Israel's chemical industry founded on immigration

Chemicals in the holy land

14 November 2008 00:00  [Source: ICB]

The immigration of highly educated chemical professionals laid the foundation for Israel's dynamic chemical industry

IT WAS, perhaps, an omen that the first president of Israel was an accomplished chemist. An Eastern European born in what is today Belarus, Chaim Weizmann is best remembered for his role in the Zionist movement, but he was also the father of industrial fermentation, most famously developing a process for large-scale acetone production.

Weizmann died in 1952, only four years after the birth of the state of Israel. Even in his absence, however, chemistry has become one of the nation's leading industries. In 2007, it accounted for 25% of industrial revenues, excluding diamonds, or $20.48bn (€16.36bn), according to the Manufacturer's Association of Israel.

About 150 chemical companies with around 300 facilities employ more than 32,000 workers - 9% of Israel's industrial workforce. These firms manufacture everything from high-value products such as pharmaceuticals to commodities such as propylene, and they include global leaders such as top-10 pharma company Teva Pharmaceutical Industries the agchem giant Makhteshim Agan and the mineral producer Israel Chemicals Ltd. (ICL), the world's leading producer of bromine and a major producer of potash.

In a region dominated by petrochemicals, how did a flourishing, highly diversified chemical industry like this happen?

Unlike other major chemical producers in the region, Israel has no domestic sources of petroleum, and its population numbers barely 7m. However, these people embody enormous know-how, partly the achievement of an excellent system of education, but also the result of decades of immigration by Jews escaping persecution or just seeking a better life.

A NATION OF IMMIGRANTS

The origins of Israel's chemical industry stretch back at least as far as 1901, when a small wholesale drug business, Salomon, Levin and Elstein, was founded in Jerusalem.The firm would ultimately become part of Teva.

The region's mineral resources, which include the Dead Sea (potash, bromine and magnesium) and the Negev desert (phosphate) also attracted development ICL's earliest precursor, Palestine Potash, was founded in 1927.

Petrochemical manufacturing goes back to 1938, when the British government, the colonial ruler of Palestine, built a refinery in Haifa to process imported petroleum. The refinery, which became the company Oil Refineries Ltd., has since provided a nucleus, not only for its wholly owned subsidiary Gadiv Petrochemical Industries and the 50%-owned Carmel Olefins, but also for many other chemical activities.

"Over the years, this refinery became a highly developed complex with many companies around it receiving feedstocks," says Haim Rosenbaum, president of Dor Chemicals. Founded in the 1970s, Dor produces methanol and derivatives, high-purity solvents, hydrogen, and plastics. It also produces methyl tertiary butyl ether (MTBE) by processing isobutylene from the refinery.

It was the Holocaust and the Second World War, however, that drove great numbers of scientists and engineers to the region, where they used their expertise to begin the many chemical companies key to the new nation's emerging economy.

Makhteshim Agan traces its roots to this era, observes Ron Zakai, manager, investor relations. Agan Chemical Manufacturers was founded in 1945, near Jerusalem, while Makhteshim was started in 1952 in the Negev desert.

"The founders were several Jewish people who came from Eastern Europe after the Second World War," he says. "They had been working for Bayer and other German companies before leaving, and they had very good knowledge of chemistry. They knew that agriculture was well developed in Israel - we have terrific weather and very good arable land. So they decided they would bring this technology to Israel."

In 1933, the large flavor and fragrance company Frutarom began manufacturing near Haifa. Teva originated with three companies - Assia, Zori and Teva - started in the 1930s by chemists from Central Europe. Zohar Dalia, a manufacturer of detergent intermediates and cleaning products, was established in 1939 by an agricultural collective, Kibbutz Dalia. The drug company Rekah began operations in 1940, and Taro Pharmaceuticals was started in 1950.

The pace of growth picked up with the founding of Israel in 1948. Refugees and other immigrants flooded into the region, providing not only manpower, but also an expanding local market for these and other local manufacturers.

A second and third wave of highly qualified workers followed.

