The Economist, in an interesting analysis, pointed out a new phenomenon in the business world. The most accepted doctrine in the past thirty years has been to focus the activity of each company on what it does best, and to outsource any other activity to specialized companies. The logic behind this approach is simple – any activity in which the company has no relative advantage will be carried out more efficiently by a company that has a relative advantage in the field.
However, today we find leading companies that deviate from this recommendation: For example, Apple writes its own software, designs its own chips and even operates its own chain of stores. Another example is Tesla, which makes 80% of its electric cars, manufactures its own batteries, and operates a service system – all under its wings.
What is the logic? The Economist points out several aspects, many of them relevant to the Israeli context. For example, one of the main problems when outsourcing emerges when a company develops a product at the forefront of technology. Tesla's electric cars require batteries that only the company's knowledge can deliver, so it built its "gigafactory" for batteries. Second, many technological products consist of many different hardware and software components. This complexity can create an integration problem due to insufficient synchronization between components. As a result, Apple decided to create an end-to-end design for its iPhone, because it knew that customers would be willing to pay more for a completely integrated design – an estimation easily justified by the success of the iPhone.
Israel is a perfect place for companies to carry out this trend. Israel is a small country, which allows close proximity between different sites along the value chain. It also enjoys an open culture in which "everyone knows everyone", which helps when creating an integrated network. In addition, the ecosystem in Israel offers great diversity both in the sectors operating in it as well as in the type of activities carried out in it – all at the forefront of technology. Therefore, it offers a comfortable platform for the placement of various activities under one roof, which can produce innovative and complex products efficiently and of high quality.
We at Invest in Israel believe in the potential of the combination between R&D and manufacturing in Israel, simply because it works. Many companies already discovered the benefits of locating different activities in close proximity in Israel: HP, Intel and Flex spark a long list of companies who operate R&D centers alongside manufacturing facilities in Israel. In fact, 20% of the 300 multinationals operating R&D centers in Israel also operate a manufacturing site in Israel. Surprising? Not so much when you realize who beneficial it is to keep it all under your hat. And what about your company?