developments and trends - export

1

Written by the Economic Department – March 2013

DEVELOPMENTS AND

TRENDS

IN ISRAELI EXPORTS

SUMMARY OF 2012 AND FORECAST

FOR 2013

Written by the Economic Department

2013 March

2


TABLE OF CONTENTS

Executive Summary ....................................................................................................... 3

Export Adjustments ....................................................................................................... 8

General – Trends in world economy .............................................................................. 9

Exports of Goods and Services .................................................................................... 10

Exports of Goods by Sectors ........................................................................................ 11

Diamond Exports ......................................................................................................... 12

Agricultural Exports ..................................................................................................... 13

Industrial Exports ......................................................................................................... 13

Exports of Services ...................................................................................................... 17

Total High-Tech export; Services & Industry ............................................................. 19

Export by trading regions ............................................................................................. 20

Developments in Israel's leading export destinations .................................................. 25

Exports to the Palestinian Authority ............................................................................ 38

Israel’s 20 leading export destinations in 2012 ............................................................ 39

Changes in exchange rates ........................................................................................... 41

Export Forecast for 2013 ............................................................................................. 44

3


Executive Summary In the last few years have been witnessing a clear deceleration in the growth of global

trade in view of the continued debt crisis in Europe, the slow recovery of the US economy

and the restrained growth of Asian economies. Consistent with this trend, we have seen a

significant deceleration in Israel’s goods exports during those years. Following two years of

recovery and growth, in 2012 growth in exports was curbed; whereas in 2010 a positive

trend was recorded with a 19% increase in exports in dollar terms, a trend that continued in

2011 with an 11% increase in dollar terms – in 2012, the growth in exports came to a halt

and for the first time since 2009, the year of the global sub-prime crisis, the trend points to a

slight decrease in the growth of exports.

Total exports of goods and services by Israeli industries in 2012 remained unchanged from

2011 in dollar terms; exports of goods fell 7%, exports of goods excluding diamonds

declined 3% while exports of services rose 11%; total exports of goods and services

excluding diamonds and sale of start-up companies rose slightly by 1% compared to the

previous year1.

Exports of goods and services,

In dollar terms, historical data, 1995-2012 and 2013 forecast:

**IEICI Estimates

In line with the overall negative trend in exports in 2012, diamond exports fell by 24% in

dollar terms compared with the same period of 2011 while industrial exports declined 3% in

dollar terms. The decline in industrial exports was seen across the board (high tech and low

tech) and was affected by a broad decline in most industrial sectors, including, among

others, pharmaceuticals, chemicals, plastics, aircrafts and transportation vehicles, minerals

and metals. In contrast to the general trend, this year agricultural exports rose 2.5% in

dollar terms.

1 It should be noted that goods export data as taken from foreign trade data do not include the adjustments and additions which are factored in the calculation of goods and services exports in the balance of payment and national accounting – details and explanation are presented in the section on export adjustments. Export data and rates of change are calculated in US dollars.

15%

8% 7%3%

15%

23%

-13%

-3%

11%

20%

9% 9%

14% 15%

-17%

18%

13%

0%

5%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

4


In 2012, exports of high tech industries decreased 1% from last year and totaled $21.2

billion – the first decline to be recorded by high tech exports since 2002. Exports of

pharmaceuticals led the trend of declines with a 6% decrease. On the other hand, exports of

electronic components continued to rise and grew by a sizable 13% in 2012 to a record level

of approximately $4 billion. Teva and Intel constitute a dominant and almost absolute factor

in the exports of pharmaceuticals and electronic components (respectively). Our estimates,

which are based on the data published by these companies, Teva’s weight in pharmaceutical

exports is estimated at 88% and Intel’s weight is almost 90% of total exports of electronic

components.

High tech exports, 2011-2012 (annual exports – original data, $ billion)

Other key industrial sectors saw a clear negative trend: exports of chemicals, the biggest

industrial sector ($8.2 billion) fell 12% in dollar terms, exports of metals dropped 11% ($2.4

billion), exports of transportation vehicles dropped 11% ($2.1 billion), exports of minerals

shrank 12% ($2 billion), exports of rubber and plastics declined 3% ($1.8 billion), exports of

textiles, apparel and leather declined 7% ($0.8 billion), exports of jewelry declined 1.5%

($0.5 billion) and exports of wood, furniture, paper and printing fell 17% ($0.4 billion).

Export industries which stood out favorably were machinery and equipment (up 10% to

$3.3 billion) and electrical equipment (up 20% to $1.2 billion). Exports of food and

beverages remained unchanged from 2011 and totaled $950 million.

In contrast with the negative trend in exports of goods in 2012, exports of services

maintained a handsome growth, as in 2011, primarily owing to a significant increase in

exports of computer, software, research and development services. In 2012, exports of

services grew to $30 billion, rising 11% in dollar terms year-over-year. Exports of computer

and software services rose 11% in dollar terms to $7.6 billion, exports of research R&D

services soared 57% in 2012 to $4.8 billion. Exports of services in the high tech sector mainly

comprises computer and support services (information technologies, system integration,

outsourcing, etc), sale of software, sales of software licenses, sale of patents and know-how

and sale of know-how and services of start-up companies.

7.3

3.4 3.42.8

2.11.4

1.0

6.8

3.93.5

2.62.1

1.50.9

Pharmaceutical

products

Electronical

components

Electronic

equipment

Communication

equipment

Aircraft Medical &

Surgical

Computing

equipment

2011 2012

5


In 2012, the growth in exports of services offset the decrease in exports of goods

(excluding diamonds), such that total exports of goods and services (excluding diamonds)

has remained at a similar level as in the corresponding period of 2011, pointing to

stagnation in exports.

In 2012, exports to the EU decreased 7% as compared to 20112, exports to Asia rose 5%

year-over-year, primarily owing to the accelerated growth in the exports of electronic

components, exports to Latin America grew by 8% and exports to Africa declined 3% year-

over year. While exports to the US fell 6%, this decline is accounted for by a sharp decrease

in the exports of pharmaceuticals in the first half of 2012. Excluding this sector, the picture is

reversed and exports to the US point to a 4% increase.

2012 saw an increase in exports to only 3 out of 10 major export destinations – the general

picture points to a decline in exports to developed markets, which was partially offset by an

increase in exports to developing markets.

Ranking first among Israel’s major target markets in the period January-December 2012 is

the US. As stated, exports to the US were primarily affected by the continued contraction in

exports of pharmaceuticals. Exports to the UK (the second-ranking export market and the

biggest in Europe) remained unchanged. Exports to China pointed to a far more moderate

growth than that recorded in the last few years (6% in 2012 as compared to 32% in 2011 and

97% in 2010). China ranks third among export destinations and is Israel’s biggest export

target in Asia, and accounts for 26% of total Israeli exports to the continent. The key

industrial exports to China are electronic components, chemicals and minerals. The

dominance of these industries in exports to China increased during 2012 and reached 71%

of total exports to the country. The growth in exports to China in 2012 is primarily

attributed to exports of electronic components which accounted for almost half of total

exports to China during the period. Exports to China in 2012, excluding components, points

to a 16% drop compared to 2012.

In 2012, a negative trend was recorded in exports to Germany, Turkey, Italy, France and

even India. On the other hand, exports to Brazil continued to recover driven by an increase

in exports of minerals and chemicals.

2 It should be noted that the erosion in the Euro vis-à-vis the dollar during the years accounts for part of the decline in exports to the region, which is calculated in dollar terms.

6


Israel’s 10 leading export markets, 2012

Exports of goods excluding diamonds, in $ billion, % of change year-over-year

The change in the rating of the 10 leading export markets, 2012

Volume of goods exports excluding diamonds, in $ billion

Country Exports

(2012, B$) % change

2012

rating

2011

rating Change

US 10.8 -6% 1 1 (-)

Britain 3.1 0% 2 2 (-)

China 2.4 6% 3 3 (-)

Netherlands 2.2 4% 4 4 (-)

Germany 1.8 -4% 5 5 (-)

Turkey 1.4 -23% 6 6 (-)

India 1.3 -10% 7 7 (-)

France 1.3 -7% 8 8 (-)

Brazil 1.1 28% 9 13 +4

Italy 1.1 -16% 10 9 -1

7


The change in the shekel’s exchange rate: the real-effective3 currency basket depreciated by

4.4% compared to the 2011 average. However, the currency basket’s exchange rate still

points to a 12% appreciation compared to the average level in 2006-2007. It should be

noted that each 5% appreciation in the real-effective exchange rate contributes to a 1%

real decrease in Israeli exports, with a 8-14 months’ lag in effect. A similar effect in

opposite direction results from a depreciation in the real-effective exchange rate.

Furthermore, the decline in the Euro’s value against the dollar during 2012 accounts for

part of the decrease in Israeli exports to EU countries.

