The Israeli innovation ecosystem is one of the most mature technology hubs worldwide. The roots of Israel’s technological strengths can be traced back to its development of defense technologies, with some of the notable achievements including becoming the eighth country in the world to launch a satellite into space, on par with much larger economies such as France and the United Kingdom. Like the effects of the DARPA1 programs on Silicon Valley in California, these significant governmental investments in R&D have been followed up and strengthened by entrepreneurs in the private sector. Today, Israel spends almost double the OECD (Organisation for Economic Co-operation and Development) average on R&D, at 4.5 percent of GDP, placing it a close second to South Korea (Exhibit 1). This R&D effort is supported by a large number of researchers, with 17 full-time researchers per 1,000 employed, compared with 14 in South Korea and 9 in the United States.
Fueled by the need to defend critical electronic infrastructure and to analyze data collected by Israel’s intelligence corps, two of the technologies the country has been developing the most are cybersecurity and artificial intelligence (AI), which are now becoming key technologies in the ACES (autonomous, connected, electrified, and shared) revolution in the automotive and mobility industries. An analysis by the McKinsey Center for Future Mobility (MCFM) expects the market for automotive software and electronics to grow by 7 percent year over year in the coming years, becoming a $470 billion industry (Exhibit 2). In 2030, 57 percent of this industry is predicted to be in software development, sensors, and electronic control units (ECUs), fields that are expected to rely heavily on AI algorithms—and require cybersecurity capabilities to ensure their safety.
A lot of the development of these technologies for the automotive world is done by start-ups, as opposed to established OEMs. Since 2010, over 40 mobility-dedicated start-ups in Israel have received funding from investors, as have over 300 start-ups with possible applications in mobility. These companies have been funded by very strong growth in investment in autotech, totaling $18.4 billion since 2010 in Israel. Even excluding the largest one-off investment in Mobileye, we see an acceleration in yearly investments of 400 percent between the time periods of 2010–13 and 2014–18. The total investment sum places Israel in fourth place globally, behind the United States, China, and United Kingdom but ahead of traditional automotive powerhouses, such as Germany and Japan. Most of these investments are focused on companies developing autonomous-driving-related technologies, as well as cybersecurity and telematics. The most notable success story is Mobileye, developer of computer vision used for autonomous driving, which was acquired by Intel for $15.3 billion in 2017, the largest exit ever made by an Israeli company. Other notable companies include Argus Cyber Security, developer of cybersecurity technologies for use in automobiles, founded in 2013 by several military veterans and bought four years later for $430 million by Continental, and Innoviz Technologies, developers of lidar (laser radar) hardware and software for autonomous vehicles, which has raised over $250 million in funding, with the latest round ending this past June.
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SOURCE: McKinsey & Company
