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The secret to success of an Israeli company that’s the darling of Warren Buffett

Ephrat Livni

Iscar is a metalworking tool manufacturer in Israel that few people had heard of until the Oracle of Omaha, Warren Buffett, blessed it with an investment in 2006. It was the first time Buffett’s Berkshire Hathaway invested in a company outside of the US, and one of the biggest foreign investments in an Israeli company ever, amounting to about $4 billion for 80% of the metalworks.

Buffett’bought the remainder of Iscar for another $2 billion in 2013, valuing the company at $10 billion. Although Iscar doesn’t reveal its numbers, Haaretz reports that “sources close to the company” say Iscar has made about $6 billion for Berkshire Hathaway since its initial investment, meaning the bet has at least paid for itself and possibly yielded about $1 billion in profits. The company’s sales have boomed and Iscar is now the jewel in the crown of the IMC Group, one of the world’s largest international metalworking conglomerates, owned by Berkshire Hathaway.

When he acquired Iscar, Buffett attributed the company’s success to its exceptional management. Apparently, that’s still the reason that this remote manufacturer in Israel’s upper Galilee region remains a quiet powerhouse. According to Haaretz, the secret to Iscar’s appeal and success lies in precisely the reasons some might have expected it to fail.

Iscar is headquartered in Migdal, not far from the border with Lebanon, where military skirmishes occur. It’s far from hip Tel Aviv, where much of the Israel’s innovation happens. But it’s the second-largest employer in the region, after defense contractor Rafael, and its 3,500 workers are reportedly utterly devoted to the company, perhaps in part because there are fewer opportunities in the north than in the capital.

However, that’s not the sole reason that Buffett and Iscar’s employees love the company. Another reason is that Iscar seems to be as dedicated to employees as they are to the company. It offers nearly total job security and it’s not snobbish about who it hires. There is almost no turnover at Iscar, which hires engineers from local schools and recruits management from within its ranks, rather than seeking students from prestigious US universities, for example. Iscar also trains talented local workers with minimal education and puts them in production and sales positions. And of the 3,500 employees, more than 1,000 are of Druze or Arab origins, which is an unusually high proportion of non-Jewish workers in an Israeli company.

One source told Haaretz, “When a company like Iscar gives an opportunity to a local resident, including a car, fancy meals and professional interest, he is willing to give his soul [in return]. People arrive at 5 AM and leave at 11 at night. They know they won’t get such an opportunity anywhere else. For the non-Jewish employees, who can’t work in a defense company such as Rafael, this motivation is even stronger.”

Interfaith employment

Iscar isn’t the only Israeli company to to attract foreign investors with its products and diverse workforce. In December, PepsiCo. purchased SodaStream, which is best known as the maker of a consumer home carbonation product. The $3.2 billion purchase allows Pepsi to expand its healthy beverage options.

SodaStream employs workers from all of Israel’s population. But the company was caught up in international controversy and boycotts in 2014 because its main factory was located in the occupied West Bank. The factory was shuttered in 2015, and a new facility was opened in the Negev desert.

More recently, SodaStream has sought to position itself as a politically progressive company that emphasizes the equal treatment of its Jewish, Palestinian, and Bedouin employees, who work alongside one another. This year, SodaStream opened a new factory in Gaza, with its CEO Daniel Birnbaum noting in December, “We want the people of Gaza to have jobs, real jobs, because where there is prosperity, there can be peace.”

SodaStream also hosted what it told Quartz at the time was Israel’s largest ever Iftar celebration on the final day of the Muslim holiday, Ramadan, in May. Nearly 3,000 Israelis and Palestinians joined the gathering at its factory in the southern Israeli town of Rahat, home to a large Bedouin population, to break bread after holiday fasting.

Birnbaum recently gave a TEDX talk in Tel Aviv in which he explains how he took the then-$6 million company from the brink of bankruptcy in 2006 to the point where it became an appealing target of acquisition by focusing not only on business, but on the people working within it.

Birnbaum says that on the first day that 150 Palestinians joined the 600-strong SodaStream workforce in 2007, three Jewish-Israeli employees resigned in protest. “But 597 stayed,” Birnbaum notes optimistically. And in short order, all workers not only labored together but created a tradition of observing each other’s holidays.

 

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