In 2013 exports are expected to return to a growth track, a trend that will accelerate

during the second half of the year. While the general weakness in many economies is likely

to continue in the first quarter of 2013, but, as stated, already in the second half of 2013

there will be a gradual improvement in global economic activity. The growth momentum

will continue into 2014 and will sustain the recovery in global economy and global trade.

Israeli exporters are expected to face waning demand in Israel’s main target markets in

Europe and a moderate increase in exports to the US (a market that still account for more

than 60% of Israeli exports). In addition, exporters will face the Shekel’s depreciation vis-à-

vis the currency basket, following a trend of appreciation in the last five years.

Exports of goods and services, excluding services by start-up companies in 2013, are

expected to grow by 5% in dollar terms, to a total of $95.5 billion. Exports of goods and

services excluding start-ups and excluding diamonds is estimated to total $86 billion, up 5%

from an $81.5 billion in 2012. Amid the decline in imports of EU countries, exports to the EU

in 2013 are expected to grow by 4% only in dollar terms. Exports to the US are expected to

grow 7% in dollar terms whereas exports to Asia are estimated to rise 11% in 2013, mainly in

the second half of 2013.

3 In order to more accurately measure changes in foreign currency exchange rate development, the Bank of Israel measures changes in the real-effective rate of the currency basket, which is composed of the shekel vis-a-vis the currencies of Israel’s main trading partners, net of inflation differences vis-a-vis each country).

8


Export Adjustments: the link between exports based on

foreign trade data and exports based on the balance of

payment and national accounting data:

In this context, we wish to emphasize several key points:

A. The national accounts data published by the CBS are initial estimates only, which are likely

to be revised at a later stage. Accordingly, in its current publication the CBS states that:

“bear in mind that economic statistic in Israel have been characterized by high irregularity

in the past few years. This makes it difficult to analyze developments based on a series of

seasonally-adjusted quarterly data and it would be well advised to examine these

developments over longer time periods”.

B. Export figures based on foreign trade data (deriving from export records) do not include

various adjustments in the calculation of goods and services exports in the balance-of-

payment and in national accounting:

Most of the adjustments in exports arise from the following:

1. International trade in goods sold overseas, where such goods do not enter or exit the

country: pursuant to the new international guidelines for entry in the balance-of-payment,

these transactions are recorded as exports of goods (in 2010 such transactions were

recorded in the balance-of-services), where the purchase of goods overseas or the cost of

production overseas by subcontractors are recorded as negative exports, and the sale of

goods overseas to the end customer is recorded as a positive export. The summary of the

two transactions will be recorded as net exports of goods.

2. Sales are recorded based on the work-in-progress in large plants: these plants carry out

large-scale projects, while a partial execution of the projects is recognized as a sale that

can be recorded in the company’s books. The entry in the balance-of-payments is based on

the reports of companies that use this method, while the amounts reported by customs

for such exports are deducted from foreign trade data.

3. Exports to the Palestinian Authority: these exports are recorded based on VAT invoices

rather than customs documents, and are therefore not included in foreign trade data.

C. Exports of services are not reported in export records. In contrast to the negative trends in

exports of goods in 2012, exports of services continues to point to impressive growth

owing to a significant increase in exports of software and research and development

(according to international statistic definitions, exports of these items is classified under

services). The growth in exports of services had a positive offsetting effect on exports of

goods in 2012.

9


General – Trends in world economy In the last few years there have been prominent developments both in global trade

and in Israeli exports: in 2009, in the wake of the credit crunch, global demand and

commercial activity contracted notably, which led to a sharp decline in global trade

which accordingly, a steep decline in Israel’s goods exports. After the rapid recovery

in 2010, Israeli exports bounced back, while in the last two years (2011-2012), we

are witnessing a clear deceleration in the growth of global trade amid the

continued debt crisis in Europe, the slow recovery of the US economy and the tepid

growth of Asian economies. Consistently with this trend, we have seen a significant

slowing of the growth in Israeli exports.

Trends in global trade and in Israeli exports

Rates of change in dollars, exports of goods including diamonds

Analysis: Israel Export Institute, Data: Economist Intelligence Unit

A further indication of global effects on Israeli exports is provided by a model that,

based on the forecasts of research institutions, weights the change in exports of

Israel’s major target markets. These countries provide a reliable estimate for the

direction in which Israeli exports is headed in the near future. This model clearly

shows the sharp deceleration in the weighted imports of these countries over the

last few years, which in 2012 dropped to a negligible growth rate. At the same

time, the model points to a gradual recovery in these economies, reflecting the trend

of Israeli exports during those years.

-24.0%

22.6%18.6%

0.7%

-16.7%

18.7%

12.2%

0%

2009 2010 2011 2012

% Change in import of main target markets % Change in israel exports

10


A projected gradual increase in imports from Israel

Weighted forecast imports in Israel’s key export markets, 2011-2015


As aforesaid, an initial analysis of export data relating to goods and services in

2012 shows that following two years of recovery and growth, in 2012 the trend of

growth came to a halt. The stagnation in exports is in fact consistent with the

negligible growth in the weighted imports of Israel’s main target markets. This trend

is in line with the estimates we published at the end of 2011, which projected a curb

in growth and stagnation in exports in 2012.

Exports of Goods and Services4 Exports of goods and services in 2012 remained unchanged from 2011 in dollar

terms YoY, totaling $91 billion. Exports of goods fell 7% to $54 billion while exports

of services grew 11% YoY to $30 billion.

The decline in goods exports during the year is primarily to diamond exports which

contracted 27% to a total of $8.3 billion only (as compared to $11 billion in 2011)

and accounted for 15.5% of total exports of goods during the period. Industrial

exports declined 3% in dollar terms, totaling $44.3 billion (82% of total goods

exports). The decline in industrial exports was seen across the board (high tech and

low tech) and was affected by a broad decline in most industrial sectors, including,

among others, pharmaceuticals, chemicals, plastics, aircrafts and transportation

vehicles, minerals and metals. Agricultural exports rose 2.5% and totaled $1.4 billion

(2.5% of total goods exports).

4 As stated, the export figures presented below do not include various adjustments in the calculation of goods and services’ exports in the balance-of-payment. These adjustments include ongoing projects where no shipments have left the ports of Israel as well as sales made directly by subcontractors that carry out projects for Israeli companies.

18.6%

0.7%

5.5% 6.2% 6.8%

2011 2012 2013 2014 2015

11


Exports of Goods by Sectors5

After slipping 4% in dollar terms in the first quarter of 2012 QoQ (the sharpest

decrease since 2009), in the second quarter exports of goods excluding diamonds

continued to slow, shedding 2% in dollar terms QoQ.

In the fourth quarter of 2012 exports of goods excluding diamonds contracted 3.5%,

pointing to the continued negative trend in Israeli exports. Apart from the growth in

exports which was recorded in the third quarter of 2012 (which was affected by an

irregular increase in exports of pharmaceuticals and aircrafts), there is a trend of

stagnation and deceleration in exports as of the second quarter of 2011 – a trend

that accelerated during 2012.

Exports of goods, excluding diamonds, including and excluding pharmaceuticals

Change in quarterly exports –, seasonally-adjusted data in %

Analysis: Israel Export Institute, Data: Central Bureau of Statistics

5 All export figures presented below relate to the exports of goods excluding diamonds, ships and aircrafts – unless otherwise stated. Previous period relates to the previous quarter and is based on seasonally-adjusted data. Corresponding period relates to the same quarter of 2011 and based on original data.

0.9%

10.6%

1.0%

-0.5%

1.2%

-4.3%

-2.4%

6.4%

-3.4%

6.8%

10.1%

-0.4%

2.1%

-0.9%

-1.1%

-3.9%

3.0%

-2.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Export exc. Diamonds

Export exc. Diamonds & Pharmaceuticals

12


Exports of goods, excluding diamonds: 2009-2012

Change in export volumes – quarter vs. previous quarter, seasonally-adjusted data


Diamond Exports Following a 23% growth in diamond exports in 2011 (which, among others, was

affected by the price hike in the industry), the trend reversed and throughout 2012

steep declines were seen in diamond exports which culminated in the third quarter

of 2012. In the fourth quarter, diamond exports fell 41% to its lowest level since

the third quarter of 2009. In the fourth quarter of 2012, the trend of decline

slightly moderated to 8.5%.

Overall in 2012, diamond exports contracted 24% YoY, to $8.3 billion, 15.5% of

total goods exports.

Exports of crude diamonds in 2012 totaled $5.6 billion (67% of total diamond

exports), down 25% from 2011, when exports of crude diamonds totaled $2.7 billion

(33% of total diamond exports), dropped 23% from 2010.

Despite the sharp decrease in diamond exports in 2012, according to assessments

of experts in the industry, diamond exports are expected to recover already in

2013.

