Start-Up Nation - The Story of Israel's Economic Miracle Part 5

Most people do not know what a router is, and so might have trouble relating to Chambers's excitement. A router is something like the old modems we used to use to connect our computers to the Internet. If the Internet is like a mighty river of information that all of our computers connect into, then routers are at all the junctions of the tributaries that feed in, and are the main bottleneck that determines the capacity of the Internet as a whole.

Only a few companies can build the highest-end routers, and Cisco-like Microsoft for operating systems, Intel for chips, and Google for Internet searches-dominates this market. Upon its unveiling, the CRS-1, which took four years and $500 million to develop, earned a place in the current volume of Guinness World Records Guinness World Records as the fastest router in the world. "We liked this entry, because the numbers are so huge," said David Hawksett, science and technology editor at Guinness World Records. "I just installed a wireless network at home and was quite pleased with 54 megabits per second of throughput, but 92 terabits is just incredible." as the fastest router in the world. "We liked this entry, because the numbers are so huge," said David Hawksett, science and technology editor at Guinness World Records. "I just installed a wireless network at home and was quite pleased with 54 megabits per second of throughput, but 92 terabits is just incredible."2 The tera tera in in terabit terabit means "trillion," so one terabit is a million megabits. According to Cisco, the CRS-1 has the capacity to download the entire printed collection of the U.S. Library of Congress in 4.6 seconds. Doing this with a dial-up modem would take about eighty-two years. means "trillion," so one terabit is a million megabits. According to Cisco, the CRS-1 has the capacity to download the entire printed collection of the U.S. Library of Congress in 4.6 seconds. Doing this with a dial-up modem would take about eighty-two years.

A chief proponent of the CRS-1 was an Israeli named Michael Laor. After earning an engineering degree at Ben-Gurion University in Beersheba, Israel, Laor went to work for Cisco in California for eleven years, where he became director of engineering and architecture. In 1997, he decided he wanted to return to Israel, and Cisco, rather than lose one of its leading engineers, agreed that he would open an R&D center for the company in Israel-its first outside the United States.

At around this time, Laor started to argue for the need for a ma.s.sive router like the CRS-1. Back then the Internet was still quite young and the idea that there might be a market for a router this big seemed far-fetched. "People thought we were a little nuts to be developing this product four years ago," Cisco's Tony Bates said at the time. "They said, 'You're biting off more than you can chew,' and they asked, 'Who is going to need all that capacity?' "3 Laor argued that, to paraphrase the movie Field of Dreams Field of Dreams, if Cis...o...b..ilt it, the Internet would come. It was hard to see back then that the Internet, which was just starting off with e-mail and the first Web sites, would in a few years balloon exponentially with an insatiable need to move the ma.s.sive data flows produced by pictures, videos, and games.

Though the CRS-1 was the company's biggest ever and thus a company-wide project, Laor's team in Israel was pivotal in designing both the chips and the architecture needed to bring the technology to a new level. In the end, when Chambers unveiled the CRS-1 at the 2004 conference, he was right to be enthusiastic. Fully configured, the routers sold for about $2 million each. Yet by the end of 2004, the company had sold the first six machines. And in April 2008, the company announced that CRS-1 sales had doubled in less than nine months.4 By 2008, the center opened by Laor a decade earlier had seven hundred employees. It had swelled quickly with Cisco's acquisition of nine Israeli start-ups, more companies than Cisco had bought anywhere else in the world. In addition, Cisco's investment arm made another $150 million in direct investments in other Israeli start-ups, and also put $45 million into Israel-focused venture capital funds. All told, Cisco has spent about $1.2 billion to buy and invest in Israeli companies.5 Yoav Samet, a graduate of the IDF's elite 8200 intelligence technology unit who now runs Cisco's acquisitions department for Israel, the former Soviet Union, and central Europe, says that Cisco Israel is among the company's largest overseas centers, along with those in India and China. "But," he notes, "whereas in China and in India there is quite a bit of engineering work done, when it comes to pure innovation and acquisition activity, Israel is still holding the front line."6 It is unlikely that Cisco would have become so deeply invested in Israel, and that its Israeli team would have almost immediately become central to the company's core business, if Michael Laor had not decided it was time to come home. As with Dov Frohman of Intel and many others, Laor's decision to gain knowledge and experience in the United States or elsewhere ultimately redounded to the benefit of both the multinational company he worked for and the Israeli economy.

