative enterprises that stand out only on the background of mostly old-fashioned plants that are constantly closing? While it is likely that outdated factories will continue to close, we estimate that there are sectors and companies in the manufacturing industry that can transform, change their "DNA" and become competitive on a global level. To make this transformation possible, the management paradigm should be changed by taking calculated risks, as well as investing in the development of technological innovations, and striving to manufacture new value and quality for customers. The Israel Innovation Authority (former Office of Chief Scientist) is here exactly for this purpose.
Why supporting of innovation in the manufacturing industry is of unparalleled importance?
- Upgrading of plants that serve as other Israeli companies’ subcontractors, will increase the quality of the value chain and contribute to a healthier ecosystem. A prominent example is the metal industry, which serves, among other things, as the subcontractor of the defense industry.
- Supporting of breakthrough startups in the manufacturing industry will launch them to a leading position in the global market, and may lead to the development of new manufacturing sectors and jobs.
- Industrial upgrading, which will require personnel to undergo training in advanced skills, will contribute to a rise in productivity, an increase in wages and a reduction in the gaps between highly skilled and low skilled workers. Even if the number of jobs is reduced in the short term, in the medium-long term, the revitalization of the industry will ensure steady employment in the future, and may contribute to the increase in the number of manufacturing jobs.
- Diversification is vital to ensuring economic stability during sector crises, in the sense of “not putting all your eggs in one basket.”
The answer: a variety of tools supporting the implementation of technological innovation in the industry
The Office of Chief Scientist had early recognized the challenge on the doorstep of the manufacturing industry, and also contributed to the Makov Committee Report. Accordingly, over the past decade, the Office of Chief Scientist has invested nearly a billion shekels in the manufacturing industry, as part of the support program for technological innovation in the traditional industry. The program's goal is to promote companies to the next level, and ensure their competitiveness in the long term, based on quality and innovation. The program has reached hundreds of companies in Israel, and provided research and development grants to over 560 companies in various industries, including metals, plastics, food processing, electrical equipment, construction materials, machinery, and so on. Some of these enterprises are leading companies that were assisted by the OCS in the upgrade of their R&D processes. Other companies kick-started their R&D and technological innovation processes for the first time with the assistance of the Office of Chief Scientist.
The uniqueness of the program stems from the detailed examination of individual needs and capabilities of each company, and subsequently adapting the program to each company, to ensure its ability to compete and survive in the market for long term. Another unique feature of the program is the budgeting of activities typical to manufacturing-oriented companies, such as supporting research and development of process innovation, participation in the financing of molds and more. These unique characteristics have increased the relevance of the program for its target audience, many of whom have successfully completed their R&D projects.
The Israeli government, recognizing the challenges that characterize the manufacturing industry on the one hand, and the necessity of investment in it on the other hand, has expanded the R&D Law in the past year, and instructed the Israel Innovation Authority to promote the “encouragement of growth, increase of productivity, and promotion of technological innovation in the Israeli industry, including the Negev and the Galilee.” Expansion of the scope of the law and its new targets constitutes the first sign of change in government priorities.
As a result of this new mission, and based on the strategic work already conducted, the Israel Innovation Authority will establish a new division with the purpose of acting as a catalyst for technological revolution – “advanced manufacturing revolution” – that will lead to an increase in growth and productivity in the manufacturing industry. This division will be established based on the experience of the support program in the traditional industry, which it will upgrade. For example, it includes the planned establishment of the National Institute of Advanced Manufacturing, as well as support for breakthrough R&D projects in the manufacturing industry, expansion of the preparatory tech program for traditional industry, and increased support of process innovation development. In addition, the expansion of our mission allows the Israel Innovation Authority to broaden the audience eligible to receive support from the Advanced Manufacturing division. We call on the government to back the change in national priorities with an incremental budget, dedicated for the benefit of the advanced manufacturing revolution.
Combining the forces of the government and the private sector is the basis for promoting a sustainable competitive advantage in the manufacturing industry. Together, we can change the face of the manufacturing sector and remake it as a highly technological industry. Just as joining forces resulted in the creation of a world-leading hi-tech industry, we can transform the manufacturing industry in Israel into one of the leading and the most advanced in the world.
 CBS divides industry sectors into four groups according to their technological intensity, in accordance with international classification. These groups are: low, medium-low, medium-high and hi-tech industries.
 Manufacturing industries make or assemble new products through a physical or chemical transformation of materials of components into new products, including assembly of component parts of manufactured products and recycling of waste materials. Definition source: OECD, Measuring the Non-Observed Economy: A Handbook, 2002.
 See: The Committee for Developing the Periphery and Improving Traditional Industry, 2007, also called the "Makov Report."
 Results of a survey conducted by the OCS among the companies that completed the program.