8.2 8.4

9.3

10.210.6

10.3 10.4 10.5

11.711.8 11.7

11.8

11.411.1

11.711.3

-13.3%

1.7%

10.8%10.0%

3.8%

-2.8%1.1% 1.0%

10.7%

1.5%-1.3%

1.5%

-4.2%-2.0%

5.4%

-3.3%

-20%

-10%

0%

10%

20%

30%

40%

50%

6

7

8

9

10

11

12

13

13


Agricultural Exports In the fourth quarter of 2012, agricultural exports continued its impressive positive

trend and rose 16% YoY, following a 5% increase in the third quarter. Overall in

2012, agricultural exports rose 2.5% YoY and totaled $1.4 billion, 2.5% of total

goods exports6. The rise in agricultural exports was due to a 19% growth in exports

of fruit, while exports of vegetables and field crops declined 3.5% and exports of

flowers fell 14%.

Industrial Exports In the fourth quarter of 2012 industrial exports decreased 2% YoY. Overall in 2012,

industrial exports declined 3% in dollar terms compared to 2011 and totaled $44.3

billion, 82% of total goods exports.

� High Tech Exports

For the first time in a decade, high tech exports recorded a contraction. In the past

year, high tech exports declined 1% to $21.2 billion (48% of total industrial exports,

and 46% of total goods exports excluding diamonds). In 2011, high tech exports

rose7%, following a 12% growth in 2010. The last time high tech exports decreased

was in 2001-2002, the years of the global high-tech crisis and second Intifada –

during those years high tech exports fell 10% and 12.5%, respectively. Even in 2009

(the year of the serious global crisis, during which total exports fell by a double-digit

rate, with sharp declines across the board), high tech exports actually grew 5%.

Industrial high tech exports: 1990-2012

Annual export volume –original data, $ billion


6 It should be noted that since agricultural exports are mostly directed to EU countries, the dollar proceeds of these exports was highly affected by the Euro’s depreciation against the dollar during the period.

7.3

3.4 3.42.8

2.11.4

1.0

6.8

3.93.5

2.62.1

1.50.9

Pharmaceutical

products

Electronical

components

Electronic

equipment

Communication

equipment

Aircraft Medical &

Surgical

Computing

equipment

2011 2012

14


The contraction in high tech exports primarily stemmed from declines in exports of

pharmaceuticals and communication equipment, while on the other hand, the

growth in exports of electronic components offset these declines. Excluding this

sector, high tech exports would have recorded a steeper decline of 4%.

In 2012, pharmaceutical exports fell 6% and totaled $6.8 billion (33% of total high

tech exports), compared to exports of $7.3 billion in 2011. Teva’s manufacturing,

marketing and selling activity has substantial impact on pharmaceutical exports and

it is almost an exclusive player in the exports of this sector. According to Teva’s

publications7, as of year-end 2010, the company’s weight in Israel’s pharmaceutical

exports is more than 88%. However, although Teva’s production and exports from

Israel account for a significant portion of the company’s global revenues – most of

Teva’s drug production is outside Israel. The pharmaceutical giant operates

production facilities in East Europe (mainly Hungary, the Czech Republic, Croatia and

Poland), in West Europe (Germany, Spain, UK, Ireland and Italy), in Asia (mainly

Japan and India) and in the US – with most of the manufacturing, apart from Israel,

carried out in Germany, the Czech Republic, Hungary and the US. The company’s key

production facilities in terms of size and staff engaged in production, are located in

the US, Hungary, Germany, Israel, Japan and the Czech Republic8.

Additional sectors that contributed to the negative trend were exports of

communication equipment, which fell 6% to $2.6 billion (12% of total high tech

exports) and exports of computer systems, which declined 2% to $930 million (5% of

total high tech exports).

On the other hand, the growth in exports of electronic components helped to

offset the declines in high tech exports with an impressive increase of 13% to $3.9

billion, and accordingly, its weight in total high tech exports rose to 18%. Similar to

the pharmaceutical industry, the electronic components sector is materially affected

by the Intel’s production and export activities. According to statements by company

top executives in Israel9, total exports arising from Intel’s chip production facilities in

Israel totaled $3.5 billion in 201210 - meaning: Intel’s share of electronic

components exports in 2012 was estimated at 90% and it accounts for 16.5% of

total high tech exports. Assuming Teva’s weight in pharmaceutical exports is 88%

(according to 2010 data), the company’s exports in 2012 can be estimated at $6

7 In its website Teva states that its exports in 2010 totaled NIS 22 billion. According to the CBS’ data, pharmaceutical exports in NIS during that year totalled NIS 24.8 billion. 8 The biggest staff engaged in Teva’s production activity work in the US, Germany and Hungary (13% each of total employees in production), in Israel and Japan (12% each) and in the Czech Republic (8%). In total, 14,000 are employed in the production facilities according to the company’s reports in its periodic and annual statements for 2012. 9 According to publications on the company’s website and statements made by Israel Intel’s president, Moly Eden, in a press conference held on February 17, 2013. 10 Excluding exports by Israeli suppliers as a result of their partnership with Intel.

15


billion. Based on this estimate, exports by Teva dn Intel alone totaled $9.5 billion in

2012, which account for 45% of total high tech exports (!).

Apart from exports of electronic components, exports of aircrafts rose 4% in 2010

(to $2.1 billion, 10% of total high tech exports). Exports of electronic equipment also

rose in 2012 (by 2% to $3.45 billion, 16% of total high tech exports). It should be

noted that the electronic equipment sector was substantially affected by the activity

of defense companies, excluding which this sector would have recorded a significant

decline in exports. Exports of medical-surgical equipment remained unchanged

from 2011 and totaled $1.45 billion (7% of total high tech exports).

Exports of high tech industries, 2011-2012

Annual exports – original data, $ billion


-

500

1,000

1,500

2,000

2,500

Pharmaceuticals

Electronic components & computers

Communications, control, medical & scientific equipment

Aircrafts

16


� Other Industrial Sectors

A clear negative trend was also observed for the majority of other industrial sectors in

2012. Exports of the chemicals sector, the biggest among industrial sectors, fell by 12% in

dollar terms, totaling $8.2 billion, exports of metals declined 11% to $2.4 billion, exports of

transportation vehicles also fell 11% to $2.1 billion and exports of minerals contracted 12%

to $2 billion.

Other industrial sectors that saw declines in exports were: rubber and plastics (down 3% to

$1.8 billion), textiles, apparel and leather (down 7% to $810 million), jewelry (slightly down

by 1.5% to $470 million), and wood products, paper, publishing and printing which fell 17%

to $380 million.

Two sectors that stood out favorably were: machinery and equipment11 which rose 10% YoY

to $3.3 billion and exports of electrical equipment12 which rose sharply by 20% to $1.2

billion. Exports of food and beverages remained unchanged compared to 2011 and totaled

$950 million.

Exports of industrial sectors, 2012

Annual exports – original data, $ billion


11 Including, among others, exports of printing, robotics, irrigation and food machinery. 12 Including, among others, equipment and systems in alterative energy, electricity, electronics and components.

20.6%

9.9%

-0.3%

-1.3%

-2.7%

-6.7%

-10.6%

-11.1%

-11.6%

-11.6%

-16.5%

Electrical equipments

Machinery & equipment

Food & beverages

Jewellery

Rubber & plastic

Textiles

Transport equipment

Metal

Chemicals

Minerals

Wood&Paper

1.2

3.3

0.95

0.5

1.8

0.8

8.2

2.1

2.4

2.0

0.4

17


Exports of Services In contrast to the negative trend in goods exports in 2012, services exports

continue to grow handsomely compared to 2011, mainly owing to a significant

increase in exports of software and R&D. In 2012 services exports totaled $30

billion, up 11% YoY. The growth in services exports The growth in services exports

has offset the decrease in goods exports (excluding diamonds), such that total

exports of goods and services (excluding diamonds) is effectively at the same level

it was last year, pointing to stagnation in exports.

In 2012, exports of business services (which account for 58% of total services

exports), rose 16% YoY and totaled $20.2 billion. Exports of tourism services (17% of

total services exports) rose 5% YoY to $5.1 billion. Exports of transportation services

rose 1% to $4.5 billion (15% of total services exports). A study of transportation

services items shows that “shipments between foreign ports” (which accounts for

64% of total exports of transportation services and 10% of total services exports)

rose 3% YoY to $2.85 billion.

Among the business services sectors:

Exports of computer services13, which accounts for 38% of exports of business

services and 26% of total exports of services, rose 11% in 2012 YoY, to a total of $7.6

billion.

Exports of research and development services, which accounts for 24% of exports of

business services and 16% of total exports of services, rose sharply by 57% during

year to $4.8 billion.

Exports of services of startup companies, which is included in R&D exports (and is

partially derives from the number of exits during the year) doubled by more than

2.5% in 2012 and totaled $1.1 billion. Exports of start-up companies in 2012 reached

its highest level since the subprime crisis and currently accounts for 4% of total

services exports and 1.2% of total exports of goods and services exports in 2012.

2012 is considered one of the best years in terms of the sale of Israeli technology

companies – in the past year more than 50 exit transactions were signed for a total

of $9.3 billion.