While many countries, including Israel, bemoan the fact that some of their brightest academics and entrepreneurs go abroad, people like Michael Laor show that the "brain drain" is not a one-way street. In fact, international-migration researchers are increasingly noting a phenomenon they call "brain circulation," whereby talented people leave, settle down abroad, and then return to their home countries, and yet are not fully "lost" to either place. As Richard Devane writes in a study issued by the World Bank, "China, India, and Israel enjoyed investment or technology booms over the past decade, and these booms are linked . . . by expatriate leadership in all three countries."7 AnnaLee Saxenian is an economic geographer at U.C. Berkeley and author of The New Argonauts The New Argonauts. "Like the Greeks who sailed with Jason in search of the Golden Fleece," Saxenian writes, "the new Argonauts [are] foreign-born, technically skilled entrepreneurs who travel back and forth between Silicon Valley and their home countries." She points out that the growing tech sectors in China, India, Taiwan, and Israel-particularly the last two countries-have emerged as "important global centers of innovation" whose output "exceeded that of larger and wealthier nations like Germany and France." She contends that the pioneers of these profound transformations are people who "marinated in the Silicon Valley culture and learned it. This really began in the late '80s for the Israelis and Taiwanese, and not until the late '90s or even the beginning of the '00s for the Indians and Chinese."8 Michael Laor at Cisco and Dov Frohman at Intel were cla.s.sic new Argonauts. Even while gaining knowledge and status within their major international companies, they always intended to return to Israel. When they did, they not only became catalysts for Israel's technological development but founded Israeli operations that provided critical breakthroughs for the companies they worked for.

The new Argonaut, or "brain circulation," model of Israelis going abroad and returning to Israel is one important part of the innovation ecosystem linking Israel and the Diaspora. Another Diaspora network is a non-Israeli Jewish Diaspora.

Israel owes much of its success to a deep Diaspora network that other countries, from Ireland to India and China, have also developed. Yet the non-Israeli Jewish Diaspora ties are not automatic, nor are they the key catalysts to the development of the tech sector in Israel. In fact, whereas China's Diaspora is the source of 70 percent of foreign direct investment (FDI) into China and India's Diaspora did much to help build its homeland's high-tech infrastructure when the country's economy and legal system were both underdeveloped, Israel's experience has been different. The vast majority of American Jewish investors historically would not touch the Israeli economy. It was not until much later, when Israel became more successful, that many Diaspora Jews started looking at Israel as a place to do business, not just as a draw for their sympathy and philanthropy.

So it has required creativity for Israel to learn how to use its Diaspora community in order to catalyze its economy. The tradition of Israelis' tapping into a very small but pa.s.sionate subset of the Jewish Diaspora to help build the state has its roots in inst.i.tutions like Israel's start-up air force.

The fantasy of an Israeli aircraft industry took shape on a b.u.mpy flight over the North Pole in 1951, inside what was to become the first aircraft in Israel's new national airline. The conversation was between a pair of opposites: Shimon Peres, the erudite future president of Israel, who in 1951 was the chief arms buyer for the new Jewish state, and Al Schwimmer, a swashbuckling American aviation engineer from Los Angeles, whose pals included Howard Hughes and Kirk Kerkorian. Schwimmer's first name was Adolph, but against the backdrop of World War II, he'd opted for Al.9 Peres and Schwimmer were on one of their many flights over the Arctic tundra in used planes purchased for Israel's fledgling air force. Flying over the North Pole was dangerous, but they took the risk because the route was shorter-no small consideration when piloting planes that were falling apart.

Al Schwimmer was a raconteur who'd been captivated by the airline business in its earliest days, when flying machines were an exotic novelty. He was working for TWA when the United States entered World War II and the entire airline was drafted into the war effort. Though not officially in the U.S. Air Force, Schwimmer and his fellow fliers were given military ranks and uniforms and spent the war ferrying troops, equipment, and the occasional movie star all over the world.

During the war, Schwimmer's ident.i.ty as a Jew meant little to him and had almost no influence on his thinking or way of life. But seeing a liberated concentration camp and the newsreel footage of countless bodies and speaking with Jewish refugees in Europe trying to reach Palestine transformed him. Almost overnight, Schwimmer became a committed Zionist.

When he heard that the British in Palestine were turning back ships full of European Jewish refugees, Schwimmer came up with what he was convinced was a better way: fly over the British navy patrols and smuggle the Jews in by landing them at hidden airfields. He tracked down Ben-Gurion's secret emissary in New York and pitched him the idea. For months, the representative of the Haganah, the main underground Jewish army in Palestine, sat on the idea. But when it became clear that the British would soon withdraw and a full-scale Arab-Jewish war over Israel's independence would ensue, the Haganah contacted Schwimmer.

