A clear-cut future?

Israel's total exports down 33%, diamond sales plunge by nearly 66%.

June 4, 2009 11:53
A clear-cut future?

Zim container ship 88 248. (photo credit: Ariel Jerozolimski)

When Finance Minister Yuval Steinitz saw the statistics on exports for the first four months of the year, he told the Knesset, "Whoever hasn't understood until now how bad the crisis is ought to understand now. We are truly in an emergency situation." The country's prosperity over the last quarter-century has been led by its export industry - and by the economic principle that while there aren't enough Israeli customers to support a healthy domestic economy, there are more than enough customers in the outside world for that purpose. But now the main engine of the nation's prosperity has fallen on very hard times, a victim of the global economic crisis. The explanation is simple: All over the world, people are hard up for money, so they're buying less, which means the sellers - the exporters here and in every other country - are selling less. As a result, Israeli exports during the first four months of the year fell by 32 percent compared to the same period in 2008. An emergency, no question. However, Stef Wertheimer, the recognized visionary of the export sector, doesn't seem particularly worried. "I'm sure things will pick up. The world will still need cars, weapons, machines," says Wertheimer, 82, from his office in the Tefen industrial park he built in northern Galilee. But then, if Warren Buffett had paid you $5 billion for 80% ownership of your business, as Buffett did for Wertheimer's Iscar Metalworking Co., you probably wouldn't be too worried either. Of all Israel's glamour exports, the diamond industry probably took the worst hit, dropping 58% in sales in the first four months of the year compared to the first four months of last year. Beta Diamonds, one of the bigger-selling companies in the Ramat Gan diamond bourse, saw its sales go down along with everyone else's as the price of diamonds, which is set pretty much like the price of stocks, sank like a stone, so to speak. "But we made decisions at the start of the recession that left us in a relatively good position," says Tomer Smetana, one of Beta's trio of partners. "This is not an industry for people with weak hearts. We sleep well at night," says co-partner Avi Mandler, examining a small case of diamonds that, only half-full, is worth an estimated $500,000. THE WORLD recession is commonly dated from September 15 of last year - the day Lehman Brothers declared bankruptcy and Wall Street officially crashed, taking most of the world with it. Yet Given Imaging, one of the most auspicious Israeli start-ups in the field of medical technology, continued to expand its sales, which are forecast to rise to $140-plus million this year from $125 million last year. "We're sort of an exception," says CEO Israel Makov, who two years ago left the board chairman's job at Teva, the country's largest drug manufacturer and exporter, for Given. The 11-year-old company produces a capsule containing a micro-sized video camera that, when swallowed, photographs the patient's gastrointestinal tract - a remarkably elegant method of noninvasive diagnostic technology. Early last month, Given sold its millionth capsule, says Makov. The recession has caused bankruptcies and massive layoffs in the export sector - but not for all exporters. Some have weathered the storm with relatively little damage, like Iscar and Beta, and some, like Given, continue to grow. So when so much has been going wrong in the economy - when exports, the country's lifeline, are in an emergency situation - what have these remarkably confident exporters been doing right? Wertheimer, now honorary chairman of Iscar (his son, Eitan, is chairman and Jacob Harpaz is CEO), says this is a period in which the company is not under the usual pressure to meet production deadlines, so it's using the available time investing in the future. "We have the time to educate the staff to be more efficient, to waste less material and energy," he says. Since the 5,000-strong workforce is not really "fully employed," he says, Iscar has to go out of its way to keep everyone on the payroll. "But this is very difficult because the market is down." Wertheimer, who learned machine-tool manufacture in the Hagana, began making tools commercially in his backyard in Nahariya in 1952. Later on, while the country was still mired in a protectionist, socialist economy in which the customer base was almost totally limited to within its narrow borders, Wertheimer began sounding the charge for an export-oriented economy. He turned it almost into a religion. He mounted a gigantic display on the walls of Ben-Gurion Airport's terminal that showed Israeli history in its stages of nation-building - first agriculture, then defense, then immigrant absorption and now - exports. It was time, he said, to open up to the world, and vice versa. Today, this seems so obvious nobody even has to say it anymore. But when Wertheimer began spreading his gospel in the '50s, the '60s, and even the '70s, he was a lone public advocate for the future, a visionary. His Tefen industrial park, built in 1982, was the first of the modern industrial "campuses" here; he has since built four more in the country and others abroad. But while he is considered a pioneer of the hi-tech mentality in Israel, he bridles at the description. He doesn't even like the term "hi-tech." "It