Should Israel Subsidize Intel?

The two sides of the dilemma of whether or not Israel should give Intel 741 million shekels.

By SHLOMO MAITAL
Shlomo Maital (photo credit: Courtesy)
Shlomo Maital
(photo credit: Courtesy)
“GIVE ME A ONE-HANDED economist!” former US president Harry Truman once demanded. “All my economists say, ‘on the one hand, on the other [hand].’” I’m sorry, Harry, I try my best to write decisively one-handed, as you demand, but some prickly issues are like Chopin’s Minute Waltz – there is no way to do them justice with just one hand.
The recent government decision, in principle, to give Intel 741 million shekels ($205 m.) to subsidize the expansion of its new Fab 28 semiconductor factory in Kiryat Gat is a perfect example. The decision still needs final approval by the Finance Ministry, Knesset committees and by Intel corporation. Fierce debate rages.
So Harry, please understand – you are my all time favorite American president. You made fateful decisions, like recognizing Israel in 1948, and the tough one to drop atomic bombs on Japan. But Harry, regarding the question of whether Israel should subsidize Intel, I have no choice but to present the dilemma with two hands, and then let you and our readers decide.
On the one hand, Intel brings much-needed jobs to Kiryat Gat, a city of some 50,000 located in the northern Negev roughly equidistant from Tel Aviv, Beersheba and Jerusalem. About half of Kiryat Gat’s workers earn only minimum wage.
Unemployment is 10.9 percent, compared with only 3.4 percent in Tel Aviv and 6.5 percent in Haifa. Expanding Fab 28 will create 570 new wellpaying jobs directly, bringing employment to a total of 3,100 workers at the Kiryat Gat plant, and creating many more jobs indirectly (through subcontractors).
On the other hand, Harry, spending 741 m.
shekels to create only 570 jobs means each new job costs 1.3 m. shekels. That is simply too costly! Used elsewhere, for instance in retraining programs, that money could generate far more jobs. It’s a bad deal.
On the one hand, the country vitally needs an expanded Fab 28. Israel is known worldwide for its inventions, but it is losing its industrial production at an alarming rate. Many Israeli inventions are manufactured in Asia. Israel needs the expanded Fab 28 to prove that it is a world-class manufacturer, not just a dreamer and inventor. Intel Israel’s exports totaled $3.4 billion in 2009, up from only $1.4 b. in 2007, despite the global crisis.
On the other hand, it is utterly absurd to subsidize Intel. In the second quarter of this year, Intel worldwide had a record $10.8 b. in revenues, an incredible gross margin (operating profit as percent of sales) of 67 percent and net profit of $2.9 b. In the third quarter, Intel had $11.1 b. in revenues, up 18 percent from 2009 and a net income (profit) of $3 billion. Intel is drowning in cash and has no bank debt. Its shares rose from only $12 last October to today’s $19.12, a 60 percent rise.
Israel’s government has already paid grants of over $1 b. to Intel plants. Enough is enough.
Yet on the other hand, Intel has many options. It could invest, instead, in expanding plants in the US, Malaysia, or Ireland. If Israel fails to offer Intel a deal, other countries surely will.
On the one hand, Harry, Intel owes a huge debt to Israel. Two decades ago, three upstart Israeli engineers led by current Intel Mobility Group head David (Dadi) Perlmutter flew to Intel headquarters in Santa Clara, California, and persuaded Intel leadership to reverse a bad decision and instead develop what became the Pentium microprocessor.
Perlmutter and colleague Shmuel (Mooly) Eden then led its design. At one point, 80 percent of the world’s PCs had Pentiums inside. The Centrino chipset, too, was conceived and designed at Intel Israel, as was the Core 2 Duo chip. Doug Freedman, an analyst for a US brokerage, once said of Intel’s innovative Israelis, “They saved the company. Without these new products, Intel would be in a lot more trouble.”
On the other hand, in competitive global markets, sentiment and gratitude play no role. On the one hand, the Finance Ministry has slashed the crucial 2011 budget of the Chief Scientist’s Office (OCS) to only 1 billion shekels ($270 m.), compared with 1.35 b. shekels ($365 m.) this year.
That money funds start-ups and R&D, and every shekel is vitally needed at a time when venture capital has collapsed. If the Intel subsidy comes at the expense of the OCS budget or other investments, it’s a bad deal.
On the other, perhaps it’s not really a subsidy because Intel pays taxes on its Fab 28 profits that can and should fund other public investments. So, Harry and readers, there it is. With which hand should Israel greet Intel and its expanded Fab 28? Overall, I personally favor investing the 741 m.
shekels in Intel. But on the other hand, Harry, happily that famous buck of yours does not stop here.
The writer is the senior research fellow at the S. Neaman Institute, Technion.