13 Including development of software computer services and outsourcing (IT)

18


Additional sectors exporting business services:

Exports of services to industrial sectors declined 3% to $2 billion, exports of

wholesale commerce rose 7% to $800 million, exports of communication, postal

and currier services declined 6% to $390 million while exports of banking and

financial services fell 22% to $410 million.

Exports of services to the Palestinian Authority is expected to decrease sharply by

28% and total $285 million only, compared to $386 million in 2011.

In the second half of 2012, a negative trend developed in exports of services, which

aggravated during the fourth quarter of 2012. During the quarter all the major

export industries recorded declines, quarter-oevr-quarter; exports of services

excluding start-ups contracted 6%, after slowing 2% in Q3, exports of business

services excluding start-ups also fell 6% after slowing 2% in Q3, exports of tourism

services fell 8% after declining 3% and exports of transportation services declined

4% in Q4, with no change recorded in Q3. The contraction in services exports in the

last few quarters raises concern for the future, especially given the growing weight

of services in total exports.

Exports of services and exports of business services, excluding start up

companies

Export volume – seasonality-adjusted data, $ million


3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

Exports of services

- Total

Export of other

business services

19


Total High-Tech export; Services & Industry

Analysis of high tech export data based on goods and services

In the last few years the weight of exports of high tech services has been capturing

a more significant share of the industry, while the weight of exports of high tech

industries has been shrinking. This trend has been clearly visible in 2012; exports of

high tech industries has declined for the first time in a decade, while exports of

high tech services continued its accelerated growth and reach its highest level ever.

Total exports of high tech industries, which comprise mainly pharmaceuticals,

electronic components, aircrafts, telecommunication equipment, control and

supervision equipment and medical and scientific equipment, declined 1% totaling

$21 billion. The weight of industrial high tech in total high tech exports has dropped

to 63%, from 68% in 2011 and 70% in 2010.

In line with the trend of accelerated growth in exports of high tech services in the

last few years, in 2012 the trend continued. Total exports of high tech services grew

23% (following 16% in 2011) totaling $12.2 billion. The weight of high tech services in

total high tech exports leaped to 37% from 32% in 2011 and 30% in 2010. Exports of

high tech services mainly includes computer and support services (information

technology, systems integration, outsourcing, etc), sale of software, sales of software

licenses, sale of patents and knowhow, sale of knowhow and services of start-up

companies and R&D services to global companies.

Total exports of products and services in the high tech sector increased by 6% in

2012 to $33.3 billion – 37% of total exports in 2012, 19% of total business product

and 14% of GDP.


70% 68%

63%

30%32% 37%

25%

35%

45%

55%

65%

75%

2010 2011 2012

High-tech industries High-tech Services

Trends of high tech exports

A decline in industry, an increase

20


Export by trading regions

Analysis of data of exports of goods excluding diamonds, by trading blocs

In the fourth quarter of 2012, exports of goods (excluding diamonds) declined 1.5%

YoY, and totaled $11.4 billion. During the quarter, exports were affected by a sharp

decrease in exports to Asian countries, which until then had seen moderate growth,

despite the global slowdown in demand and the general decline in exports.

In the fourth quarter of 2012 exports to Asia totaled $2.2 billion, down 13% from

$$2.5 billion in 2011. Accordingly, Asia’s weight in exports declined from 21% in

Q4/2011 to 19% in Q4/2012. The decline in exports to the regions in the fourth

quarter primarily stems from a sharp decrease in exports of minerals and chemicals –

however, we estimate that already in Q1/2013, exports to Asia will recover, in line

with the growth in these exports.

Exports to the EU continued to shrink. During the fourth quarter of 2012 exports to

the EU declined by 4% in dollar terms YoY – after declining 15% and 13% in Q3 and

Q2, respectively. At the same time, it should be stated during Q4, the Euro

depreciated by 3.8% on average against the dollar, which explains most of the

declines in exports, since there were recorded in dollar values.

Each period is presented year-over-year


Total exports to the EU came at $14.3 billion – 34% of total goods exports, remaining

the biggest destination for exports of goods from Israel.

7.1%

-13.0%-14.8%

-4.2%-4.1%

-9.8%-11.4%

-3.8%

Q1.2012 Q2.2012 Q3.2012 Q4.2012

Export to E.U % Change in euro-dollar rate

21


In contrast to the negative trend in exports to the EU, the trend of recovery in

exports to the US continued and even strengthened. In Q4/23012 exports to the US

grew by a sharp 20% in dollar terms YoY (totaling $2.7 billion, 24% of exports during

the quarter), following a 5% increase in Q3/2012. Overall, in the second half of 2012

exports to the US rose 11% YoY – after dropping sharply in the first quarter of 2012

by 20% YoY. The recovery in exports to the US primarily stemmed from a rapid

growth in pharmaceutical exports in the second half of 2012. Pharmaceutical exports

to the US, being dominant, are subject to volatility from one period to the next and

affected by Teva’s activity in the country.

Development of exports by trading Areas

Change QoQ– original data in %


The European Union and Other European Countries

Exports to Europe in 2012 accounted for 38% of total exports (40% in 2011). Total

exports to Europe were $17.6 billion, down 6% in dollar terms YoY.

Exports to the EU in 2012 accounted for 31% of total exports (32% in 2011). Exports

to the EU totaled $14.3 billion, down 7% in dollar terms YoY.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

E.U Asia U.S

22


Exports to our countries in Europe, which are not members of the EU, including

Russia, Turkey and AFTA, accounted for 7% of total exports (similar to its weight in

2011) totaling $3.4 billion, down 3% in dollar terms YoY.

The decline in exports to Europe was affected, among others, by the Euro’s

depreciation against the dollar in 2012 YoY. The dominance of European countries in

Israeli exports and especially the significant share of EU countries, increase these

exports’ sensitivity to the stability of European markets,

As stated last year in the IEI’s forecast for 2012, exports to EU indeed had a negative

affect on total goods exports and was the main reason for the declines in 2012. The

declines in exports to the EU during 2012 were recorded in most industries and to

key target markets. In 2012, exports fell to Germany, France, Italy and Belgium, with

a sharp deceleration recorded in the second half of 2012 in exports to the UK and

Holland.

The US

Exports to the US totaled $11 billion, down 6% in dollar terms YoY. The decline in

exports to the US is entirely accounted for by the sharp decrease in pharmaceutical

exports to the US market. Total exports to the US, excluding this sector, grew 4%

YoY. Exports to the US in 2012 accounted for 24% of total exports of goods excluding

diamonds, similar to its weight in 2011.

Asia

Despite the decelerating growth in exports to Asia in 2012, this market remained a

stable and consistent exports target in terms of growth rates. The share of Asian

countries in Israeli exports continued to grow in 2012 and as of year-end 2012 is

accounts for 21% of total exports, a significant increase from 19% in 2011.

Total exports to Asia in 2012 came at $9.5 billion, up 5% in dollar terms YoY,

compared to a growth rate of 8.5% in 2011. The said growth in exports to Asia

primarily stemmed from the continued growth in exports to China (albeit far more

moderately than that in recent years), from the impressive rise in exports to

Singapore and wing to the accelerated growth in exports to Vietnam (owing to the

sharp growth in exports of electronic components14). On the other hand, the

14 Global Intel has assembly and testing facilities in China and Vietnam and a large portion of the production of components in Israel is transferred to these countries. For example, exports to Malaysia consists entirely of electronic components and affected by Intel’s business decisions regarding the allocation of Israeli production to assembly plants owned by global Intel and

located worldwide.

23


declines in exports to India, South Korea, Japan and Taiwan had a negative impact on

the growth in exports to Asia.

Latin America

Exports to Latin America accounts for 6% of total exports (5% in 2011) and in 2012

totaled $2.7 billion, up 8% in dollar terms YoY. Most of the growth in exports to Latin

America stemmed from a sharp 28% increase of 28% in exports to Brazil, which

accounts for 43% of total export to the region. The growth in exports to Mexico

(+27%), Chile (+74%) and Columbia (+39%) contributed to the positive trend in

exports to the region.

Africa

Exports to Africa in 2012 accounted for 3% of total exports and totaled $1.4 billion,

down 15% in dollar terms YoY. The decline in exports to Africa is entirely accounted

for by a decline of more than 60% in the “Rest of the World” item (as classified by

the CBS). This decline is a correction of the exceptional increase of 142% in 2011 in

this item. The catalogue of exports to ROE countries includes Israel’s unclassified

export to Africa, which is 2011 accounted for 25% of exports to the continent.

However, the trend of slowdown in global trade also affected demand by African

countries, most of which recorded declines in imports from Israel compared to 2011.

For example, exports to Nigeria, Israel’s biggest export destination in Africa,

contracted 8% YoY. Exports to South Africa decreased 3% and exports to Egypt fell

13%. On the other hand, exports to Kenya soared 87% compared to 2011.