By this time they had an even more urgent need than smuggling refugees: building an air force. The Haganah did not have a single aircraft and would be completely exposed to the Egyptian air force. Could Schwimmer buy and repair fighter planes and smuggle them into Israel?

Schwimmer told Ben-Gurion's agents that he'd start immediately, even though he knew he would be violating the 1935 Neutrality Act, which prohibited U.S. citizens from exporting weaponry without government authorization. This wasn't just chutzpah chutzpah. This was criminal.

Within days, Schwimmer had tracked down a handful of Jewish pilots and mechanics from the United States and the United Kingdom for what he told them would be the first civilian Jewish airline. He was obsessed with secrecy, and did not even want to bring them into the fold about the idea of building fighter planes. Few were even informed that the planes were destined for Israel. When outsiders inquired, the cover story was that they were building a national airline for Panama and would ferry cattle to Europe.

Though the FBI impounded the largest aircraft he bought-three Constellations-Schwimmer and his gang succeeded in smuggling out other aircraft, some by literally flying over the heads of the FBI agents who'd demanded that the planes be grounded. At the last minute, the Haganah cut a separate deal to buy German Messerschmitts from Czechoslovakia, which Schwimmer was also drafted to fly to Israel.

When the 1948 War of Independence came, Schwimmer's aircraft fought off Egyptian planes that were bombing Tel Aviv. In certain battles, the barely trained Israeli pilots were instrumental in ensuring that the Negev Desert-a relatively large triangular swath of land starting a few miles south of Jerusalem and Tel Aviv, between the Egyptian Sinai and Jordan-became part of Israel.

After Israel prevailed in the War of Independence, Schwimmer returned to the United States, despite being a wanted man. The FBI had figured out the smuggling scheme, and the U.S. Justice Department had built a criminal case against him. His trial, along with those of a number of the pilots he had recruited, was a public sensation. The defendants pleaded not guilty, on the grounds that the law itself was unjust. Schwimmer got off with paying a fine, which was widely seen as exoneration.

Once Schwimmer was cleared, it didn't take him long to get back into the smuggling game. By 1950, Schwimmer had joined forces with Shimon Peres, then a young Ben-Gurion protege working for the new Israeli Defense Ministry. Peres had tried to buy thirty surplus Mustang aircraft for the Israeli Air Force, but the United States had decided to destroy the planes instead. Their wings were sliced off and their fuselages cut in two.

So Schwimmer's team bought the cut-up planes at cost from a Texas junk dealer, reconstructed them, and made sure they had all their parts and were operational. Then the team disa.s.sembled the planes again, packed them in crates marked "Irrigation Equipment," and shipped them to Israel.

But because of the urgency with which they had to get the aircraft to Israel, a few of the planes were left a.s.sembled, and Schwimmer and Peres flew these to Tel Aviv. And that is how they found themselves in 1951 talking about a future Israeli aviation industry. Peres became captivated by Schwimmer's ideas for creating an aircraft industry in Israel that would serve a purpose beyond short-term military strategy. It was part of Peres's fascination with creating industries in Israel.

Schwimmer insisted that in a world flooded with surplus aircraft from the war, there was no reason why Israel could not buy planes cheaply, repair and improve them, and sell them to militaries and airlines in many countries, while building Israel's own commercial industry. Shortly after they returned to the United States, Peres took Schwimmer to meet Ben-Gurion, who was on his first visit to America as Israel's prime minister.

"You learning Hebrew now?" was Ben-Gurion's first question when Schwimmer reached out his hand to greet him; they had met repeatedly during the War of Independence. Schwimmer laughed and changed the subject: "Nice girls here in California, don't ya think, Mr. Prime Minister?"

Ben-Gurion wanted to know what Schwimmer was working on. Schwimmer told him about the renovations he was carrying out.

"What? With this tiny collection of machines you can renovate planes?"

Schwimmer nodded.

"We need something like this in Israel. Even more. We need a real aviation industry. We need to be independent," Ben-Gurion said. This was exactly what Schwimmer had discussed with Peres, while flying over the tundra. "So, what do you think?"

Unbeknownst to Schwimmer, Ben-Gurion had recently instructed the Technion to build an aeronautical engineering department. In giving the order, he'd said, "A high standard of living; a rich culture; spiritual, political and economic independence . . . are not possible without aerial control."

"Sure, I think you're right," said Schwimmer, falling into the prime minister's trap.