"During the 1970s and in the late 1990s, there was very good immigration from Russia and Eastern Europe," says Pinni Raveh, deputy general manager of marketing at Chemada, a fine chemicals manufacturer specializing in bromine chemistry. "A lot of well educated, very professional chemists immigrated to Israel."

Product innovation was not a priority in the early days.

"Bear in mind, because we are a relatively small country with limited population and limited resources, both financial and natural, those companies did not have the resources to develop new molecules," Zakai points out. "The investment required, either in pharma or agchem, is huge. So they focused on what they were good at - copying existing molecules by reverse engineering."

The early choices have had an enduring influence: Makhteshim Agan is now the world's largest manufacturer of branded generic agrochemicals, while Teva is the largest manufacturer of branded generic drugs. Both are consumers of basic chemicals and intermediates produced locally, notes Rosenbaum.

"These factories are consuming many raw materials, many solvents," he says. "Around this you have many other activities - for instance, we are very active in recycling solvents for the pharmaceutical industry."

Israel's burgeoning high-tech sector is another major customer of the chemical industry. The semiconductor industry, for example, has an extensive presence. US electronics giant Motorola established a facility in Israel as early as 1964. Compatriot chip maker Intel arrived in 1975 and now has three fabrication plants there, while Israel's Tower Semiconductor has two. The biotech industry includes Protalix, Omrix, Keryx and hundreds of other home-grown companies. Nanotechnology is another growing area.

Meanwhile, a strong domestic defense industry has provided demand for chemical and metallurgical technology that has diffused into the civilian market.

Half of Israel's chemical production is sold overseas, however. In 2007, chemical exports totaled $10.74bn, accounting for 52% of the chemical industry's revenues and 22% of the country's industrial exports (leaving aside diamonds), according to the Manufacturer's Association of Israel. Europe, the US and South America are the primary destinations.

The country's location relative to major markets is a significant advantage, says Zakai. "We are close to Europe in distance," he says, "which has helped us to market there, as has the fact that the type of crops we have in Israel are similar to those in Europe." Of the company's 2007 sales, which totaled $2.1bn, 39% came from Europe, 19% from North America, 26% from Latin America, 11% from the rest of the world and only 5% from within Israel.

THE COST OF BUSINESS

The cost of manufacturing in Israel is little different from that in the US or Europe, say producers. The influence of the shifting currency exchange rate has at times been positive, while at others, it has been negative.

"Due to the significant devaluation of the US dollar, and with the shekel quite strong, there is not a significant difference in costs between the US and Israel," says Raveh. "If I compare to Europe, there may be a 10-15% advantage." There had once been an advantage with respect to environmental costs, but that has changed dramatically in recent years.

"Standards have increased very much," notes Raveh. Makhteshim Agan, for example, invested about $120m on environmental upgrades over the past two to three years, according to Zakai.

"Regulations are tough," says Rosenbaum. "You have to do a lot of investment to be in line with new requirements, especially nowadays, with clean air regulations. But once you do it, that's it. The standards are the same as the European Union."

Ori Yehudai, president and CEO of Frutarom, agrees.

"In recent years, Israel has not been extremely different from many other Western countries with respect to environmental issues - the awareness, the communicational emphasis, the regulatory requirements and the enforcement extremely increased and the costs in this area are not lower than in other European countries," he says.

Yehudai would like to see more government interest in the chemical industry's success. "The strengthening of the shekel affects the costs in the manpower field [and therefore] the profitability or the ability to compete of Israeli export companies," he notes. "In my position as the head of the economics committee of the Manufacturers Association of Israel, we made our utmost efforts to persuade the government of Israel to act in the matter. In my opinion, the government of Israel does not support the subject enough and not enough is done."

The government played an important role in the chemical industry's early growth, but attention has shifted to high-tech industries with a smaller environmental footprint.

"In the past, the function of the government of Israel was more material," says Yehudai. "Some chemical industries were owned by the State of Israel, [and] the Israeli government supported research and ­development and capital investments," he says. "This support has weakened over the years."

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Author: Clay Boswell
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