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from Globes
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Israel’s Business Arena
Amidst Fears of War, Huge Budgets of Homeland Security Office Await Fast
Investment Targets
The panic-ridden US government looks for advanced security products, and
Israeli companies appear to be uniquely suited to provide such products; in
fact, the picture is much more complicated.
Gilad Ness and Dan Yachin
February 24, 2003
The officers of special units who were summoned to Port Newark on the
morning of September 9, 2002, already saw the biggest American nightmare
crystallize before their very eyes. They embarked on board the Palermo
Senator, a ship sailing under the Liberian flag, after a routine check
had detected traces of radioactive substances in one of its cargo
containers. Immediately upon the discovery of dangerous substances the
ship was marooned to a distance off the New York shores where Navy Seals
began thorough searches.
After four days of searches, the US security officials could begin to
breathe freely. “It turned out that this was a cargo of bananas”, says Dan
Inbar, the founder and chairman of HSRC, a company engaged in technological
research and consulting in the area of homeland security against terrorist
threats. This incident did not receive wide publicity in the media, but the
manner in which the Palermo Senator was handled evidences today’s
America’s profound fear of non-conventional terrorism – especially nuclear
terrorism. This is also the reason for which Inbar has been hired to work
for US port authorities – to ensure that terrorist organizations such as al-Qaeda
will not be able to smuggle harmful substances – radioactive, chemical or
biological – into the US.
The budgets allocated to the relevant US authorities for the purpose of
getting equipped with the technologies conforming with the new
[anti-terrorism security] regulations, constitute only a fraction of the
immense budgets of the newly formed Homeland Security Office, established in
the wake of 9/11.
“This is an economic war”, says Inbar. “The six million containers that
enter the US ports annually are a time bomb. If twenty tons of explosives
were to go off in any of the ports, this would paralyze the economy in many
regions. Therefore, the US has decided not to permit further entry of
containers that have not undergone a search into the ports. All over the
world there are now preparations for purchasing equipment for surveying
containers, as it is known that entry into the US has been restricted.”
“The question is how much one is prepared to spend on this. Therefore we do
not speak of weapons of mass destruction, but of weapons of mass disruption.
The principal damage caused by terrorism will be measured in economic terms,
rather than in body bags. A single case of oversight in the Glilot [gas
storage] facility in Israel cost 200 million dollars the same day, as
insurance rates leaped up. This could have been prevented by an investment
of 2 to 3 million dollars.”
Israelis rely on an aunt
The threatening scenarios of terrorism serve as a justification for the
large amounts of money that the US government allocates for the needs of
research and development in the framework of homeland security. On the face
of it, the Israeli industry has a potential for winning a segment of these
allocations, however in practice this potential as of now is not exactly
being realized.
“Every Israeli has relied on his friend from Los Angeles or on his aunt in
New York to pave the way for him to the tenders,” says Adv. Marc Zell, of
Zell, Goldberg & Co. law office. “This approach can work only in small,
local tenders. But where you enter a business the financing of which is
measured in billions of dollars, these methods simply do not work.”
Zell, originally of Washington, D.C., in conjunction with a US firm of
Shapiro, Sher, Guinot, shortly after 9/11 established FIST, a cooperation
venture between an Israeli law firm, a US law firm and local businessmen.
The company acts as an intermediary between Israeli companies and the
relevant authorities in the US, and according to Zell, it acts vis-à-vis the
Pentagon, the Department of Treasury and the Department of Defense.
Globes: “Israel’s image in the sphere of security is good. Why is there a
need for an intermediary?”
Zell: “This market is so large and complicated that many companies, not only
Israeli companies, can get lost in the maze. The procurement regulations of
the US federal authorities are 2000 pages long. What businessman has the
time to read 2000 pages of complicated English? Not to mention the unwritten
procedures – you may know your product, but you do not necessarily know to
whom you are supposed to be selling it.”
The structure of Homeland Security, Zell agrees, was originally intended to
simplify the connection between the governmental offices and the suppliers.
“It is very important for the Americans to be able to say: ‘The White House
is dealing with the most pressing issue of today’. However, in practice,
this simply adds another management layer on top of others, so that now you
are required to interact with it as well. In addition, tens of billions of
dollars supposed to come from the government will in the majority come to
the Pentagon.”
Zell describes a client of his, a company which has developed a technology
using sensors for the detection of dangerous substances. “Thanks to this
technology, those who smuggled a car with explosives into the parking lot of
the Twin Towers in 1993 have been tracked. Another company has developed a
technology for the detection and identification of the anthrax virus, and is
now negotiating with the US Postal Authority.”