"I'm glad you think so. We'll expect you to come back to Israel to build one for us."

Schwimmer stared dumbfounded at Peres.

"Just do it, Al," said Peres. Schwimmer resisted. He immediately began thinking of the run-ins he would have with the Israeli Air Force chiefs and the small but powerful Israeli establishment. Plus, he didn't speak Hebrew. He wasn't a party insider. He hated politics and bureaucracy. And the Israeli combination of socialist economic planning and cronyist politics could be stifling for anyone, let alone someone trying to build an aviation industry.

He told Ben-Gurion that he could build the company only if it would be free from cronyism-no political hacks getting jobs. A private company, organized along commercial lines, he told Ben-Gurion.

"You're just right for Israel. Come," Ben-Gurion responded.

Schwimmer did go to Israel. Within five years, Bedek, the airplane-maintenance company he founded with two Israelis, became the largest private employer in the country.

By 1960, Bedek was producing a modified version of the French Fouga fighter plane. At an official unveiling and test flight of the plane, dubbed Tzukit ("swallow" in Hebrew), Ben-Gurion told Schwimmer, "This place isn't just Bedek anymore. You've gone beyond repairs. You guys have built a jet. The new name should be Israel Aircraft Industries." Peres, who by now was deputy defense minister, translated the new company name.

Peres and Ben-Gurion had managed to recruit an American Jew to help provide one of the biggest long-term jolts to Israel's economy, all without asking anyone for one investment dollar.

CHAPTER 9.

The Buffett Test

For our customers around the world, there was no war.

-EITAN W WERTHEIMER WE'RE NOT HERE TO STEAL WORKERS FROM M MICROSOFT," said Google's Yoelle Maarek. "But," she continued, grinning mischievously, "if they think they'll be happier with us, they're welcome."1 Only ten weeks earlier, Hezbollah missiles had been raining down on Haifa, home to the Google R&D center she headed. Now she was in Tel Aviv, opening Google's second research facility in the s.p.a.ce of a year. Only ten weeks earlier, Hezbollah missiles had been raining down on Haifa, home to the Google R&D center she headed. Now she was in Tel Aviv, opening Google's second research facility in the s.p.a.ce of a year.

Yoelle Maarek grew up in France, where she studied engineering, then earned her PhD in computer science at Columbia University and the Technion in Haifa. Before being tapped to head Google Israel's R&D operations, she worked at IBM Research for seventeen years, specializing in a field called "search" before Google existed and when the Internet was in its infancy.

To Maarek, the roots of search go deep into history. Scholars in the sixteenth century would consult a Bible concordance to see where Moses was mentioned and in which context. A concordance is "basically an index, which is the data structure that every search engine is using. Five centuries ago, people would do that manually. . . . As Israelis and as Jews, we are the people of the Book. We like to consult texts. We like to search," Maarek said.

In 2008 Google Israel sold $100 million in advertising, about double the previous year and 10 percent of the total advertising market in Israel-a higher market share than Google has in most countries.

While Google has become a growing empire of products and technologies-from search, to Gmail, to YouTube, to cell phone software, and much more-the heart of the company remains its ubiquitous home page. And if the most trafficked home page in the world is Google's temple, the search box on it is the holy of holies.

It was somewhat ambitious, then, for Google Israel to take on a project that went right to the heart of the company, to the search box. The Israeli team took a small experimental idea that had been sitting untouched for two years-Google Suggest-and made it something that millions of people see and use every day.

For those who have not noticed it, Google Suggest is that list of suggestions that pop down as you type in a search request. The suggestions update as you type in each letter of the request, just about as fast as you can type.

Google is famous for delivering results almost instantaneously. But Google Suggest had to achieve this feat with each letter letter. Information had to go to Google's servers and send back a list of relevant suggestions, all in the split second before the next letter was typed.

Two months into the project, the team got its first break. Kai-Fu Lee, who was the president of Google China, said that he was willing to take the risk that queries would be slowed down. Chinese is very hard to type, so having Suggest to fill words in was particularly valuable in China. Suggest worked, and it expanded quickly to Google's sites in Hong Kong, Taiwan, Russia, and Western Europe, and soon to Google around the world.

