Intel Heads For The Hinterland...

Intel may be a household name from Boston to Bombay, but not to most folks in the sleepy Israeli town of Qiryat Gat. Until now, that is. Today, many of Kiryat Gat's 48,000 residents are probably invoking the giant Santa Clara (Calif.) chipmaker around their dinner tables.

Located 60 kilometers south of Tel Aviv, Kiryat Gat is one of the few places in Israel that the high-tech boom has never reached. That's about to change dramatically, following Intel Corp.'s Oct. 20 announcement that it plans to build a $1.6 billion plant in the town--the largest industrial investment in Israel's history. The plant will produce $1 billion annually in flash-memory chips, which are increasingly used to store data in personal computers and smaller electronic devices. Intel plans to sell the chips worldwide.

OUT OF AFRICA. "The investment will change the face of our town," predicts an upbeat Ze'ev Boim, mayor of Qiryat Gat. Up to now, low-tech industries such as textiles and food processing have been the backbone of the local economy.

Founded in 1955 near the site of the Biblical village of Gat, the modern-day town was settled primarily by immigrants from North Africa. Qiryat Gat is the Israeli equivalent of the boondocks. Try calling city hall at noon and you'll find that no one will answer because the switchboard operator is out to lunch.

Immigrants from the former Soviet Union and Ethiopia have swelled the town's population by nearly 80% since 1990. They're attracted primarily by cheap housing and the relative proximity to the center of the country. A two-bedroom apartment goes for $70,000 in Qiryat Gat, less than half the price of similar housing in suburban Tel Aviv.

But the new immigrants have found jobs hard to come by. Unemployment in Qiryat Gat stands at 11.2%, nearly twice the national average. Needless to say, the Intel plant looks like a blessing. Once the plant begins operation in 1998, it will employ 1,500 people directly--half assembly workers, half engineers and technicians--and provide jobs for another 3,000 others through subcontractors and suppliers.

Intel already has a substantial presence in Israel. The chipmaker set up a research and development center in Haifa 22 years ago and in the early '80s built a large plant in Jerusalem. The company already employs 1,500 Israelis.

Initially the new plant was to be located in Jerusalem, too, but Intel couldn't find a big enough site. Qiryat Gat became a contender because earlier this year it was classified as a development zone, entitling companies to a government grant covering 38% of the cost of a project--in this case, a hefty $608 million. Now that the deal is done, bulldozers and tractors are clearing farmland to the east of town--and Kiryat Gat is about to find out what it's like to have Intel inside.

The backbone of Qiryat Gat's economy for decades has been the Polgat textile factory. Set up in 1960, the publicly traded company is based in Herzeliya and has long been the largest employer in Qiryat Gat. "We welcome Intel with open arms, even though their presence will lead to competition for workers," says Hanan Greenberg, Polgat Ltd. deputy managing director.

One of Israel's biggest textile companies, Polgat makes menswear, racking up sales of $171 million in 1994, with $7.6 million in profit. Most of the Qiryat Gat plant's production is exported to Britain, France, and the U.S. The largest customer is Britain's Marks & Spencer PLC chain.

At its peak in the late 1980s, Polgat employed 5,000 workers at the Qiryat Gat operation. But the company has been forced to fire over half its workforce because "we couldn't compete with the cheap labor in the Far East," Greenberg says. The company shut down its cheaper lines and is concentrating on high-quality textiles.

Polgat recently introduced a new wrinkle-free high-tech material called "bi-stretch" that contains Lycra. Bi-stretch suits went on sale this summer at Marks & Spencer and will soon be available at France's Galeries Lafayette. Even for a textile company in the Israeli hinterland, high tech seems to be the only way to survive.

Before it's here, it's on the Bloomberg Terminal.