implies that everything else is lo-tech," he says, maintaining that Israelis abandoned industry for hi-tech and finance "so they wouldn't have to dirty their hands." He wants the country to go back to a simpler approach to economics: "To make money from what you can produce, not what you can speculate." Smiling his toothy smile, Wertheimer says, "I'm glad the stock market crashed. I'm glad the hi-tech sector collapsed. This should be a learning experience. People forgot what it means to work with their hands, to build industry, and this will help them remember." In an Iscar promotional video, Buffett is shown after a tour of the company's plants, saying, "I am impressed. We have nothing like this. This is incredible." The vast production areas at Iscar don't look like anyone's image of a factory - they're immaculate. The floors are painted bright yellow because this color best reveals the presence of dust, which gets immediately swept up. (Although one might ascribe obsession with cleanliness to Wertheimer's yekke background, a tour guide says his son Eitan got the idea for the yellow floors after visiting industrial plants in Japan.) While waiting for the world economy to revive - and Wertheimer doesn't hazard a guess as to when that might happen - Iscar is busy "trying to make more new products, investing in R&D and providing even better service, the best service you can dream of, as efficiently as possible," he says. "Everyone got used to easy times, now it's harder. Not every day is Shabbat," he shrugs. "It's no tragedy. It's good for our health." BEFORE THERE was Wertheimer, before there was even a State of Israel, there was a diamond industry in this land, begun by Dutch and Belgian Jewish immigrants in the late 1930s. Today, Ramat Gan hosts the world's largest diamond trading floor, and Israel is a keystone, in a manner of speaking, of the international diamond industry. But in the latter part of 2007, the first rumblings of bad things to come were felt here. "The Christmas season in the United States that year was disappointing," says Beta Diamonds' Tomer Smetana. But the crash didn't really begin until summer of 2008. And after the fall of Lehman Brothers, the world diamond industry caved in. "There was a sharp drop in diamond prices, which destroyed the industry's financial basis," says Martin Rapoport, the New York-born Jerusalemite whose Rapoport Prices List is the basis for the prices at which diamonds are bought and sold the world over. Since the industry runs on credit, the nosedive in diamond prices meant buyers had trouble paying off their debts; sellers' inventories lost tremendous value; manufacturers stopped making diamonds; and diamond mines suspended operations. "By December, the industry essentially shut down worldwide," says Rapoport. In Israel, where more than 6,000 people are directly employed by the diamond industry - "It's a family business, everybody is everybody's cousin," Rapoport notes - perhaps 1,500 people lost their jobs. A few companies simply went broke. So what did Beta Diamonds, ranked 15th in the local industry, do to stay afloat? "The first thing was that we saw, very quickly, that the situation had changed fundamentally. Right away we changed our focus, our basic orientation, from being a company that was out there aggressively looking for new customers, for new markets, and became a company that was on the defensive, that was trying to protect what it had," says Smetana. Suddenly Beta Diamonds became a very, very conservative firm. With the price of diamonds plummeting, every diamond company's inventory - the cache of gems locked away in its safes - was losing millions of dollars of value in weeks or even days. So Beta decided to thin out its inventory by buying diamonds at a much slower rate. Furthermore, it reduced credit to customers; more and more sales were made on a strictly cash basis, and the customers who did get credit had to clear a higher bar. Also, the company stopped borrowing money from banks. And finally, Beta accepted the fact that prices were not about to rebound anytime too soon, so instead of sitting on a fortune in diamonds it couldn't sell at their previous prices, the company began selling them at the new, decidedly lower prices. "We sold even at a loss," says co-partner Mandler. "We didn't play wait-and-see." As a result, Beta, which employs some 30 people, has managed the recession without any more than marginal dismissals, says Smetana. THE RAMAT Gan bourse is a very intimidating place. Security there is considerably more strict than it is at the Prime Minister's Office. You don't go anywhere without getting fingerprinted and photographed, and you're never left alone. There are cameras trained on every inch of the endless inner space, except inside the bathrooms. There are much, much easier ways to become a multimillionaire than by stealing from the Diamond Exchange. The principle that crisis brings opportunity holds absolutely true in the diamond industry, says Rapoport, and it is a principle that Israelis are particularly well-situated to exploit. "Why is there a diamond industry in Israel? We don't have any diamond mines. We don't really manufacture anymore because manufacturing costs are much cheaper abroad. We don't have a large enough population to buy lots of diamonds. So what the hell is Israel doing in this business? The answer is that we're traders, we're Jewish traders like the Jewish traders in Vienna 400 or 500 years ago - we buy something for X and we sell it for X plus Y," says Rapoport, who insists that with the industry turning upside down worldwide, a diamond trader, rather than a diamond mine owner or diamond manufacturer, is an excellent thing to be. "This economic fire is destroying the old dominant firms, the old order, and young, aggressive new firms can take their place," he says. "Because of the cash crunch, the supply side can no longer dominate in the short term, so if you can find customers, you're the king. This is a buyer's market, and Israelis should get out there in the big world and sell diamonds aggressively; they should be exporting more to China, Taiwan, Korea, South America. They should look at this recession as a new opportunity. This is not a crisis, it's a new reality. Young people who are not weighed down by large inventories should move into this industry." Rapoport's advice to "Go east, young man" has been taken to heart by the fellows at Beta Diamonds. They're on the plane frequently to the emerging giants of the world economy, and they're finding a very fast-growing demand for what they sell. "What we're seeing in China and India," says Smetana, "is that as people become wealthier and the middle-class grows, diamonds are becoming a must-have item very much like in the West. They're a traditional gift for weddings and other major life-cycle events in those countries, too." The consensus wisdom is that in a serious financial crunch, bread-and-butter survival goods like food and medicine and low-cost day-to-day items are going to be good bets, while diamonds are going to be the first thing on a family's budget to get cut. Avi Mandler disagrees. "People are still getting married, they're still having anniversaries, they're still having children. Diamonds are not like a Louis Vuitton bag - in certain key events in one's life, they're not optional, they're necessary," he says. He notes, happily, that Beta's stock-in-trade is mid-level priced diamonds, meaning in the $3,000-$7,000 category, which haven't been hit as hard as the high-end stones, which run from $50,000 to an effective top price of $1.5 million. Because of the precautions they took, and because of what they see as the enduring strength of their product, the partners at Beta Diamonds never worried about going under (even though they do worry that some of their customers will). "My father's been in the business for 35 years, and he's been through recessions before - but not like this one," says Mandler. "He told me, 'This is my last crisis. You'll probably have about three more to go.'" WHEN THE crash on Wall Street came last fall, the heads of Given Imaging also played it a little conservative, moving the company's financial reserves around to safer places. And with hospitals around the world cutting their expenditures sharply, the company saw that sales probably weren't going to go galloping forward at the pace they had during the boom years before. For a hospital or clinic to contract with Given, it not only has to buy the capsules, it also has to lay out $10,000 to $20,000 for a work station that has the technology to read the photos the micro-video camera is sending back. "After the recession began, some hospitals and clinics that used to have one work station per doctor and were planning to purchase additional ones, began doubling or tripling up doctors on work stations instead," says Israel Makov. But at bottom, Given was in a nearly impregnable position. The company was new and it provided a painless answer to a problem - gastrointestinal ailments - that wasn't going away and it did so at a price that wasn't prohibitive for hospitals and clinics. "The main challenge is to get health insurance companies to cover the cost of the capsule for patients, and we achieved that in France even after the crash on Wall Street, and also in Japan. We're now expanding to the Far East. We bought a manufacturing company overseas and we're moving it to Israel," he said, noting that of Given's 400-plus employees, more than 200 work here. Medical technology is an especially strong field for this country, but few companies have performed as well as Given during the global economic crisis. "Some other Israeli companies in the field are doing well, but those whose products and services require a major expenditure have experienced a slowdown," he says. All exporters interviewed for this article said that politics - specifically the rising international criticism Israel has been coming under in recent years, especially since Operation Cast Lead - has not played a part in the difficulties experienced by the export industries. "There have always been political tensions involving Israel, and customers, businesspeople and investors have always dealt with us," says Smetana. Actual boycotts have been marginal at worst. Still, Wertheimer says politics - specifically, peace with our neighbors - will determine whether Israel breaks through to the next stage of its economic life: regional cooperation, with Arabs and Jews both succeeding in their work and having a stake in the future. This is one of the reasons he will be creating a technical school and an industrial park for the mainly Arab population of Nazareth in the months to come. "This has happened in the Balkans in the last decade, and it can happen here as well," he says. "The 'good fight' isn't for land or religion, it's for income and productivity."

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