Microsoft was not far behind in capitalizing on Israel. While the damage from two thousand missile strikes during the 2006 Lebanon war was still being repaired, a defiant Bill Gates arrived for his first visit to Israel. He came with a clear message: "We are not afraid of Google," he told an Israeli news agency. While he couldn't resist getting in a dig about Internet search engines being "in a terrible state compared to where they could be," he also conceded that Google and Microsoft were in fierce compet.i.tion. And the new battlefront was Israel. Earlier Gates had said that the "innovation going on in Israel is critical to the future of the technology business."2 No sooner did the richest man in the world leave Israel than the second-richest, Warren Buffett, showed up. The most revered investor in America had arrived to visit the first company he'd bought outside the United States. Buffett spent fifty-two hours touring Iscar, the machine-tool company he'd purchased for $4.5 billion, and Israel, the country he had heard so much about. "You think of people walking those steps 2,000 years ago," he said of his visit to Jerusalem, "and then you look at the Iscar factory on a mountaintop, supplying 61 countries-whether it's Korea or the United States or Europe or you name it. It's pretty remarkable. I don't think you can really find that kind of combination of the past and the future, in such close proximity, virtually any place in the world."3 But it seems unlikely that it was an appreciation of history that convinced Warren Buffett to choose Israel as the place to change his decades-long policy of not making acquisitions outside the United States. And nor was it, for this apostle of risk aversion, an indifference to Israel's vulnerabilities.

You do not have to be Warren Buffett to worry about risk. Every company carefully considers the risks of doing business anywhere far from headquarters, let alone somewhere perceived as a war zone. The question, according to Buffett, is how how you think about risk. you think about risk.

We sat in Jon Medved's office-at the Vringo headquarters, in Beit Shemesh, a neighborhood between Jerusalem and Tel Aviv-to discuss the risks of investing in Israel.4 But before he would answer our questions, Medved posed one of his own. He pulled out one of the slides from a PowerPoint presentation, the "Israel Inside" presentation he often gives in his role as unofficial economic amba.s.sador. But before he would answer our questions, Medved posed one of his own. He pulled out one of the slides from a PowerPoint presentation, the "Israel Inside" presentation he often gives in his role as unofficial economic amba.s.sador.

FIGURE 9.1.

"Look at this graph," he told us (figure 9.1).

"What do you see here?" Medved probed. The horizontal x x-axis showed the years 2002 through 2004; the vertical y y-axis was unlabeled. And there was a line heading-in a relatively linear, diagonal direction-up into the upper-right corner of the graph. But with no y y-axis label, the graph was incomplete. We figured Medved had posed a trick question.

"Well, there is something increasing over the 2002-to-2004 time frame," we hazarded. "But the vertical y y-axis doesn't tell us what the 'it' is."

"Exactly," he quickly responded. "The 'it' could be a number of things. For one: violence. It was, tragically, one of Israel's most violent periods in our history, during the second intifada and leading up to the second Lebanon war. The graph ill.u.s.trates the number of rockets that hit Israel over those years."

But, Medved told us, the graph also ill.u.s.trates the performance of Israel's economy, which also rose steeply in the first half of the decade. He then pulled out another slide that was virtually identical to the first (figure 9.2 ).

FIGURE 9.2.

The vertical y y-axis on this next slide was labeled "Foreign Investment in Israeli High Tech." Remarkably, during the same period, there was an increase in investments coming in as the rocket attacks were increasing.

In fact, as we researched other economic metrics, we found that a number of sets of data would fit roughly along this generic graph structure. For example, foreign direct investment (FDI)-another macroeconomic metric-measures the total amount of overseas direct investment in any form that comes into a country. During the period from 2000 to 2005, Israel's FDI tripled, and Israel's share of the global venture dollars invested inside Israel doubled.

Medved was not suggesting that there was a correlation between violence in Israel and its attractiveness to investors. Rather, he believes that Israel has managed to divorce the security threat from its economic growth opportunities. In other words, Israelis are confident that their start-ups will survive during war and turbulence. And Israeli entrepreneurs have managed to convince investors of this, too.

Alice Schroeder, the author of The s...o...b..ll The s...o...b..ll, is the only authorized biographer of Warren Buffett. We asked her about the perceived risk of investing in Israel. "Warren has been in the insurance business for a long time, and looks at every investment decision through that lens," she told us. "It's all about a.s.sessing risk like you would in an insurance policy. The things you really worry about are the potential for earthquakes and hurricanes. Warren asks: What kind of catastrophic risk is there, and can I live with it?"5 Iscar, the Israeli company Buffett bought, has its main factory and R&D facilities in the northern part of Israel and was twice threatened by missile attacks-in 1991, when the whole country was targeted by Iraq's Saddam Hussein during the Gulf War, and during the 2006 Lebanon war, when Hezbollah fired thousands of missiles at Israel's northern towns. "Doesn't this const.i.tute catastrophic risk?" we asked her.

