Dynamics of Industrial Location

A Kibbutz-based MNC

Manufacturing is not normally associated with Israeli Kibbutzim. The Kibbutz is an agricultural settlement based on socialist principles in which all activities are communally organized and controlled. For many years, even child rearing was a community rather than a family responsibility.

However, a business firm called Netafim, founded in 1965 on Kibbutz Hatzerim, has developed as the world's largest enterprise designing, manufacturing and distributing irrigation systems. I was lucky enough to visit Netafim Hatzerim in June 1999 as part of a field trip organized by the Industrial Commission of the International Geographical Union (IGU). Professor Baruch Kipnes of the University of Haifa and Professor Yehuda Gradus of the Ben Gurion University of the Negev, Beer Sheva did a great job in organizing the conference and this field trip. Thanks!

By 1999, Netafim had three manufacturing facilities in Kibbutz Hatzerim, Kibbutz Magal and Kibbutz Yiftach located in north, central and southern Israel respectively. In addition, Netafim had built two manufacturing plants in California, USA, another one in Western Australia and organized a global sales distribution network. Netafim established its first overseas sales subsidiary in the US in 1981. Twenty more subsidiaries were established subsequently around the globe, supplemented by numerous sales agents. The subsidiaries tailor their services to meet the specific needs of local customers.

Netafim's growth has been especially rapid since the 1980s. In 1970, the area irrigated by Netafim's equipment was around 75,000 hectares, in 1980 around 120,00 hectares, in 1990 almost 600,000 hectares and in 1998 about 2,400,00 hectares. (The figures are approximate because I have read them off a graph published by Netafim in a Company Profile). From 1991 to 1998, sales increased almost five-fold in nominal terms, from about US$50,000 to US$240,000.

Netafim's core innovation is a drip irrigation system which is designed to irrigate areas characterized by low rainfall, poor water resources, dry desert soil, high levels of soil salinity and very hot summers. Netafim's innovation utilizes small amounts of water much more effectively than traditional irrigation systems.

The system is widely used in Israel and in 80 other countries. In 1997 30 billion drippers were in use. The 5 manufacturing plants can produce 7 billion drippers a year, 70% of the sales outside Israel.

Around the core invention of the dripper, Netafim developed drippers and dripperlines, micro-irrigation equipment, mini sprinklers, landscape irrigation equipment and services for turnkey projects. Turnkey projects mean that Netafim develops services up to entire, working systems and then 'turns' it over to the customer in full working order. Netafim's turnkey projects are offered on a modular principle, allowing a customer to choose from a range of services, including feasibility studies, irrigation design, equipment selection, procurement and transportation, installation and implementation, training, irrigation and crop management, and consulting and marketing. Netafim has sold irrigation systems for greenhouses, field crops, vegetables and orchards in industrialized and developing countries.

To maintain its commitment to innovation, Netafim spends 5% of its sales revenues on research and development (R&D). Netafim has an R&D department which designs products and production R&D in each plant to focus on process technologies in close cooperation with production personnel. The marketing connections provide constant feedback to R&D.

Netafim has several web sites including: postmaster@netafim.com

This brief reference to Netafim illustrates many aspects of industrial location dynamics, including:

1. The close integration of manufacturing with other sectors of the economy, notably agriculture and various service activities (such as design, training and sales activities).
2. The importance of innovation to the growth of firms and to the internationalization process. In this regard, note that as of 1999, Netafim is neither a small firm nor a 'giant'. Rather, it is 'somewhere in the middle'. Indeed, Netafim illustrates a type of 'backbone firm', highly innovative medium sized firms with strong connections to home regions even as they internationalize, that is discussed in chapter 10.
3. The importance of location to the innovation process. In this case, an innovation was developed to overcome significant disadvantages in the physical environment related to water supply.
4. The importance of manufacturing to local development. Netafim has provided income and jobs to the people of several Kibbutzim not available to Kibbutzim that rely solely on agriculture. Netafim has helped stabilize these communities, provided a source of funds for Kibbutzim activities, including funds for young people who leave, and it has provided an additional range of professional, skilled and unskilled occupations for residents. In many cases, these jobs have involved overseas assignments of several years.

Can Netafim survive in a highly competitive global economy? It can draw on substantial expertise, established connections and a close understanding of irrigation needs around the world. Crucially, Netafim's R&D investments are focused on further developing its established competitive advantages. Its future is likely to depend on its ability to develop further innovations.