Rest of the World

Exports to Rest of the World15, which accounts for 3% of total exports, totaled $1.4

billion in 2012, up 5% in dollar terms YoY. Most of the increase is attributed to the

continued growth in exports to Australia (+4%) and to the sharp growth in exports to

New Zealand (+155%).

Unclassified exports, unclassified countries

The catalog of exports to “unclassified countries” primarily includes Israel’s

unclassified defense exports, which accounts for 5% of total goods exports16. Total

unclassified exports declined 5% in 2012 to $2.4 billion.

15 Including exports to Oceania and Pacific countries and exports to Canada.

16 Excluding diamonds

24


Exports in 2012 by trading regions

Original data in $ billion, 2012

Breakdown of exports by trading exports, in percent

Weight of regions in Israel’s goods exports, 2012


15.3

11.49.1

3.5 2.4 2.5 1.7 1.3

14.3

10.8 9.5

3.4 2.6 2.4 1.4 1.4

2011 2012

E.U31%

U.S24%

Asia21%

Rest of Europe

7%

Latin America

6%Unclassified

Countries 5% Africa

3%R.O.W

3%

25


Developments in Israel's leading export destinations

Rating of export markets and details by sectors: exports of goods excluding

diamonds

During 2011 there was an increase in exports to 7 out of Israel’s 10 leading export

markets. Overall in 2012, there were only 3 target markets to which exports

improved as compared to 2011. In the first three quarter of 2012 exports to 5

major target markets improved – an indication that the negative trend in exports

aggravated in the fourth quarter17.

The decline in exports in 2012 was mainly recorded in developed markets (but not

only), while the growth in exports to developing countries was a balancing factor and

slightly offset these declines. During 2012, exports to the US fell 6%, exports to

France decreased 7%, exports to Italy fell 16% and exports to Germany contracted by

4% (it should be noted that during the period the Euro depreciated against the dollar

and this had affected exports which are denominated in dollars18).

In contrast to the declines in exports to developed countries, most of the growth in

exports in 2012 stemmed from the continued rise in exports to developing countries.

Exports to Brazil grew 28%, exports to Russia rose 10%, exports to Mexico grew 27%

and exports to Vietnam soared 121%. Exports to China continue to grow in 2012

(6%), however, the growth in exports to China was significantly lower than that in

2011 and 2010 (97% in 2010 and 32% in 2011).

Israel’s 10 leading export markets, 2012

Exports of goods excluding diamonds, in $ billion, % of change year-over-year

17 It should be noted that the calculation of 10 major target markets does not include exports to the Palestinian Authority, which traditionally constitutes Israel’s biggest target market, except for the US – additional details on trade with the Palestinian Authority is presented on page 32. 18 During 2012 the Euro fell by an average 7% against the dollar.

26


The change in the rating of the 10 leading export markets, 2012

Volume of goods exports excluding diamonds, in $ billion

Country Exports

(2012, B$) % change

2012

rating

2011

rating Change

US 10.8 -6% 1 1 (-)

Britain 3.1 0% 2 2 (-)

China 2.4 6% 3 3 (-)

Netherlands 2.2 4% 4 4 (-)

Germany 1.8 -4% 5 5 (-)

Turkey 1.4 -23% 6 6 (-)

India 1.3 -10% 7 7 (-)

France 1.3 -7% 8 8 (-)

Brazil 1.1 28% 9 13 +4

Italy 1.1 -16% 10 9 -1

(* Exports to China including Hong Kong totalled $3 billion in 2012)

The weight of countries in exports –2012 Out of total exports of goods excluding diamonds, excluding exports to the

Palestinian Authority


U.S23.5%

U.K6.9%

China5.3%

Netherlands4.9%

Germany4.0%

Turkey3.1%

India2.9%

France2.8%

Brazil2.5%

Italy2.5%

R.O.W41.6%

27


United States

In 2012, exports of goods to the US, Israel’s leading and most important export

destination, declined 6% YoY to $10.8 billion. The decline in exports of

pharmaceuticals was the main factor affecting export data during the period.

Excluding pharmaceutical exports, exports to the US rose 4%, while other sector

recorded a mixed trend compared to 2011.

As stated, the decrease in exports to the US was primarily affected by the sharp drop

in exports of pharmaceuticals. Exports of pharmaceuticals, the biggest industrial

exports to the US, fell by a steep 17% YoY, from $4.1 billion in 2011 to $3.4 billion

in 2012. Most of the decrease was recorded in the first half of 2012, while the

second half saw an impressive recovery in pharmaceutical exports. As stated in the

chapter on the sector, production and exports in this industry are primarily

dominated by Teva, while most of the products manufactured in Israel is shipped

to destinations in North America (mainly the US) and Europe.

Exports of other industries to the US point to a mixed trend. Among the major

export industries, there was an increase in exports of chemicals and oil distillates

(up 28% to $1.1 billion), exports of medical and surgical equipment (up 5% to $563

million) exports of rubber and plastic products (up 9% to $396 million), exports of

rubber and plastic (up 10% to $348 million), exports of textile and apparel (up 4% to

$334 million), exports of office machinery and computer systems (up 9% to $321

million), and exports of exports of industrial control, optical and photographic

equipment (up 23% to $300million).

On the other hand, there was a decline in exports of telecommunication equipment

(down 10% to $564 million), exports of metals (down 7% to $536 million) and

exports of measuring, control and navigation instruments (down 19% to $463

million).

Exports of electronic components contracted further as a result of the continued

diversion of exports by electronic component companies from developed to

developing markets, however, its impact on total exports to the US diminished

considerably relatively to the last few years. Exports of electronic components to the

US in 2012 totaled $328 million, up 1% YoY, down 24% from 2010 and down 82%

from 2009.

It should be noted that exports of electronic components is significantly affected by

the business activity of global Intel, which holds assembly and testing facilities for its

products in China, Vietnam, Malaysia and Costa Rica. In the last few years there is a

clear and consistent decline in exports of components to the US with a

corresponding rise in these exports to the aforementioned countries. These changes

28


result from business considerations and do not necessarily point to general trends in

Israeli exports or in global trade and demand.

United Kingdoom

In 2012 exports to Britain, Israel’s biggest destination among European countries,

remained unchanged compared to its levels in 2011 (totaling $3.1 billion), but the

relative stability in exports to the country is attributed to the growth in exports in

Q1, which soared 65% YoY, owing to a sharp leap in pharmaceutical exports. Already

in the second quarter the trend changed and total exports to the country slipped 3%,

with a further 5% decline in the third quarter. In the fourth quarter the negative

trend culminated as exports to the UK fell 14% YoY.

Like the situation in the US, exports to Britain are highly affected by the dominance

of the pharmaceutical market, which primarily stems from Teva’s operations in the

UK, a major target market for the company. In fact, the sharp increase in

pharmaceutical exports to the country is the factor that established Britain’s position

as Israel’s second exports market globally and its biggest exports destination among

European countries.

The growth in exports of pharmaceuticals began to accelerate in Q2/2011 and thus,

while Q1/2012 points to a sharp 735% growth YoY, Q2 and Q3 saw stability in

exports compared to the corresponding periods of 2011. The negative trend in

pharmaceuticals exports aggravated in Q4/2012 with a steep 19% decline, so that

overall in 2012 exports to Britain remained unchanged YoY. Between January and

December 2012, pharmaceutical exports to the UK rose 6% to $1.9 billion, 58% of

total exports to the country. Excluding this impact, exports to the British Isle

declined 6%.

At the same time, it should be noted that exports to Britain point to a mixed trend:

exports of chemicals (excluding pharmaceuticals) rose 11% to $320 million to $320

million, agricultural exports rose 20% to $125 million, exports of

telecommunication equipment increased 8% to $95 million, exports of aircrafts rose

4% to $85 million, exports of machinery and equipment grew by a sharp 47% to $81

million and exports of medical and surgical equipment remained on a growth track

with a handsome increase of 19% to $45 million

On the other hand, declines were recorded in exports of textile and apparel (down

21% to $60 million), exports of industrial control, optical and photographic

equipment (down 24% to $42 million), exports of office machinery and computer

systems (down 9% to a similar level), exports of food and beverages (down 13% to

$37 million), exports of measuring, control and navigation instruments (down10%

29


to $34 million), exports of engines and electrical equipment (down 11% to $31

million) and exports of jewelry, which fell 9% to $31 million. Exports of rubber and

plastics remained unchanged and totaled $148 million.

Another point worthy of mention is the fact that none of 7 major industries

exporting to Britain19, which account for 84% of total exports to the country,

recorded a decline in exports compared to last year (6 went up, 1 remained

unchanged).

China

During 2012 export to China grew 6% YoY to $2.45 billion. This increase was in

contrast to the general trend of decrease in exports to the majority of Israel’s leading

export destinations. China is ranked as the biggest export market in Asia, the

recipient of 6% of Israel’s goods exports to the continent.

