"Beneath the surface, there is intense movement to relocate production lines from Israel to other places around the world, and dozens of manufacturers are doing so as we speak. No one is going to announce these measures with public celebrations, and no one is proud of moving production to China, Bulgaria, or anywhere else in the world. Everyone is doing it quietly,” Ran Tuttnauer, owner of Tuttnauer, the Beit Shemesh based manufacturer of medical sterilization equipment told “Globes.”
According to Tuttnauer, manufacturing abroad is one of the solutions that manufacturers are employing in response to the continuing downward trend in the shekel-dollar exchange rate, which dropped below NIS 3.5/$ yesterday. Tuttnauer explains that he, too, was forced to move some of his operations to China, and his new production line will begin operating in a district near Shanghai in the coming weeks. “At this stage, we are targeting our operations there for the Chinese market, but if we reach a situation where we decide there is no alternative, we will have to manufacture in other places abroad for the whole world.”
360 workers are employed at his Beit Shemesh factory, and 95% of the production is exported to 120 different countries. “The dollar has dropped to the point that with every deal we make, not only are we not turning a profit, we are actually losing money. The price lists according to which we operate are set each year according to the dollar rate on January 1. We have not been able to raise prices for two years, due to the global recession. For the last two years, the price lists were based on a shekel-dollar rate of NIS 3.8/$. If the shekel-dollar rate drops below NIS 3.5/$ it is simply impossible. We lose money on every sale,” he says.
The low dollar rate and the global economic situation are joined by the rising price of production inputs, such as electricity and water rates, and municipal taxes, which rise each year, as well as the cost of manpower. “There is a business environment here that does not allow operations. In Beit Shemesh, the municipal taxes for businesses rose 25%. Our income is dropping, while, on the other hand, the cost of production inputs just goes up. The Israeli manufacturing industry employs some 400,000 people. For every worker, there are another 4 workers in the service industry, which includes transportation, catering, banks, and more. A contraction in industry means many more households around the country are hurt. Until now, we have not laid off workers; I really hope that we will not be forced to reach such a situation in order to move more operations abroad,” says Tuttnauer.
“Israeli industry is in a catastrophic situation, and I am very afraid that it already almost too late for someone to wake up and take action to save the situation,” adds Tuttnauer, “The government must make immediate decisions in order to improve the ability of the manufacturing sector to exist. Some such steps may include setting a representative and stable exchange rate specifically for exporters and reducing the price of manufacturing inputs. They should be reduced as much as possible, because it does not make sense that with the low dollar, the strong shekel, difficulties in the global markets, and more, fuel should be so expensive, along with electricity, water, municipal taxes, and endless regulation. The government must also act with urgency to restrain the speculators who play with the shekel and take the Israeli market for a ride. There is a set of drastic measures, and it must be employed now,” he said.
Investing elsewhere
Kibbutz Industry Association CEO, Udi Ornstein said yesterday that the dollar problem is “the most painful problem in the Israeli export industry.” According to Ornstein, the low dollar and the lack of certainty regarding export deals are causing “many CEOs of factories in Israel to lose sleep, and one of the expressions of the trend is the diversion of investments from Israel to other places around the world. This formula, where factories move production lines abroad, is correct, but it is very limited. This is not a situation where a manufacturer will close a factory in Israel and open it somewhere else across the globe. It is simply that a manufacturer who wants to expand will prefer to invest money in other places, not here. This phenomenon illustrates the weakening competitive ability of Israeli manufacturing.”
The Kibbutz Industries Association recently published a forecast, saying that exports from the Kibbutz Industries will total NIS 13.7 billion this year, down 6.5% from last year. This is due mostly to changes in the exchange rate, which harmed the shekel value. Along with this, many factories from the Kibbutz Industries opened production lines abroad over the past years, and their production overseas is estimated at $2 billion annually, which is 30% of all the Kibbutz Industries' annual production. “There is a worrisome trend underway, and the writing has been on the wall since 2009,” says Ornstein. “If we want manufacturing and exports in Israel, the Ministry of Finance and the Ministry of Economy must act urgently to encourage competitiveness. There are many ways to do this - we have to think and act quickly.”
Following the drop in the dollar yesterday, Israel Export & International Cooperation Institute Chairman Ramzi Gabbay called upon Governor of the Bank of Israel Dr. Karnit Flug to continue with measures to reduce interest rates. Gabbay said: “The Israeli economy is poised for a major threat of companies and factories collapsing, and rising unemployment rates. This is a fatal blow for Israeli exports, particularly at a time that is marked by a slowdown in the domestic economy. Foreign currency is flowing into the market in large quantities, and the accumulated reserves at the Bank of Israel have already exceeded $80 billion. Bank of Israel intervention in foreign currency trade slows, but does not stop, the shekel strengthening.”
Gabbay called upon the government to initiate additional measures to prevent continued shekel appreciation, such as cancelling the exemptions on income from interest on mid- and long-term bonds that are given to foreign investors, and raising the national foreign currency debt, which is estimated at $30 billion, with future deals. Gabbay called upon the ministries to take steps to increase the budget for the Fund for Promoting Overseas Marketing to NIS 250 million already in 2014, in order to encourage small- and medium-sized exporters to increase their stakes, and to take advantage of developments in international markets.
Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2013
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