Silicon Wadi

Where German engineering meets Israeli innovation

Elevated dusk view of the city beachfront, Tel Aviv, Israel, Middle East
Prettier than Silicon Valley, and the beach is closer too: Tel Aviv's Silicon Wadi is helping build the country's reputation as an innovation nation. Source: Picture alliance

Earlier this month, German car parts manufacturer Continental paid an estimated $450 million (€381 million) to buy an Israeli startup called Argus Cyber Security, whose technology protects cars from cyber attacks.

“With the acquisition, we are enhancing our abilities to directly develop and offer solutions and services with some of the world’s leading automotive cyber security experts to our customers around the globe,” said Helmut Matschi, head of the interior division at Continental, the world’s third-largest car parts maker.

Continental’s investment in the Israeli tech sector highlights a common problem for German companies: While their engineering is often world class, they lag behind the rest of the world when it comes to the information technology revolution, or what Germans call digitalization, a specialty of Israel’s thriving startup culture.

Ultra Orthodox Israeli Tech Startups
An ultra-orthodox Jewish tech entrepreneur works on a laptop in the office of a Tel Aviv startup. Source: Rina Castelnuovo/Bloomberg/Getty

As a result, some 50 German companies invested around $1.5 billion in Israeli startups last year, according to a study by the Hebrew University of Jerusalem. And more than 60 percent of the companies on the DAX, Germany’s blue ribbon stock index, now have outposts in Israel, either studying or developing technology. Nearly all of them are non-IT firms hoping to capitalize on Israel’s innovation leadership.

“Many of these firms, in particular in the non-IT sectors, such as in the auto industry, feel that their business model – supplying world markets with optimized, but technologically conventional products – is threatened by ongoing technological revolutions in the IT sector,” the Hebrew University study said. “They demand access to disruptive IT-based innovations to prepare for, and gain the ability to shape this revolution and therewith the future of their industries. Israel’s disruptive innovation-oriented startup market supplies this demand.”

Not only are big multinationals, like Bosch and VW, finding innovative solutions in Israel, but the Mittelstand, the family-owned, mid-sized firms that make up the bulk of Germany’s economy, are also scrambling to complete deals in Israel’s innovation sector. Often their revenues aren’t sufficient to finance in-depth research, so they seek to acquire it from within Israel’s Silicon Wadi.

The Bertelsmann Foundation issued a report this week highlighting the benefits to Mittelstand firms that invest in Israeli startups. “Their involvement in Israel opens up many opportunities to ease the pressure to innovate,” said Markus Gick, who produced the Bertelsmann study.

Travel Trip Neighborhoods Tel Aviv
Computing in a Tel Aviv cafe. Source: AP Photo/Dan Balilty

One of the biggest challenges for medium-sized firms is transitioning to what has become known as Industry 4.0, a general term applied to the use of automation and big data in the manufacturing process. According to KfW, a German state-owned investment bank, only 20 percent of Mittelstand companies have the necessary know-how to achieve their automation goals.

“German Mittelstand firms are coming to Israel to get inspired, to look for ideas and to see why this tiny country has become such a dominant force in technology and what we can learn from them,” said Mani Honigstein, a Munich-born venture capitalist who lived in Israel for 12 years. “Whether large or small, they are all looking for innovation.”

One Mittelstand firm that already profited from the relationship is Gundlach Verpackung, a company founded in 1847 that makes packaging for tobacco, tea and food companies at its base in Oerlinghausen, a town in North Rhine-Westphalia.

“Packaging processes are changing dramatically as a result of automation and the creation of completely new applications,” said Paul von Schubert, head of the firm. At a trade show, Mr. von Schubert linked up with an Israeli company called Scodix, which offers a customizable digital printing process, which ensures each package can be made to order, but at mass production prices. “The road was not always easy,” Mr. von Schubert said, recalling the trials of bringing Westphalian engineering together with Israeli tech.

 

“Whether large or small, they are all looking for innovation.”

Mani Honigstein, German venture capitalist

While Germany excels at many aspects of engineering – cars and robots are just two examples – Mr. Honigstein says that German culture is essentially conservative and many Germans shy away from risk-taking, while entrepreneurs thrive in Israel’s try-anything culture. Some German firms are looking at startups elsewhere, including Silicon Valley, but “Israel is closer to Germany, valuations are lower than in the US and there is a lot of tech there,” he said. The Israel startup scene grew to over 7,000 startups with revenues of more than $15 billion in 2015.

Particularly attractive to German companies in the car industry: The Israelis have emerged as a world leader in technology for so-called autonomous vehicles, or self-driving cars and trucks, which are expected to lead a revolution in mobility. The sale of Mobileye, an Israeli startup that specializes in vision-based assisted driving, to chipmaker Intel for $15.3 billion in March, was just one example of the way Israeli companies are leading the charge in the sector despite the country’s small population.

“German small and medium-sized companies cannot afford to limit their innovation research to internal sources,” said Stephan Vopel of Bertelsmann. “If you want to stay innovative, you should look around in Israel – the Silicon Wadi is an attractive alternative to Silicon Valley.”

Johannes Steger covers companies and markets for Handelsblatt from Düsseldorf and Charles Wallace is an editor for Handelsblatt Global in New York. To contact the authors: J.Steger@vhb.de and c.wallace@extern.handelsblatt.com

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