Start-up Nation (21 page)

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 constitute 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.

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 assets—the same assets that attracted Buffett, Google, Microsoft, and so many others
in the first place.

Few illustrate Israeli grit better than Dov Frohman, who was born in Amsterdam just months before the onset of World War II.
As the Nazis’ 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 Institute 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 analysts 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
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
.

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.
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.
, 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.”