Israel is not known for its manufacturing industry. However, Industry 4.0 (I4) startups in Israel – in the fields of smart factories, automation, predictive maintenance, and 3D printing – are gaining momentum. There are currently 230 startups in the field in Israel, compared with 146 in 2014. Investments in companies in this nascent sector more than tripled in five years: from $112 million in 2014, to $349 million as of the third quarter of 2019.

But while investment is growing strong, actual business growth – revenues, paying customers, scaling companies – has been slower as the sector is still in its early stages. While Industry 4.0 startups typically look to initially partner with local manufacturers, Israeli industry offers limited opportunities.

While Israel does have exceptional manufacturers, local industry is smaller and not competitive globally (unlike manufacturing powerhouses such as China, Taiwan, Germany and Japan). While those countries’ manufacturing sectors are historically robust, many of their companies are struggling to innovate and keep ahead of long-term, disruptive trends globally.

Israel’s industrial base is not much different. 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.

But as noted above, while there is a growing group of tech companies that can help traditional industries make the digital leap, those startups need traditional industry companies to be more open to change.

One of the main business and tech challenges for startups is to find their first customer and successfully demonstrate their solution with them. Like many other countries in the world, cooperation between local industry and startups in Israel is an area where there is room for improvement

The problems for the Israeli manufacturers: low productivity and tight regulation

About half of all Israeli manufacturers have not yet started to plan for the Fourth Industrial Revolution (Industry 4.0), according to a survey by the Manufacturers Association last November. The results of the survey reveal that many factories across the country do not meet international standards of competitiveness due to their poor technological state. They are accustomed to traditional manufacturing processes that lead, among other things, to low productivity and the inability to cope with competition and changes at the global level. In addition, Israeli industry is highly regulated, which makes manufacturing here more expensive compared to other countries.

The incentive to be more innovative is due mainly to three reasons: the Israeli market is becoming more open and exposed to imports from foreign competition; the government is now incentivizing local manufacturers to adopt technology; many immigrants from the former USSR, who are employed as industry workers, are starting to retire.

Things are, hopefully, moving in the right direction for old industry and new I4 startups to collaborate.

The problem for Israeli startups: limited testing ground

There are currently only a few Israeli manufacturers that are open to adopting innovation from startups, and to make things worse, the ones that do are often unwilling to pay for a proof-of-concept pilot. They see their role as helping the startups rather than as real clients who benefit from the exercise.

While it can be tempting for startups to use Israel just for beta testing (if they can afford to – which is a big if), this can have consequences later. Even if a startup has successfully worked with a factory in Israel, it is often not enough for many overseas companies because it is not clear to them what the standards are in Israel.

Secondly, there is the physical distance between the startup and the client. In some sectors this is less important, but in Industry 4.0, implementation involves creating a customized connection between the physical and digital. The startup often has no choice but to devote its limited resources to be on the ground at the client’s location for some time to install systems and provide ongoing support.

Lastly, implementation at a foreign client is an expensive process and large amounts of capital need to be raised to fund it. However, later-stage investors usually want to see that the startup has at least 1-2 clients before they are willing to invest, and potential brand-name clients are reluctant to work with a startup that has not raised money from a significant investor. 

The solution: better collaboration between manufacturers and startups

Granted, implementing innovative digital technology doesn’t necessarily mean partnering with startups. In Germany, for example, most of the technology is developed internally within corporations. But this requires a lot of expertise and capital.

Another option is to use an external vendor, such as a large I4 technology supplier, but these are usually more expensive and less agile than startups. Therefore, there is plenty of room for synergy between startups and the local industry to create win-win situations.

In summary, Israeli manufacturers can benefit from the most advanced Industry 4.0 technologies, tailor-made to their specific needs, cost-effective, faster and more agile. On the other hand, Israeli Industry 4.0 startups can benefit from simpler testing for their products, the experience of working in a real factory, easier access to external funding at an early stage and the chance to start earning.

Case Study: How Industry 4.0 Technologies Helped Manufacturer Ham-Let

Israel’s Ham-Let is a traditional metal processing manufacturing company. By nature, it tends to adapt at a slower pace than more agile startups. In order to inject innovation into its manufacturing processes, Ham-Let created Let-Lab, an innovation lab focused on Industry 4.0 solutions . This hub is a platform that provides financing and a 12-month support program for business development, as well as a pilot program. Currently, Let-Lab has four active startups in its program.

One of the startups in the Let-Lab program is Qsee, an artificial intelligence solution that helps process manufacturers by predicting quality parameters ahead of time. Ham-Let used Qsee* in its production as well as in a process pulp and paper mill company, which is a sister company of Ham-Let.

Qsee was able to test and implement its solution in the customer’s 400-meter machine with thousands of parameters such as water, pressures, materials added, and more, in order to predict the quality of paper at the end of the assembly line. The results showed significant improvement in manufacturing performance.

Furthermore, Ham-Let signed an agreement to distribute Qsee’s solution under Ham-Let’s name (the Q-Let), expanding its network and solution to all of Ham-Let’s current pulp and paper process companies.

On its own, Ham-Let cannot speed up development; Qsee cannot easily become an approved vendor. Milestones that could take years for both companies have been achieved within weeks.

To learn more about the Industry 4.0 revolution, attend Industry 4.0 Week: Digitizing the Value ChainRegister here!

*Are you an Industry 4.0 entrepreneur? We want to hear about your startup! Email us.

Agmon Porat of Let-Labs contributed to this article.

Yuval Engelstein is the Industry 4.0 sector analyst at Start-Up Nation Central, responsible for researching Israeli innovation and world market activity relating to the strategic development of the Industry 4.0 and Smart Mobility industries. In close and continuous contact with innovators and entrepreneurs of these industries, Mr. Engelstein supplies the organization with knowledge and insights regarding both the technologies and the corporate or socio-economic challenges they could help to alleviate. Previously, Mr. Engelstein served as an analyst in the Research Divisions of the Central Bank of Israel, and of the Ministry of Transport. He holds a Master’s Degree in Financial Economics and a BA in Philosophy, Political Science and Economy, both from the Hebrew University of Jerusalem.

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