How the AI Race is Changing Narratives in Israel
Much has been made about the vaunted “Startup Nation”, and for good reason. History tells us that Israel’s tech talent can push the limits of what is possible in the digital age. Tech hotshots have built, wheeled, and dealed to the tune of billions of dollars across a variety of sectors. And in the face of extraordinary circumstances, the industry has been remarkably resilient. Israel has leveraged this to its advantage militarily, economically, and culturally. But, a new frontier is fast emerging, and it figures to rewrite much of what we know about Israel and its place in the modern world. Punching above its weight has been Israel’s calling card for some time, and although it figures to be a significant character in the unfolding story of AI, it will sooner or later start to feel the effects of its limitations. Israel may have to find itself leaning into its strengths while simultaneously finding creative solutions to get around its weaknesses.
Israel has proven world class at all the parts of the AI stack that fit on a plane. All the parts that don’t – compute, raw minerals, power, remain challenges. At various institutional levels, Israel looks to fill these gaps by leveraging its strengths. What costs will these strategic tradeoffs incur, and how will Israel continue to pay them are questions that lawmakers and founders alike are, and will continue to wrestle with moving forward.
According to a 2024 report from Google and RISE Israel, there were about 2,300 active AI startups – about a quarter of the country’s tech companies. Loaded with top shelf talent, the world’s big tech companies such as Google and OpenAI have shown their willingness to pay top dollar for it, shelling out amounts in the billions. This talent finds itself sitting in a variety of sectors, notably software and cybersecurity, but chip design is just as robust. Intel has a long history of developing chip design in Israel, and Nvidia is continuing that trend, employing more than 5,000 talented Israelis. And big number acquisitions continue to stream in, despite shakeups in headcount and expansion abroad. Israel can compete with anyone on this side of the equation.
On the other side of it, infrastructure can’t keep up with the increasing demand fueled by Israel’s AI boom. The Electricity Authority froze new data-center grid connections for 140 days, after requests reached nearly three times the country’s average power draw. The power grid is not equipped to handle the country’s growing needs. But power is only part of the physical problem. Another lies in compute. The national supercomputer project seeks to help Israel become more self-reliant, and yet the parts that make it run are themselves outsourced. These problems compound each other – this supercomputer was conceived to give Israel compute that it controls, yet it was built by a foreign firm and foreign chips run it. Israel’s Intel plant in Kiryat Gat is turning out chips that are increasingly outdated and not up to the task to fuel the next generation AI push. Ultimately, Israel is at the mercy of the limitations of its geography and demographics, and any potential solutions that address the aforementioned issues will have to find suitable workarounds for them.
At the policy level, lawmakers have already begun exploring ways to shore up deficiencies in the AI stack. The American-Led Pax Silica agreement, of which Israel is a founding signatory, is a promising step in securing access to key resources. This initiative’s stated mission is to foster growth and innovation while securing AI supply chains, squarely positioning Israel to be a primary beneficiary. In addition, Israel has signaled interest in courting the Philippines, offering expertise in cybersecurity and chip design in exchange for raw materials such as nickel.
The government has also taken notice of the shortage of power infrastructure. A ~36 billion Shekel expansion of the grid is underway, but skeptics claim it may still not be enough.
As valuable as Israeli tech and talent has proven itself time and time again, at a certain point, the hardware question becomes impossible to ignore. Bringing in foreign entities, whether by way of business dealings or by diplomacy, will have to be the remedy for the foreseeable future, as under the current paradigm, total AI self sufficiency remains unrealistic.
Israel can’t afford to take its time positioning itself for the AI arms race. Despite the onslaught of diplomatic difficulties Israel has faced in the wake of the Gaza War, it still appears to have suitors for its abilities in the tech and defense industries, and whatever partners it can secure will play a vital role in anchoring its AI ambitions. At the company level, it can continue to bolster its case by producing tech and talent that is indispensable, as in the case of Nvidia’s announcement of a new research and development campus in Kiryat Tivon, this development itself reinforcing the idea that Israel’s primary pathway to access to critical hardware and resources is to trade its knowledge and talent for it.
On the policy side, becoming a crucial services-centered node in the burgeoning global AI supply chain is surely at the top of any foreign policy analyst’s wishlist, and forging alliances a la Pax Silica seems to be the path forward. It remains to be seen if other such agreements can be secured, and what role Israel will play within them. The future of Israeli tech depends on it, and many eyes, ears, and wallets will be paying close attention.
Startup Nation was always a phrase about things that move. Code and talent travel well, and a company built in Tel Aviv can be sold in California without anyone shipping a thing. That was the advantage, and it still is. But the AI era rewards what stays put just as much – chip plants, minerals, power stations, and the machines running at scale. Israel excels at the first kind of asset and runs short on the second, at the moment the second is beginning to grant much more leverage. It will keep designing what comes next. Whether it holds onto any of it depends on partners it does not fully control, in a world that has grown less generous toward it.