Buffett's view, she told us, is that if Iscar's facilities are bombed, it can go build another plant. The plant does not represent the value of the company. It is the talent of the employees and management, the international base of loyal customers, and the brand that const.i.tute Iscar's value. So missiles, even if they can destroy factories, do not, in Buffett's eyes, represent catastrophic risk.

During the 2006 Lebanon war, just two months after Buffett acquired Iscar, 4,228 missiles landed in Israel's north.6 Located less than eight miles from the Lebanese border, Iscar was a prime target for rocket fire. Located less than eight miles from the Lebanese border, Iscar was a prime target for rocket fire.

Eitan Wertheimer, chairman of Iscar, who'd made the sale to Buffett, told us that he called his new boss on the first day of the war. "Our sole concern was for the welfare of our people, since wrecked machines and shattered windows can always be replaced," Wertheimer recalled of his conversation with Buffett. " 'But I am not sure that you understand our mind-set,' I told him. 'We're going to carry on with half the workforce, but we will ensure that all the customers get their orders on time or even earlier."7 One rocket did slam into Tefen Industrial Park, which was founded by the Wertheimer family and centered around Iscar, and a slew of rockets landed nearby. And though, during the war, many workers did temporarily relocate, with their families, to the southern part of the country, Iscar's customers would never have known it. "It took us a brief time to adjust, but we didn't miss a single shipment," Wertheimer said. "For our customers around the world, there was no war."

By responding to the threat this way, Wertheimer and others have transformed the very dangers that may make Israel seem risky into evidence of Israel's inviolable a.s.sets-the same a.s.sets that attracted Buffett, Google, Microsoft, and so many others in the first place.

Few ill.u.s.trate Israeli grit better than Dov Frohman, who was born in Amsterdam just months before the onset of World War II. As the n.a.z.is' grip on Holland tightened, his parents decided to hide Dov with the Van Tilborgh family, devout Christian farmers they found through the Dutch underground. Dov was only three years old when he arrived at their farmhouse in the Dutch countryside, but he remembers having to cover his dark hair with a hat, since the rest of his adopted family was blond. When the Germans periodically searched the house, he would hide under a bed, in a cellar, or in the woods with his adopted brothers. Years later, Dov learned that his father died at Auschwitz; he never knew for sure where his mother was murdered.8 After the war, Frohman's aunt, who had escaped to Palestine in the 1930s, tracked down Frohman's Dutch family and convinced them to put him in a Jewish orphanage, so that he could emigrate to Palestine. In 1949, ten-year-old Dov landed in the brand-new State of Israel.

In 1963, as Dov Frohman was about to graduate from the Technion (Israel Inst.i.tute of Technology), he decided to pursue graduate studies in the United States in order to "bring a new field of technical expertise back to Israel." He was admitted to MIT but instead went to the University of California at Berkeley, which offered him a stipend. It was a fortuitous choice.

While still a graduate student, Frohman was hired by Andy Grove to work at Fairchild Semiconductor. A few years later, Grove joined Gordon Moore and Robert Noyce to found Intel. Frohman became one of the new start-up's first employees. He quickly made his mark by inventing what would become one of Intel's most legendary and profitable products, a new kind of reprogrammable memory chip. Then, with a senior management position within reach, Frohman announced that he was leaving Intel to teach electrical engineering in Ghana. In his words, he was "looking for adventure, personal freedom, and self-development"-another "person of the Book."

Colleagues at Intel thought Frohman was crazy to leave just as the company was about to go public and shower its employees with lucrative stock options. But Frohman knew what he wanted: to start an enterprise, not just work for one. He also knew that if he stayed on the management track he might never be able to return to Israel, where he had a revolutionary idea for the local economy: he wanted Israel to become a leader in the chip design industry.

By 1973, the time to realize his idea had arrived. Intel was facing an acute shortage of engineers. Frohman returned to Intel, pitched the idea of an Israeli design center to Grove, and quickly organized an exploratory mission to Israel. Delayed by the Yom Kippur War, the Intel team arrived in Israel in April 1974 and quickly hired five engineers for its new design center in Haifa. Intel had never before established a major research and development center in a foreign country. "At the end of the day, we are in the R&D business. We could not risk the company's future by putting our core mission and operations overseas-out of our control," recalled one former Intel employee from California. "Israel was the first place we did that. A lot of people thought we were nuts."9 The Israel team began with an investment of $300,000 and five full-time employees. But it would become Israel's largest private employer, with fifty-four hundred workers, by the nation's thirtieth anniversary. Intel's investment in Israel, while seemingly a gamble at the time, would go on to become central to the company's success. Intel Israel was responsible for designing the chip in the first IBM personal computers, the first Pentium chips, and a new architecture that a.n.a.lysts agree saved Intel from a downward spiral during the 1990s, as we chronicled in chapter 1. In the southern Israeli town of Qiryat Gat, Intel built a $3.5 billion plant where Israelis designed chips with transistors so small that thirty million of them can fit on the head of a pin. As remarkably, Israel's emergence as a critical manufacturing center for Intel proved that nothing could stop its production, even a war.

