TEL AVIV, Israel—For a country that doesn’t make cars, Israel has one of the world’s hottest automotive technology industries, with globally recognized names like Mobileye (bought by Intel for $15.3B), WAZE (acquired by Google), Moovit (with over 480M users), as well as up-and-coming companies like Argus and Innoviz. Almost every single global carmaker has an innovation center and R&D facility in Israel to engage with the sector’s +400 companies.
Now entrepreneurs from another tech sector in Israel that isn’t based on any meaningful physical manufacturing — Industrial IoT (also known as the Fourth Industrial Revolution, I4, or Smart Manufacturing)– are hoping to replicate the success of their auto-tech compatriots.
A new report by Start-Up Nation Central shows that venture-backed financing into Israel’s I4 industry grew 223% in 4 years, from $113M in 2014 to $365M in 2018. The 2018 financing figure accounts for 5% of global VC-backed financing into the I4 industry, according to Pitchbook. This might be a small percentage, but only the US and China are ahead of Israel, a nation of just 9 million people.
For this report, Start-Up Nation Central used the term Industry 4.0, which canvasses the use of technologies for data collection and analysis to improve production processes, and the introduction and connection of innovative production tools, such as advanced industrial robotics and additive manufacturing (industrial 3D printing), to existing production processes.
Start-Up Nation Central counts some 230 currently active I4 tech companies, up from 146 in 2014. They operate in fields like operations optimization for factories (SparkBeyond), sensing and imaging (Vayyar), connectivity (Seebo), robotics (Deep Learning Robotics), 3D printing (Nanofabrica) predictive maintenance (Augury), inspection and testing (vHive) and cyber-security for connected factories (Claroty).
But while the Israeli I4 industry is growing steadily, there are major differences between it and the auto-tech sector, and for Israeli I4 to succeed, it needs to surmount significant structural challenges.
Foremost is the I4 sector’s niche factor, where hi-tech solutions to traditional manufacturing processes need to be highly customizable. While a Mobileye device can be installed in almost any car and the WAZE app on every phone, not every software or automation solution fits every factory –most factories require customized implementation of digital solutions. Added to that is a lack of local Israel beta testing facilities (although there has been some positive movement recently), and I4 startups have their work cut out.
“We won’t see a Mobileye in I4. We’re more likely to see many small, niche exits. It’s a much broader industry, with a product-market fit different for every vertical,” says Yuval Engelstein, Start-Up Nation Central’s Industry 4.0 research analyst, and the report’s author.
The legacy and cultural challenges slowing the adoption of I4 technologies by manufacturing companies are global. They include adapting existing human capital and machinery, the cost involved in customizing the technological solutions, and overcoming the fear of security vulnerabilities once the manufacturing facility is digitally connected. One way to help these startups overcome these challenges is to get more of them running proof of concept trials on Israeli factories, Engelstein said.
That’s going to be tough, as around 85% of Israel’s 22,000 registered factories are considered traditional, meaning labor-intensive production facilities that make things like food, pulp and paper, and textiles. Very few have the financial ability or leadership vision to take on digital transformation.
Still, there is huge potential for traditional industry, I4 startups, and Israel’s overall economy, if more test beds are created in Israel for smart factory startups. “Israel’s manufacturing industry is tiny, and not particularly competitive or globally well-known (unlike German factories, for instance). Labor productivity is stagnant and is 27% lower than the OECD average. It’s a win-win situation if the government helps traditional industry in Israel adopt and implement technology from I4 startups,” says Uri Gabai, VP Strategy at Start-Up Nation Central, and formerly a senior official at the Israel Innovation Authority.
A sign that things are moving in a positive direction are recent moves by the Innovation Authority to incentivize local proof of concept sites. Additionally, big-name industrial firms are increasingly plugging into the Israeli I4 sector (just as carmakers are plugging into the auto-tech sector). Qualcomm Ventures, Siemens Dynamo, GE Ventures, Merck, and Autodesk are engaging as strategic investors, who, unlike pureplay VC firms, can provide cash as well as test bed facilities and access to clients.
Guy Hilton, Start-Up Nation Central’s General Manager, believes Israeli I4 is poised to do great things. “Israel has done it before with auto-tech, which has become a global power despite us not having a car manufacturing legacy. We’re now poised to repeat that success –if we can help I4 startups overcome their challenges, such as building bridges between Israeli innovation and multinationals, increasing international awareness of the Israeli ecosystem, and strengthening the Industry 4.0 community,” Hilton says.
SNC’s I4 report shows that the global market for Industry 4.0 grew to almost $90B in annual revenues in 2018 with an expected 20% annual growth over the next five years.
“This industry, I4, could be even bigger than auto-tech, as it touches manufacturing everywhere. The potential is endless,” Hilton adds.
Amir Mizroch Ι Read more on forbes.com