The main industrial exports to China are electronic components, chemicals and

minerals which, as of year-end 2012, accounted for 71% of total Israeli exports to

this country. The dominance of these sectors in exports to China increased during

2012. In 2011 they accounted for 68% and in 2010 only 62%. These sectors are

almost absolutely affected by the business activity of two large corporations: Intel

(electronic components) and Israel Chemicals (chemicals and minerals), while the

accelerated growth in exports to China in the last year primarily stems from the

activity of these companies.

In 2011, Israeli exports to China totaled $2.3 billion (a 32% growth following a sharp

97% growth in 2010). During this year, exports of electronic components, chemicals

and minerals to China aggregated in excess of $1.5 billion, while exports of all other

industries totaled less than half ($743 million). Moreover, while exports of the three

major industries leaped 43% in 2011 and accounted for the accelerated growth in

exports to China, other industries recorded a more moderate increase of 14% only.

The contrasting trends in exports to China in 2011, strengthened in 2012. Total

exports of the three dominant sectors grew 12% in 2012 to $1.7 billion, representing

71% of total exports, as compared to 68% in 2011. Excluding these industries, the

picture is reversed pointing to a decline in exports YoY. Total exports of all other

industries declined 4% YoY to $712 million, accounting for 29% only of total

exports.

19 Based on the exports average in the last three years.

30


It should be noted that in 2012, in contrast to previous years, there was a decrease

in exports of minerals and chemicals to China – so that the growth in exports to

China is entirely attributed to exports of electronic components, which in 2012

represented almost half of total exports to China. Excluding electronic

components, exports to China fell 16% YoY.


Exports of minerals, which primarily includes potash, is the second biggest export

industry and accounts for 14% of total exports to China. This industry is almost

entirely affected by the business activities of Israel Chemicals and subject to great

volatility from one quarter to the next. Minerals are usually supplied following new

agreements and transactions, agreements for the renewal of supply based on

previous deals and/or exercise of options for supply based on previous deals.

In 2012 exports of minerals to China totaled $335 million, down 36% YoY. In our

opinion, in the first quarter of 2013 exports of mineral to China will likely bounce

back, which is bound to have a positive affect on total exports to the country.

As stated above, exports of other industries (excluding the 3 dominant sectors)

decreased 4% in dollar terms year-over-year, totaling $712 million only (29% of

total exports to China). Among other sectors, declines were recorded in exports of

metals (down 21% to $110 million), exports of control, measurement and

navigation instruments (down 42% to $63 million), exports of office machinery and

computer systems (down 14% to $41 million), exports of engines and electrical

41%

62%

68%71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 2010 2011 2012

Weight of key exports to China (2009-2012)

Weight of Minerals &

Chemicals

Weight of Electronic

components

Weight of Electronic

components, Minerals

& Chemicals

31


equipment (down 5% to $22 million) and exports of rubber and plastic (down 7% to

$20 million).

On the other hand, an impressive increase was recorded in exports of medical and

surgical equipment, which rose 29 % to $130 million, exports of telecommunication

equipment, which increased 15 % to $110 million, exports of food and beverages,

which rose 26% to $41 million and exports of pharmaceuticals which leaped 40% to

$17million).

The Netherlands

According to exports data for 2012, the Netherlands is ranked fourth among

Israel’s export markets. Total exports to the Netherlands in 2012 came to $2.25

billion, up 4% from 2011.

The increase in exports to the Netherlands was primarily driven by a sharp growth in

exports of pharmaceuticals, which rose YoY by a sharp 34% to $470 million (21% of

total exports to the Netherlands). In the past few years there is a consistent increase

in exports of pharmaceuticals to the country which leaped 130% between 2012 and

2012.

Apart from pharmaceuticals, other sectors did not record an increase in exports to

the Netherlands compared to 2011, and it remained at a level of $1.8 billion. An

increase was recorded in exports of machinery and equipment (15% of total

515

654 743 712

362

1,080

1,548

1,736

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2009 2010 2011 2012

Export to China;

The biggest exporters vs. other sectors)2009-2012(

Rest of Export to

china

Electronic

components,

Chemicals &

Minerals

32


exports), which rose 19% to $344 million, agricultural exports (12% of total exports),

which increased 24% to $272 million, and exports of telecommunication

equipment, which rose 4% to $87 million.

On the other hand the following industries recorded a decline in exports: minerals

(down 8% to $77million), rubber and plastic (down 1% to $67 million), food and

beverages (down 9% to $65 million), computer systems (down 24% to $50 million),

medical and surgical equipment (down 34 % to 47 million), metals (down 20% to

$40 million), engines and electrical equipment (down 12% to $33 million) and

exports of textile products and apparel which fell sharply by 50 % to 21 million only.

Exports of chemicals and oil distillates, Israel’s biggest exports to the Netherlands,

remained unchanged in 2012 and totaled $576 million (26% of exports to the

Netherlands).

It should be noted that many Israeli companies have parent companies, subsidiaries

or affiliates in the Netherlands, and the country constitutes a gateway for Israeli

companies to other European countries as well as to certain countries outside

Europe.

Germany

The trend of contraction in exports to Germany continued throughout the first three

quarter of 2012, during which exports to Germany dropped 18%. However, in the

fourth quarter exports surprisingly soared by 47%. This increase offset most of the

declines in exports to Germany, which in 2012 totaled $1.8 billion – down 4% in

dollar terms YoY.

An analysis of exports to Germany shows that the sharp growth in the fourth quarter

stemmed from exports of measurement, control and navigation instruments which

soared following a major transaction. Exports of this industry, which in the first three

quarter of 2012 totaled $63 million only, leaped 994% in the fourth quarter to $260

million (4 times the export volume in the three quarters combined). Exports of

measurement, control and navigation instruments totaled $323 million in 2012, up

by a sharp 118% from 2011. Net of this sector, exports to Germany fell by 14% in

2012 to $1.5 billion.

Germany is the 5th biggest target market for Israeli exports in the world and third

in Europe20 and one of the most stable target markets for Israeli exports, posting

20 Given the fact that Holland is a passageway for goods to other destinations around the world and that goods exported from Israel to Holland are not intended solely for this market, some consider Germany as the second most important exports market in Europe.

33


steady growth rates over the last few years. Exports to Germany are highly diverse,

without one dominant sector or company that distinctively affect exports to the

country – for this reason, the continued contraction in exports to Germany

(excluding measurement, control and navigation instruments), which was recorded

by nearly all the major sectors, reflects the repercussions of the European debt

crisis on Israeli exports.

4 out of the 5 major industrial exports to Germany (accounting for 54% of total

exports to this market) recorded declines compared to 2011 (excluding

measurement, control and navigation instruments): exports of chemicals and oil

distillates fell 13% (to $175 million), exports of rubber and plastic fell 13% (totaling

$227 million), exports of machinery and equipment fell 7% (to $155 million),

exports of machinery and equipment fell 31% (to $150 million) and exports of

metals declined 18% (to $135 million).

Other exports that declined in 2012 were: telecommunication equipment (down

21% to $98 million), engines and electrical equipment (down 13% to $83 million)

and agricultural exports (down 6% to $61 million).

It should be noted that despite the general trend, several industries recorded an

increase in exports: medical and surgical equipment rose 6% to $110 million,

pharmaceuticals grew 3% to $66 million and textiles rose 3% to $50 million.

Turkey

In 2012, exports to Turkey fell 23% to $1.4 billion. Despite the sharp drop in

exports, Turkey remained the 6th biggest export destination, similar to its ranking

in 2011.

Unlike exports to Germany, which are highly diverse, exports to Turkey are

dominated by chemicals and oil distillates. These exports fell 33% in 2012, following

which the sector’s weight in total goods exports diminished to 62% (in 2011 it

accounted for 70% of total exports to the country).

Exports of metals21, which accounts for 11% of total exports to the country, fell 12%

YoY and totaled $153 million.

A positive point arising from a sectoral analysis of exports to Turkey is the fact that

excluding the chemicals sector, exports actually decreased by 3% only, whereas

excluding the two aforementioned dominant sectors, the entire decrease is offset.

Accordingly, several industries actually improved from last year: exports of

21 Primarily consists of metal scraps and metals for recycling

34


machinery and equipment rose 30% to $65 million, exports of engines and

electrical equipment soared 94% to $43 million, exports of textiles rose 21% to $30

million, exports of minerals grew 57% to $30 million and agricultural exports rose

28% YoY to $24 million.

On the other hand, exports of paper and wood products declined 21% to $48 million

and exports of pharmaceuticals remained unchanged from 2011 at $32 million.

It should be noted, that like the Netherlands, Turkey serves as a gateway to some of

the goods exported to it.

India

The trend of contraction in exports to India continued in 2012. After declining 11%

in 2011 YoY, from $1.7 billion to $1.5 billion, in 2012 the negative trend continued

with a further decrease of 10% to $1.3 billion. In the last three years the annual

growth of exports to India averaged 3.6% only22, compared to an average annual

growth of 17% in exports to Asia and 8% in total export. It should be noted that the

base year in this calculation is 2009, a year of severe economic downturn.