Another company that turned to FIST was Safecard, a subsidiary of the
publicly traded Pitkit Technologies. The company has developed a technology
helping to prevent forgeries of plastic documents, such as identification
cards and driving licenses. According to Zell, the technology received
acclaim of the relevant players in the US Congress and is bound to be
reflected in the proposed federal statute, according to which any American
state that will prescribe a standard for identity cards incapable of being
forged will be required to apply Safecard’s technology. “The statute will
not require the use of the services of a particular company, but it will
prescribe a standard that only this company meets.”
Inbar also speaks about the difficulties encountered by Israeli companies in
communicating with the representatives of the US government. “Many Israelis,
former army generals, used to believe that they will swiftly get fat
contracts. But the problem is that the majority of them do not know how to
market – they do not know how to dress, do not know English and do not know
the theory of marketing in stages. In addition, the money did not yet stream
into the industrial street, held by lengthy legislation processes. Now the
money is streaming in. I have been 25 years in hi-tech and have not yet seen
a market that was growing so fast. It is a growth unprecedented since the
WWII.”
It was gaps between the governmental entities and industrial companies that
led Inbar together with Yonathan Tal, president of the International
Association of Private Investigators and a security advisor, and with Doron
Peli, a former intelligence officer, to establish HSRC, immediately after
9/11. Inbar, formerly vice-president for research in Elscint, says that the
company “is engaged in information services related to the sphere of
security – market surveys and analyses, consulting to companies that are
looking for the direction in which to go.”
Based on his activity in the field, Inbar identifies the failing point of
Israeli venture capital funds. “There are funds, such as Giza, that put
people in charge of researching the market and identifying appropriate
companies. Other funds are sitting on the fence. The majority of the funds
do not know that in their portfolio there are companies that with a slight
change of direction can relatively easily solve existing problems.”
“Now the money is streaming in”
Is it indeed? Inbar has chosen an example for the world of medical
equipment, or to be more precise, teleradiology – analyzing imaging from
afar, by way of Internet connection. “This year the US spent 4 billion
dollars on airport personnel who survey luggage through X-ray machines and
decode images. They cost 40 thousand dollars a year. Each decoding costs 2-3
dollars, and the mistake level of the machine is amazing – approximately
30%. Nothing is easier than putting the equipment in a place such as Alaska
or in other places where salaries are by half lower than in large cities,
and to put there people who would read the images via telecommunication
systems at the cost of 1-1.5 dollar, with a higher quality and in real
time?”
“I have no end of such examples. Also, there is no difference, for example,
between pathological detection for medical purposes and detection of
biological attack substances. Only the latter is now financed with 4.7
billion dollars.”
Perhaps this financing is intended for research and development and not for
start-ups?
Inbar: “The [venture capital] funds indeed think that all the money will go
to such giants as Boeing and Lockheed Martin, but this is not true. First of
all, there is a US law providing that 24% of the research and development
money would go to companies of fewer than 300 employees. Secondly, the speed
with which a small company, and an Israeli company in particular, develops
new technologies is much faster than that of a big hierarchical company.”
In what areas can Israeli companies find a niche?
“There is no area in the radar map of the Homeland Security where there is
no niche for Israeli companies – from equipment for detecting biological
warfare substances by way of defense against terrorism, up to equipment and
means for the military response forces. The opportunities are not lacking.
What worries me are symposia we will hold in 2005 discussing how we missed
these two-three years.”
“With every day that passes we lose time in entering this field, which fits
us indeed. We must use the advantages that we have as Israelis, such as
military experience, ability to develop fast and originality. The FBI and
the CIA are today thirsty for solutions.”
Tal Keinan, investment manager for
homeland security field in the Giza venture capital fund, also estimates
that Israeli start-ups have an advantage. “In this area we are a potential
superpower. There is no significant activity in this area yet, but in terms
of availability of products for this field we are on the same page as the
Americans, and other countries are much less relevant. We have seen business
plans from Canada, Australia, and other places, but in terms of their scope
they do not come close to what we have to offer. ”
“After 9/11 several overly energetic Israelis proclaimed themselves experts
and consultants on security issues, and some of them did a disservice to the
Israeli brand. But on the whole no damage has been done to the Israeli
prestige, and the fact is that Israeli companies, which are not even
registered in the US, succeed in selling to this market. Representatives of
Lockheed Martin and Boeing come to Israel regularly to check in on the
technologies. By and large, we are there. I hope this will last a long
time.”
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