Netafim’s Automated Irrigation Systems Incorporate the Iron Dome’s Command-and-Control Technology

November 18, 2016

Is Israel a country that devours its industrialists, as leading members of the economy claim nearly every day? As we enter a new year, does the government have to carry out soul searching in light of calls by senior Industrial Association officials to break ranks, claiming that the state is putting the nail in the industrial sector’s coffin?

It depends on who you ask. Apparently, there are industrialists who think differently. One of them is Ran Maidan (46), Netafim’s CEO for the last two years.

Maidan inherited a veteran company considered one of the world’s most advanced and promising smart irrigation firms that is working hard to maintain that position.

Netafim was founded by Kibbutz Hatzerim in 1965, and today operates 17 manufacturing plants in Israel and abroad while employing 4,300 workers.
If in its early years, fellow members from Kibbutz Hatzerim, Magal and Yiftach – Netafim co-owners at the time – were fit to choose company management, that may not be the case today given growing global competition and economic crises. Since Netafim was founded, the company has changed ownership twice. In 2011, Permira funds became the majority shareholder and replaced the company’s senior management.

When Maidan entered his role in 2014, he formulated a dynamic five-year strategic plan that is annually reviewed and updated. He says that the company is growing more rapidly than planned, and maintains a 30% share in the global smart irrigation market. While Israel’s commodity exports have stalled, Netafim has reported 10% annual sales growth. How is the company doing it without hefty tax benefits? Primarily through innovation.

“We work throughout the world, and each country offers advantages and disadvantages,” Maidan says. “All told, the commercial and business conditions in Israel are most certainly reasonable. I’m not a partner to those who cry that it’s impossible to do business in Israel. We’re happy working here, manufacturing in three plants and employing over 1,000 workers. All of our R&D is done in Israel, as is all of the global production for our advanced drippers. We are a global Israeli company and are proud of it. We’re setting up plants in Israel, and expanding production abroad according to our needs. Currently, we’re building a production line for new products. When research, development and manufacturing are integrated, results are better.”

According to Maidan, Netafim’s sales will approach $900 million in 2016. “The company is experiencing handsome growth compared to the previous year. We estimate annual growth of 5-10% and even higher growth in profits. We’re improving EBITDA (earnings before interest, taxes, depreciation and amortization) by 15% even though the agricultural market is tougher than in the past. I can say that our results over the last two years have been very good.”

Companies exporting to non-growth markets are getting hurt
Netafim’s sales growth comes on the backdrop of weak Israeli industrial exports. “Export figures aren’t encouraging,” Maidan admits. He puts the blame on a stronger local currency (shekel) over the last few years, Europe’s economy, and an erosion in Israeli manufacturing competitiveness.

“Global commerce has actually grown, but there are places that aren’t growing at all, while others are growing significantly, and whoever is exporting to a non-growth market is getting hurt,” Maidan says. “Whoever wants to boost their exports must look at growth countries like India, China and African states. The global market will be more competitive. There are manufacturing industries in India, and our global competitive advantage is being eroded. Despite that, I can say that Netafim is growing, and is in a good place. The main way for us to deal with competition is to create a technological advantage. We won’t beat the Chinese or Indians in manufacturing efficiency, but in new technologies.”

According to Maidan, the government can rejuvenate industrial growth through transportation infrastructure investments, the support of exporters entering new markets, and better education at all levels. This will lead to the development of more engineers, technologically-skilled individuals, and managers with a better perspective of the global market and ways to navigate growth within it. “The country has very high capabilities and can tip the scales back to growth,” he says.

The strategic plan: Sell a comprehensive solution
Netafim bases its growth on innovative technologies alongside the building of a commercial package for customers, starting with assistance in planning what crops should be grown. “Part of the strategic plan is to sell not only an irrigation system, but also a comprehensive solution that begins with a customer feasibility study – which land to utilize and which crop to grow. We help connect customers to financing bodies, carry out joint project planning, and offer agronomic and technical support. For example, in a $190 million deal we signed a few months back in Ethiopia, we connected the customer with Bank Hapoalim in order to get financing.”

Netafim’s line of irrigation systems includes dripperlines inserted 30cm (11.8 inches) under the ground’s surface that are unaffected by plowing and harvesting above. Some of the company’s systems integrate water with fertilizers. But Netafim’s masterpiece is its automated and computerized systems, which include technology developed by mPrest, the company that developed the command and control systems used in Israel’s renowned Iron Dome air defense system.

“If five years ago growers went out to the field and checked whether it needed to be irrigated, today in-field sensors that work around the clock and check the ground’s moisture, salinity and plant size are doing the same thing,” Maidan says.

“The sensors upload data to the cloud, and I can check Netafim-irrigated corn fields in the US or apple orchards in China. A farmer can relax at the beach while receiving field data. A worker at Kibbutz Hatzerim attending a social event can see that one of his American clients is having a problem, and resolve it with him.”

Maidan says Netafim’s main markets are in developed countries in North America, Latin America and Europe, as well as in South Africa and Australia, where the company maintains a 35-50% share of the advanced irrigation market. “During the last two years we’ve stepped up our efforts in developing countries – China, India, African countries, and Southeast Asian countries,” he says. A significant part of Netafim’s increased sales comes from there. The challenges in operating in these countries – in addition to the presence of enormous, highly competitive companies – are the large investments required there. In big countries like India and China, the company also needs know-how to help it focus on more profitable deals so as not to waste managerial resources when evaluating less-profitable deals.

Another challenge is the need to adapt the company’s product basket to various crops. Irrigation solutions for rice are not similar to those for orchards. However, contrary to common thought over the last few years that developing countries prefer non-innovative products since the technology is expensive and hard to operate, Maidan says that things are different today.

“Growers in developing countries ask for the most advanced products, not the least expensive ones,” he says. “We sell products in China that I’m not so sure that growers in California would buy. Things are happening in the developing countries. Just like at one time they didn’t have landline telephones and went straight to mobile phones, the same is true with our technology. We need to sell competitively, and explain to the grower why it is worthwhile for him to pay more.”

Believing in long-term investments
Even though the idea that the agricultural sector needs to grow – since land is limited and the population is growing – has been common thought for a decade, this analysis doesn’t always stand up to the test of reality. For example, recently the price of agricultural commodities like corn and soybeans have been low in the global markets, which reflects that investments are being made in agriculture.

Despite the current relative low point, Netafim continues to believe in long-term investments. In October, the company announced the acquisition of the Central American company RyM in order to expand its activities in the region, especially given the global demand for crops native to the area. Until the acquisition, RyM was Netafim’s distributor in the region, and with the deal, Netafim has established its 29th subsidiary, Netafim Central America.

Founded in 1989, RyM employs about 100 people, is a wholesaler of irrigation equipment, and operates in six countries – Guatemala, El Salvador, Honduras, Nicaragua, Panama, and Costa Rica. The company specializes in irrigation initiatives primarily involving sugarcane, pineapple, vegetables, coffee and bananas – important regional crops that are enjoying a growing global demand. Netafim acquired 60% of the company for a few million dollars, while RyM’s previous owners, Alberto Arguello and Carlos Enrique Gonzalez, will retain the remaining 40% share.

First published in TheMarker, September 28, 2016

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