As of year-end 2012, India is ranked 7th among export destinations and 2nd among

export markets in Asia (accounts for 14% of total exports to the continent). Israel

primarily exports minerals, chemicals and security products to India – these

products are supplied pursuant to new contract and transactions, and therefore

exports to India are highly volatile.

Israel’s main exports to India are minerals (25% of total exports to the country)

which fell by a sharp 30% in 2012 YoY and totaled $315 million. As we stated in the

previous survey for then third quarter of 2012, potash shipments to India, which

were renewed during the third quarter of 2012 contributed to the growth in total

exports to the country, but the Rupee’s depreciation and the change in subsidies to

farmers led to excess potash inventories and to a drop in demand. As a result, India

refrained from signing new contracts, which led to a significant decline in exports

of minerals, the main industrial exports to the country, and to a contraction in

exports to India in Q4 and in the whole of 201223.

Exports of chemicals and oil distillates, the second biggest exports to India, which

accounts for 20% of total exports grew 10% in 2012 YoY and totaled $243 million.

22 Based on the calculation of CAGR (compound annual growth rate), with 2009 as the base year. 23 As the company stated in its financial statements for Q3/2012; the expiry of existing contracts and the delay in the renewal of contracts in India and China is expected to significantly reduce potash shipments to India.

35


Another sector that notably affects exports to India is defense exports, which is

also subject to a great deal of volatility, which affects exports of “defense”

industries24. Exports of industrial equipment for control, optical equipment and

photographic instruments, between January and December of 2012, rose 30 % YoY,

totaling $130 million. Exports of control, measurement and navigation instruments

rose 35% to $30 million. On the other hand, exports of aircrafts declined 5% to $37

million, exports of exports of computer systems fell 41% to $23 million and exports

of electronic equipment fell 48% to $ 11 million only. Overall exports of “defense”

sectors fell by a slight 2% YoY and totaled $246 million – 19% of total exports to

India.

A key industry exporting to India, which contributed to the negative trend was

telecommunication equipment (accounts for 13% of total exports to the country,

17% in 2011) which in 2012 fell 31% to $174 million. On the other hand, exports of

metals rose 30% to $85 million and exports of machinery and equipment rose 41%

to $115 million. Also noteworthy are exports of pharmaceuticals which soared 78%

YoY to $20 million.

France

In line with the negative sentiment in exports to Europe, exports to France

declined 7% in 2012 to $1.27 billion. France ranks 8 among Israel’s major export

markets.

Similar to the breakdown of Israeli exports to Germany, exports to France are

decentralized without one dominant sector. The major industrial exports to France

during the period include: metals (totaled $276 million, down 3%), chemicals and oil

distillates (totaled $191 million, down 31%), agricultural exports (totaled $123

million, up 29%), rubber and plastic (totaled $98 million, down 5%),

telecommunication equipment (fell 26% to $70 million), aircrafts (rose 46% to $70

million), food and beverages (rose 15% to 57 million) and medical and surgical

equipment which fell 11% YoY to $50 million.

Brazil

In 2012, Brazil climbed to the 9th place among Israel’s leading export markets,

rising 4 places from last year. Exports to Brazil during 2012 totaled $1.1 billion,

growing 28% from 2011. Most of the growth in exports to Brazil is attributed to the

24 Sectors included under defense exports are those whose exports primarily stem from defense

companies.

36


sharp increase in exports of minerals, which accounts for 36% of total exports to

Brazil.

Exports of minerals to Brazil (mainly potash) during 2012 rose by a marked 62% to

$405 million. Similar to the situation concerning exports to China and India, most of

the change in the industry’s export levels stems from ICL’s business activity in the

country. As we anticipated in the previous review, during the fourth quarter of

2012 the growth in exports of mineral to Brazil continued, and was the main driver

of the growth in exports to the country.

Chemicals and oil distillates, one of the two key industries exporting to Brazil

(accounts for 30% of total exports to the country) totaled 345 million, rising 10% YoY.

Machteshim-Agan, which holds production facilities in Brazil, has considerable

impact on chemical exports to the country.

Apart from these two sectors, a positive trend was recorded by other exporting

industries: exports of telecommunication equipment rose 9% to $91 million,

exports of pharmaceuticals rose by an impressive 55% to $56 million, exports of

rubber and plastic soared 90% to $35 million and exports of aircrafts marked a

successful year, leaping from exports of dozens of thousands of dollars to $20 million

– following a defense deal signed by one company.

Italy

During 2012 Israeli exports to Italy fell 16% YoY, totaling $1.1 billion – accordingly,

Italy fell to the 10th place among export markets. The decline in exports to Italy was

significantly affected by a sharp decrease in exports of chemicals and oil distillates,

a key exporting industry to Italy (43% of total exports), which fell 23% to $477

million, and from a drastic decline in agricultural exports, which fell 70%, from $103

million in 2011 to $32 million only in 2012.

Other sectors that had an adverse impact on exports to Italy in 2012 were rubber

and plastic (down 22% to $76 million), telecommunications equipment (down 17%

to $50 million), minerals (down 19% to $46 million), textiles (down 8% to $32

million), food and beverages (down 10% to $31 million) and electronic equipment

which fell by a sharp 90% to $2 million only.

On the other hand, machinery and equipment rose 4% to $100 million, metals rose

16% to $73 million and (up 54% to $23 million), and industrial equipment for

control, optical equipment and photographic instruments rose 17% to $41 million.

37


Israel’s major export markets: Change in imports from Israel versus

change in total imports of goods Rate of change in %, exports of goods excluding diamonds

Analysis: Israel Export Institute, Data: Central Bureau of Statistics & Economist Intelligence Unit

* Estimated growth in goods imports 2012/2012

** Growth in goods imports from Israel (excluding diamonds, 2012)

*** The US: growth in goods imports from Israel (excluding diamonds, 2012)

28%

6%4%

1%0%

-7%

-10%

-15%-16%

-23%

-1.4%

4.2%

0.1%2.8%

0.5%

-5.9%

4.0%

-5.5%

-13.4%

-1.8%

Import from World (% change)** Import from Israel (% change)*

38


Exports to the Palestinian Authority The Palestinian Authority is traditionally one of the most important export markets

for Israeli goods – apart from the US, the Palestinian Authority is Israel’s biggest

export destination.

The Palestinian Authority primarily trades with Israel, which is the main export and

import market for Palestinian goods. Other goods exported and imported to

Palestinian territories are conveyed through Israeli custom checkpoints, mainly via

the Haifa and Ashdod ports and Jordan’s border crossings.

In fact, Israel and the Palestinian Authority do not share “commercial borders” and

the Palestinian Authority does not control sea ports or land border crossings. In the

absence of these, the Paris Agreement (the economic addendum to the Oslo

agreements, which regulates the economic relations between Israel and the

Palestinian Authority) establishes a uniform custom code for Israel and the

Palestinian Authority and in their trading with countries across the globe.

Goods exports to the Palestinian Authority in the first three quarters of 2012

totaled $2.2 billion, down 16% YoY. In 2011, exports to the Authority totaled $3.6

billion, up 14% from 2010. For comparative purposes, exports to the UK, Israel’s

second biggest export market in the world25 totaled $3.1 billion.

Exports of goods to the Palestinian Authority26


25 Based on foreign trade data taken from export records; excluding exports to the Palestinian Authority. 26 Because there is one customs code there are no export records for products exported from and imported to the Authority. Trade data are published by the Palestinian Authority as part of the publication of balance-of-payment data.

1.7

1.21.0

1.4

1.82.1 2.0

2.6

3.3

2.8

3.1

3.6

2.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

B$

39


Israel’s 20 leading export destinations in 2012 Israel’s export markets ranking 11th to 20th include Spain, exports to which rose 7%

in 2012 mainly owing to the growth in key exports to the country, chemicals and oil

distillates. Spain ranks 11 among Israel’s key export markets in 2012 with exports

totaling $1.05 billion.

Another country which is a member of Israel’s billion club is Russia, exports to which

slightly topped $1 billion in 2012, up 10% from 2011 (Israel’s 12th export target in

2012). Exports to Russia have been growing steadily in the last few years mainly (but

not only) owing to the continued growth in exports of pharmaceuticals, chemicals

and oil distillates. In 2012, exports of pharmaceuticals rose sharply by 50% YoY

(following a 40% increase in 2011 and 41% in 2010), and exports of chemicals and oil

distillates rose 28% (after rising 2% and 21% in 2011 and 2010, respectively).

Another important exports market for Israel is Japan (ranked 14th) with a 4% rise in

exports to $870 million. Exports to Japan in 2012 was primarily affected by a sharp

leap in exports of electronic components (from $13 million in 2011 to $110 million in

2012), whereas exports of testing and measurement instruments fell sharply (from

$152 million in 2011 to $72 million in 2012)27.