"We will trust your judgment, Dov. Do whatever you must do." That was the message of Intel's management days after the January 1991 start of the Gulf War.

Iraq had invaded Kuwait five months earlier. From the moment Frohman heard the news, the worry that he might have to send all his workers home began to creep into his thoughts-during quiet moments driving into work, waiting on the tarmac for takeoff, or before bed at night. He knew that to shut everything down shut everything down would be devastating for Intel Israel. So he tried to put it out of his mind. would be devastating for Intel Israel. So he tried to put it out of his mind.

While hundreds of thousands of U.S. troops deployed to Saudi Arabia in preparation for war, Frohman was distracted by the risk Intel was undertaking. That gamble was a product of IBM's decision, in 1980, to give Intel its big break, choosing the 8088 chip to power the IBM PC. But the computer giant had forced Intel to license its technology to a dozen manufacturers; even though Intel had designed the 8088, IBM thought it was risky to rely on Intel alone to manufacture the chip. So Intel was able to earn only 30 percent of the total revenues. Security and price leverage for IBM meant lower profits for Intel.

In 1983, with the 286, its next-generation chip, Intel had managed to convince IBM to cut the number of manufacturers to four, thereby increasing Intel's own share of the work. And by 1985, after investing $200 million and four years of development in its even faster 386 chips, Intel had been prepared for a gamble. This time, IBM had acquiesced to Intel's request to become the sole manufacturer of the chip that would power most of the world's new desktops. This strategy would maximize Intel's profits, but also its risk. What if Intel could not ramp up its manufacturing capability in time? And the bigger risk was the decision made by Intel's management in Santa Clara to center much of this new responsibility in Israel.

The main burden fell on Intel's Israeli chip plant in Jerusalem, which produced about three-quarters of Intel's global output by running two twelve-hour shifts, seven days a week.

But now that output was under threat. Saddam Hussein had declared that if the United States launched an offensive, he would respond with missile strikes against Israel.

The Israeli government took Saddam at his word. Iraq had Scud missiles that could reach Tel Aviv in under ten minutes, and those missiles might be armed with chemical warheads. In October 1990, the Israeli government ordered the largest distribution of gas masks anywhere since World War II.

It was a surreal time in Israel. In kindergartens, teachers showed five-year-olds how to put on their gas masks in case of attack, and everyone practiced rushing to specially prepared "sealed rooms" if the sirens went off. The distribution system for the masks was elaborate, with every household receiving a note in the mail telling them where they could pick up the equipment. The IDF placed its Home Front Command offices in malls, so it was not uncommon to pick up some new shoes and a cup of coffee along with a set of gas masks for the whole family.

Frohman did what every Israeli manager does during or in advance of war: he drew up contingency plans for the "standard" war scenario, in which employees would be called up for reserve duty. Most Israeli men under forty-five serve in the reserves for one month every year. During an extended war, these civilian-soldiers can be called up for as long as the government deems necessary. This exacts a huge economic toll on businesses in Israel-including lost work days and less productivity-even during peaceful times. During a war, employees can be absent for weeks or even months. As a result, some Israeli businesses go bankrupt during war.

In early January 1991, U.S. and European commercial airlines suspended or curtailed their flights to the region. On January 11, four days before the United Nation's deadline for Iraq to withdraw from Kuwait, the U.S. government advised its nationals to leave Israel. On January 16, the Israeli government announced that all schools and businesses, except for certain essential enterprises (the electric utility, for example), must close for the week and maybe longer. The government wanted people at home, off the roads, and poised to hop into their sealed rooms at the sound of air-raid sirens.

For Frohman, compliance with the government's directive would mean suspending the production of Intel's 386 microchip at a critical moment for the company. Frohman expected to have management's full support for a shutdown, but he also knew that just because an employer is willing to grant an employee sick leave, it does not mean that their relationship will go on unaffected. Especially when the "ailment" is one that could conceivably repeat itself in the future.

