Progress undeterred by bumps on road to Intel plant

When the Israeli government gave final approval to the Santa Clara-based Intel Corp. to build a $1.6 billion semiconductor plant near the Negev, proponents of the deal here and in Israel breathed a sigh of relief.

That's because for weeks, it looked as if the deal — the largest investment ever made in Israel by a foreign firm — might fall through.

Just weeks before Intel won approval late last month, the media reported a study by Israel's Industry and Trade Ministry's Investment Center that showed Israel, which was loaning Intel heavy startup costs, could actually lose more than it would gain from the deal with the Silicon Valley chip manufacturer.

"It would be very difficult under the current conditions to recommend going ahead with the project," a government official reportedly said. "Under the current conditions the economy will lose a great deal of money."

What the press reports did not explain, said Shlomo Shalev, Israel's Consul of Economic Affairs for the Pacific Northwest Region, is that the Israel Investment Center — the organization responsible for implementing laws regulating both local and foreign capital investment in industry — always investigates the economic feasibility of potential investments, then conducts negotiations as needed. Usually, however, that process is not made public.

"Because it is Intel and because it is such a huge investment, it was in the press," said Shalev, whose office is in Santa Clara. "It's actually quite a regular type of process. It takes a couple of months to approve large investments."

Now that the investment has been approved, details of the bumpy road that led to the company getting the green light are coming to the fore.

After months of wrangling over the size of the capital investment grant the government would offer Intel, the two parties agreed that Intel would receive the originally stipulated grant of 38 percent (the standard package for this type of investment) in exchange for Intel's commitment to buy an undisclosed amount of Israeli goods and services for its local and international branches.

That part of the deal, said Shalev, can only serve to aid quality control among Israeli high-tech manufacturers.

"Having the state-of-the-art technology company operating in Israel helps other Israeli start-ups in this business of semiconductors," he said. Intel "sets standards for Israeli companies that would like to sell to it."

The $608 million that Israel is due to provide Intel over the next decade will go toward construction of a wafer fabrication plant that will make computer memory chips for the storage of electronic data.

Intel first established a presence in Israel in 1974, alongside such major computer hardware manufacturers as Apple and IBM. Intel Israel maintains a design center in Haifa, which employs some 750 engineers, a microchip-processing factory in Jerusalem, a networking software development center in Netanya and a regional sales office in Tel Aviv.

Israel Finance Minister Avraham Shohat said the new factory in Kiryat Gat, located east of Ashkelon, is expected to provide direct employment for 2,500 people once the company is running at full capacity. More are expected to be employed through contract work. The new plant, scheduled to be completed in two years, is expected to generate $1 billion in annual revenues.

In order to stay ahead of heavy competition, Intel — the world's largest producer of microprocessors, with 75 percent of the market and more than $11 billion in sales — has earmarked billions of dollars for investment in its facilities, equipment and research, and development programs.

Last year, Intel invested $100 million in upgrading its operations, and two years ago the company opened new plants in Ireland and the U.S., including a $1.3 billion chip factory in Arizona.

The fact that the company is now expanding its presence in Israel, Shalev said, boosts Israel's image as a leader in the world of high tech.

"Everyone knows Intel and everyone knows that Intel is a well-established, leading company," he said. "It knows how to weigh places and benefits and it chose Israel."

Dov Frohman, general manager of Intel Israel, said the Jewish state's skilled work force was 90 percent of the reason Intel decided to establish the plant there.

Israel, he said, beat out competition from many countries and virtually every state in America.