---

Zichron Yaacov, Israel—On first glance, the Israeli economy couldn't be worse. Unemployment is at an all time high. Since September, 2000, two entire industries, tourism and high tech- have been literally decimated. Government debt reached 103% of Gross National Product in 2002. Interest payments on the government debt stands at about $8 billion, or 8.1% of GDP, amounting to a fifth of the state budget.

Yet when the new Finance Minister, Benjamin Netanyahu, recently introduced his new economic plan to bring the Israeli economy out of the mud- he said something which no other Israeli Finance Minister has ever said. He stated: "Our major economic goal needs to be to enlarge the size of the private sector and reduce the size of the public sector."

Never before has such concepts been expressed by an Israeli Finance Minister- as usually it defense expenses or immigration costs which are to blame for Israel's poor economic showing. What Netanyahu was trying to get across was that the steady growth of Israel's private sector, companies owned and operated by private citizens and not the Israeli government- is where the future of the Israeli economy lies.

What Netanyahu did not mention is what all of his predecessors would invariably state during a speech to the Israeli public on the state of the Israeli economy: that Israel's economic future rests on its high tech industries.

The reason is that today, after the country's high tech industry has taken a huge beating, it is the non-venture side of the scale that is doing so well in Israel. Perhaps there is more to what shines in Israel than just "high tech"?

What many don't realize is that there are other more rewarding areas to be in other than "high tech". The Israeli economy is only one-third high tech- and that includes all the defence equipment that is being produced. What areas: construction abroad- particularly in Central and Eastern Europe.

What type of non-high tech companies represents the future of the Israeli economy?

Companies like Amcor Ltd. Amcor- which has been in business for nearly 50 years recently signed its first $3M order for air purifiers and dehumidifiers from China. Another old-time Israeli electronics manufacturer Electra creates more than $100 million worth of air conditioners a year.

Or how about MultiLock which manufactures a sophisticated locking device. In March 2001 it opened its new plant in Yavne which giving 80 family's livelihoods- of which only 15% are from research and development and engineering. The company exported $40 million worth of products in 2002- a 50% increase over the previous year to more than 70 countries worldwide. In contrast to conventional wisdom about how Israeli manufacturing capabilities are not competitive in world markets, MultiLock is flourishing as an Israeli-based company with its manufacturing and management departments based in Israel.

While high tech start ups may be considered "hot and sexy", what better type of company to have in Israel's economy than a Pitkit Printing Enterprises? The company has a technological advantage, is financially stable and earns real profits on its turnover. It has an aggressive stance to search for investment opportunities in its own market in young start ups developing new technologies the Israeli company understands as they are for markets they sell it.

Founded back in l967 the company went public on the TASE in l993 and currently sells about $10 million with net profits of $1.5 million (how many high tech companies earn 15% net on their sales? How many can even show any real profits?) It employs 100 people.

What does the company do? It makes labels, low-tech labels which it sells in Israel and abroad. It realized the problem of counterfeiting clothes and thus, labels, and went out and looked for technology that the market was asking for. It then invested in a Swiss company that made the special inks to write on the labels so they couldn’t be counterfeited. With significant stakes in four other start ups that are all developing anti-counterfeiting technologies of some type, the stability the young start ups can receive from such an established company is extremely beneficial.

Or how about Tadbik. It was established in l983 and with a staff of 400 is much larger than Pitkit with revenues of $55 million and net profits of $13 million. How a company can earn 22% net profit on turnover is not a feat even the great Cisco or Microsoft can match.

A few years ago the company changed directions from being a sticker manufacturer to a “provider of comprehensive packaging solutions”. Meaning they were climbing up the food chain and gravitating towards technology as a competitive edge. It too has made external investments, in PowerPaper (an Israeli start up which has developed a technology to "print" batteries onto into all types of materials and paper) and Latent Image Technologies (another Israeli start up which has developed a unique "anti-counterfeiting label").

Companies like Tadbik, Pitkit, MultiLock, Electra and Amcor produce competitive products and sell them abroad. (even if part of the product, or even the majority of it, is manufactured outside of Israel) These types of enterprises are creating interesting and rewarding employment opportunities for Israelis, bringing foreign currency into the Israeli economy, and enlarging the size of Israel's private sector.

The fact is only 5% of the Israeli workforce is employed in high tech, and only 15% of the national economy is derived from high tech activities (most of which comes from the major electronics firms that manufacture products not “internet start ups”). Yes high tech is important, but not more so than all of the other productive economic sectors such as non-high tech manufacturing, added-value services, tourism, construction, etc. To claim that only high tech is beneficial to the economy or only high tech can contribute to economic development, is to completely disqualify the contributions made to the Israeli economy from companies such as Electra and Amcor.

Another development which bodes well for the Israeli economy is the recent trend whereby Israeli companies (most of them in non-high tech areas) have been acquiring distribution outlets in Europe and the US.

For instance:

**Gmul and D.I.G. industries, two financial institutions in Israel, recently acquired the Virginia-based Fast Mart Convenience Stores for $35 million. A privately owned chain of 169 gas stations in Delaware, Maryland, North Carolina and Virginia with a yearly turnover of $360 million. Gmul and D.I.G. is the third Israeli concern to enter the US fuel industry, following Alon Israel Oil Company and Delek Israel Fuel Corp. Acquisition of US-based duel companies has become a trend among Israeli oil companies attempting to break away from the stagnant Israeli fuel market. Alon operates more than 1,7000 service stations in the southwestern US. Delek operates 234 service stations in Tennessee and Virginia.

**Kenvelo, and Israeli company selling womens' fashion, recently purchased the German chain store "Jon Pascal" with more than 180 branches in Europe that sell women's clothes. Revenues for the Israeli company for 2002 were $160 million and this year will reach $210 million

**Kafrit has acquired a German company that makes polyethylene concentrates for $10 million. In December, 2002, Kafrit agreed to acquire an Anglo-Dutch plastics company for $3 million. In 2002, it acquired a British plastics company for $25 million.

** In March 2003, Israeli confectionary manufacturer Elite resumed its overseas shopping spree after a six-month hiatus. Elite is in the process of buying a coffee factory in Serbia. Serbia will become the eleventh country in which Elite operates, after France, Belgium, Turkey, Bulgaria, Croatia, Poland, Romania, Brazil, the Ukraine and Russia.

**Hogla-Kimberly, Israel's largest non-food consumer products company, is about to acquire a Turkish diaper and tissue factory, in partnership with the multinational company, Kimberly-Clark, for $80 million. Rob van der Merwe, group president Kimberly-Clark Europe, Middle East, and Africa, says: "We plan more acquisitions of companies outside Israel, in partnership with the Israeli company"

Why is this trend of Israeli companies purchasing corporate assets outside of Israel so important?

Because in the world of international business- he who controls the means of distribution calls the shots. When Israeli companies buy up their means of distribution in Europe, Asia and the US, it means they will control the contact with the end user, the customer.

One of the reasons why Israeli high tech has not been as successful as it could have been- is because too many Israeli companies in that sector of the economy believed in the notion that "we'll interest a multinational company in our technological development and they will market the product- we won't have to". The world doesn't work this way and those that control the means of distribution are the ones that grow into "multinational corporations" and employ tens of thousands of people which pay taxes to finance the needs of the country.

As Netanyahu said, if Israel's economy is going to be strong in the future, the private sector needs to grow as a percentage of the total economy.

.