"We already had a number of struggles inside the company over the transfer of strategic technologies and critical products to the Israeli operation," recalled Frohman. "I was convinced that if we had to interrupt production, even for a brief period of time, we would pay a serious price over the long term." Frohman had expended time and political capital to persuade Intel's management to put the future of the company in the hands of an overseas outpost, a dream of his since he'd first left Intel. And it was this outpost that was about to find itself on the receiving end of Scud missiles.

But Frohman had another-surprisingly far greater-concern: "I kept thinking about the survival of Israel's . . . still small high-tech economy." The key stumbling block to further investment in Israel was the lingering impression of geopolitical instability in the region. If Intel couldn't operate in an emergency situation, then any confidence that multinationals, investors, or the markets had in Israel's stability would instantly crumble.

Frohman had spent enough time abroad to be familiar with the rap against investing in Israel. Almost every day a bad headline about Israel ricocheted around the world: another terrorist attack . . . another provocation on its border . . . more bloodshed. Intifada. Violence, terror, war. It was the only narrative people knew.

He believed that both Israel and its economy needed a counternarrative. As the January 15 deadline approached, he became fixated on an imaginary boardroom debate-taking place somewhere in the United States-between an executive who was enthusiastic about investing in Israel and a cautious board that thought he was reckless. What would the enthusiast need in his back pocket? I understand your skepticism. I saw the news, too. But let's not forget that Intel was producing the 386 chip-one of Intel's most important microchips-in Israel during the Gulf War, and the Israelis never missed a beat. They stayed on schedule. They were not late . . . not even once . . . not even when missiles were falling on them I understand your skepticism. I saw the news, too. But let's not forget that Intel was producing the 386 chip-one of Intel's most important microchips-in Israel during the Gulf War, and the Israelis never missed a beat. They stayed on schedule. They were not late . . . not even once . . . not even when missiles were falling on them.

On January 17, Frohman informed his employees of his unilateral decision to keep Intel Israel open during the war, in defiance of government orders, but on a voluntary basis: no worker would be punished for not showing up.

At 2:00 a.m. a.m. on January 18, Frohman, like most Israelis, was awoken by air-raid sirens. He and his family quickly put on their gas masks and sealed themselves into their home's safe room. When the all clear sounded, they learned that eight missiles had struck Tel Aviv and Haifa-near Intel's main R&D facility-but they had not been armed with chemical warheads. More missiles were expected in the days ahead. Whether Saddam would arm future Scuds with chemical capabilities was still unclear. on January 18, Frohman, like most Israelis, was awoken by air-raid sirens. He and his family quickly put on their gas masks and sealed themselves into their home's safe room. When the all clear sounded, they learned that eight missiles had struck Tel Aviv and Haifa-near Intel's main R&D facility-but they had not been armed with chemical warheads. More missiles were expected in the days ahead. Whether Saddam would arm future Scuds with chemical capabilities was still unclear.

At 3:30 a.m. a.m., when Frohman arrived at the plant with his gas mask, he went straight to the clean room-the heart of the chip factory, where, to maintain a dust-free environment, technicians worked in sealed suits that made them look like astronauts. Work there had already resumed. He was told that when the sirens had sounded earlier, the employees had gone to a sealed room in the plant, but after quick calls home, they had returned to their work stations. When the first postattack morning shift began, Frohman expected to see-best-case scenario-half of the shift; 75 percent showed up. Following a second Iraqi missile attack the next night, turnout at Intel's Haifa design center increased to 80 percent. The more brazen the attacks, the larger the turnout. Welcome to Israel's "new normal."

The executives in Intel's Santa Clara headquarters could not get their heads around this. During a conference call with Santa Clara two days later, air-raid sirens went off again. The Israeli team members asked for a moment to relocate, put on their gas masks, and continued the call from their sealed room. A group of Intel workers even set up a wartime kindergarten on the premises, since schools were still closed and if employees wanted to be part of Frohman's defiant mission, they had no choice but to bring their children to work. On top of their regular jobs, the workers volunteered to serve shifts on kindergarten duty.

The legacy of Frohman's commitment is still seen in the decisions of new multinational companies to set up critical operations in Israel. And some of these facilities, such as Google's, were being built around the time of the 2006 Lebanon war.

The explanation for this concerns more than just engineering talent. It is also a matter of less tangible factors, such as a drive to succeed that is both personal and national. Israelis have a term for this: davka davka, an untranslatable Hebrew word that means "despite" with a "rub their nose in it" twist. As if to say, "The more they attack us, the more we will succeed."