Exports to Vietnam, one of the most important growth markets for Israeli exports

in the last few years, reco4rded an impressive growth. During 2012 exports to

Vietnam soared 120% totaling $750 million. In the last three years exports to

Vietnam leaped by an annual average of 86%, while in the last two years it soared

by an annual average of 145%. Most of the growth during those years stems from a

steep and rapid growth in exports of electronic components – but it should be noted

that excluding this sector, exports still point to a double-digit growth for most

industries that export to Vietnam.

Additional notable targets of Israel’s goods exports were: Belgium – exports to which

fell 13% in 2012 (totaling $780 million), as part of the negative trend in exports to EU

countries and South Korea, with a 3% decline in exports to $700 million, mostly due

to a 46% decline in exports of electronic components. Excluding electronic

components, exports to South Korea grew by 7%.

Taiwan – exports to this country was also affected by the sharp decrease in exports

of electronic components (down 61% in 2012) which led to an 8% decline in total

exports to $680 million. On the other hand, measurement and testing instruments

27 This sector is a derivative of the semiconductors industry and is affected by the volatility of this industry. Many companies categorized as manufacturers of measurement and testing instruments are engaged in the development, manufacture and marketing of testing and processing systems and equipment for the global semiconductors market.

40


rose sharply by 36% and offset the decline in exports of electronic components.

Excluding these two sectors, exports to Taiwan remained unchanged from last year.

Canada – an important target market to which exports slipped 4% in 2012 to $705

million. Exports were affected by a 44% decline in chemicals and oil distillates

following unusually high exports in 2011. Excluding this sector exports to Canada

grew 9%.

While Malaysia is ranked 16th with exports of $765 million, they almost entirely

stems from exports of electronic components.

Ranking Country Exports (M$) 11/12 %change

11 Spain 1,045 7%

12 Russia 1,014 10%

13 Cyprus 907 -2%

14 Japan 868 3%

15 Belgium 780 -13%

16 Malaysia 765 7%

17 Vietnam 753 121%

18 Canada 707 -4%

19 South Korea 702 -3%

20 Taiwan 679 -8%


36%

10%7%7%

3%

-2%-3%-4%-8%

-13%

41


Changes in exchange rates

Export data which are stated in dollars are, among others, affected by the frequent

changes in the shekel’s rate against the dollar and the Euro, and the dollar’s rate

against the Euro. We estimate the dollar’s weight in the developments of Israeli

exports at 75%.

In 2012 the Euro’s average rate was $1.289, 7% lower than its average rate in 2011,

which was $1.392. This decline in the Euro vis-a-vis the dollar partially explains the

slowdown in the growth of Israeli exports to European countries.

In the first quarter of 2012 the dollar-shekel’s average exchange rate was 3.77, up

4.7% from its average exchange rate in the first quarter of 2011. In the second

quarter of 2012 the dollar-shekel’s average exchange rate was 3.82, up 11.1% from

its average exchange rate in the second quarter of 2011. In the third quarter of 2012

the dollar-shekel’s average exchange rate was 3.99, up 12.4% from its average

exchange rate in the third quarter of 2011. In the fourth quarter of 2012 the dollar-

shekel’s average exchange rate was 3.94, up 5.9% from its average exchange rate in

the fourth quarter of 2011.

In the whole of 2012 the dollar-shekel’s average exchange rate was 3.86, up 7.8%

from its average exchange rate in 2011.

In contrast, in the first quarter of 2012 the Euro-shekel’s average exchange rate was

4.94, up by a marginal 0.4% compared to the first quarter of 2011. In the second

quarter of 2012 the Euro-shekel’s average exchange rate was 4.92, down 1% from its

average exchange rate in the second quarter of 2011. In the third quarter of 2012

the Euro-shekel’s average exchange rate was 4.99, down 0.6% from its average

exchange rate in the third quarter of 2011. In the fourth quarter of 2012 the dollar-

shekel’s average exchange rate rose to 5.03, but remained unchanged compared to

the average exchange rate in the fourth quarter of 2011.

In the whole of 2012 the Euro-shekel’s average exchange rate was 4.95, 0.5% lower

than its average exchange rate in 2011.

42


The shekel against the dollar, 2010-2012

Analysis: Israel Export Institute, Data: bank of Israel

The shekel against the Euro, 2010-2012


43


For a more accurate measurement of the development in exchange rates, the Bank

of Israel measures the real-effective exchange rate of the currency basket, which is

composed of the shekel’s exchange rate against the currencies of Israel’s 30 main

trading partners, net of the effect of inflation differences vis-a-vis each country.

During the second half of 2011, the shekel’s appreciation against the effective

currency basket came to a halt and the shekel began to lose strength, a trend that

persisted in 2012 until the third quarter when the currency basket reached a record

level of 116.9 (September 2012), the highest since year-end 2009. In the fourth

quarter of 2012 the shekel began appreciating vis-à-vis other currencies rising 1.2%

during the quarter (a trend that continued into 2013). Overall in 2012, the shekel

depreciated 4.4% vis-à-vis the currency basket, following a 3% decline in its value in

2011. However, the real-effective exchange rate still points to a 12% increase from

the average level in the years 2006-2007, which contributed to the rise in exports in

these years up to the outbreak of the global economic crisis.

It should be noted that each 5% decline in the real-effective exchange rate

contributes to a real 1% increase in Israeli exports, with an 8-14 months’ lag in

effect. An appreciation in the real-effective exchange rate leads to a similar effect,

but in the opposite direction.


90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

The Currency Basket – Real-Effective: 1999- 2012

44


Export Forecast for 2013 Following a significant deceleration in the growth of global economy in 2012,

according to forecasts in 2013 we are expected to witness a gradual pick-up in the

growth of global economic activity, which will accelerate in the second half of

2012. While the general weakness in many economies is expected to continue in

the first quarter of 2013, already in the second half of 2014 there will be a gradual

improvement in the global economy. Both sides of the political map are likely to

reach a fiscal cliff deal with an agreement on a clear fiscal policy, while the Chinese

stimulus plan and economic recovery measures in Europe are expected to underpin

growth in these regions. The growth momentum will continue into 2014 and

support the trend of recovery of global economy and world trade.

The World Trade Organization (WTO) recently revised downwards its projections for

trade growth in 2013 from 5.6% to 4.5%. The main factors for the downward revision

were the continued debt crisis in Europe, the slow recovery of the US economy and

the slow growth of China’s economy. These factors contributed to a significant

declined in global demand and to the deceleration of global trade activity in 2013.

The WTO projects that in 2013 imports by developed countries will grow by 3.4%

and imports and developing economies will grow by 6.1%.

At the same time, 2013 is expected to be better than the prior year, which

recorded a moderate 2.9% growth in global trade.

Global trade, 2008-2013

Seasonally adjusted, base index Q1.2005 = 100

Source: WTO

45


Change in global trade, 2008-2013

Annual rate of change, in %

Source: WTO

(*) 2012, 2013 - forecast

Israeli exporters are expected to face waning demand in Israel’s key export markets

in Europe and with a moderate increase in imports to the US (bear in mind that

despite the accelerated growth in exports to developing markets in the last few

years and growth in their share of the exports pie, traditional markets still represents

more than 60% of total Israeli exports). At the same time, the shekel is depreciating

vis-à-vis the currency basket, following a real decline in the shekel in the last five

years.

Rates of growth in imports by Israel’s key target market:


13%

17%

-5%

3%

34%

24%

4%

9%

23%

16%

3%5%

2010 2011 2012 2013

E.U Asia U.S

46


The following chart is based on weighted growth data and growth forecasts for the

imports of several chosen economies, which constitute Israel’s main target markets.

This model presents the anticipated changes in imports by these markets, whose

weight in exports is 80%, and which therefore provide a good indication of future

trends.

The model shows that after dropping 5%, imports by key target markets in the EU is

expected to grow by 3% in 2013. US imports is expected to grow by 3% and imports

by Israel’s key target markets in Asia are expected to increase from 4% to a growth

rate of 9% in 2013.

On the back of the aforesaid, we expect that exports of goods and services,

excluding start-up companies is expected to grow by 5% in 2013, in dollar terms.

And total $95.5 billion.

Exports of goods and services excluding start-up companies and excluding

diamonds are estimated to total $86 billion in 2013, up 5% from $81.5 billion in

2012.

Amid the decline in imports by EU countries exports to the EU is expected to grow

by 4% in dollar terms in 2013. Exports to the US are expected to increase by 7% in

dollar terms while exports to Asia are expected to grow 11% in dollar terms, mainly

in the second half of 2013.

Exports of goods and services – comparison in dollar terms, 1995-2013

*IEI’s estimate

** IEI’s forecast, excluding export of services by start-up companies

15%

8% 7%3%

15%

23%

-13%

-3%

11%

20%

9% 9%

14% 15%

-17%

18%

13%

0%

5%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

developments and trends - export

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