For Israel's high-tech industry, it's beginning to look a lot like the 1990s. After several years of stagnation, signs abound that the sector is mounting a comeback. Demand for high-tech workers is up almost 19% this year, foreign investment rose sharply in 2005, and exports continue to climb.
What's more, the number of new startups that form the backbone of the country's tech industry rose for a second year in a row. The industrial parks known collectively as Silicon "wadis" are on track after being hit hard during the global slowdown that followed the September 11 terrorist attacks.
NEW VENTURES. What's fueling the boom? For starters, economic recoveries in the U.S., Western Europe, and the Far East have sparked an upturn in demand. With 85% of the local high-tech industry's production earmarked for foreign markets, exports are key to the continued prosperity.
Israeli civilian high-tech exports rose by nearly 10% in 2005, to $16.6 billion. They represent nearly half of Israel's industrial exports, the highest percentage anywhere in the world. When defense exports are added, the figure rises to nearly $20 billion. "We're looking for a doubling of high-tech exports by the end of the decade," says Elisha Yanay, chairman of the Israeli Association of Electronics & Information Industries and general manager of the Israeli operations of Motorola (MOT). Initial estimates are for the high-tech industry to grow by at least 10% again in 2006.
Much growth is expected to come from the hundreds of startups established in recent years. This year, more than 200 new ventures joined the ranks. Many are founded by entrepreneurs looking to replicate earlier successes. The Israel Venture Assn. estimates that the country now has more than 2,000 startups in various stages of development.
ACQUISITION TARGETS. In 2005, the local and foreign venture-capital funds plowed $1.5 billion into new ventures in communications, software, the Internet, and life sciences. The figure is still only about half the record level of 2000, at the height of the global tech bubble, but today's startups are showing more promise than many of those of the last decade. "The situation nowadays is far healthier, and valuations have come down to earth," says Zeev Holtzman, CEO of Tel Aviv based Giza Venture Capital, a leading local venture firm.
It's not just this decade's new companies generating growth. Some startups established in the early to mid-1990s have also developed into local giants, employing thousands. Among the major global leaders are companies such as Check Point Software Technologies (CHKP) in Internet security, Comverse Technology (CMVT) in telecommunications services, Nice Systems (NICE) in the field of digital recording platforms, and medical-device maker Syneron Medical.
Others have been gobbled up by industry giants like Cisco Systems (CSCO), which has spent more than $1 billion to buy Israeli startups in recent years.
TURNING TO STARTUPS. And there's plenty of talent to go around. Following the wave of mass immigration from the former Soviet Union in the early '90s, Israel boasts 135 engineers per 10,000 employees, compared with 70 in the U.S. and 65 in Japan. Competition is heating up for those workers, and wages are expected to rise by 8% on average this year in high tech.
Software and hardware engineers, as well as programmers conversant in the Java and .NET languages, can almost write their own tickets. "The big change is that workers are leaving well-known companies again to find jobs at startups developing new technologies," says Edith Padan, CEO of MIT, the high-tech subsidiary of Manpower Israel. That wasn't the case in the 2002-03 recession, when more startups were closing than opening.
Of course, Israel isn't alone in vying for investment and demand from regions such as North America and Europe. China and India are increasingly alluring to some of the world's tech giants (see BW, 11/28/05, "Cisco: Sold On India", and 12/08/05, "Now Microsoft Wagers on India").
PLUS SIDE. Yet Israel is also benefiting from the emergence of India and China as high-tech forces. Those countries have become increasingly important customers for Israeli companies. In the past few years a growing number of Israeli outfits have opened up shop in India to capitalize on low-cost integration and programming talent. "Israel's biggest advantage is knowhow and innovation, and that's likely to remain the case for some time to come," says Carmel Sofer, general partner at Gemini Israel Funds, a Herzliya-based venture firm. Nevertheless, he believes that this could change in the future.
Foreign companies are continuing to expand their local research centers and production facilities. They accounted for a substantial chunk of the $6.8 billion in foreign investment in the first three quarters of 2005. On Dec. 1, Intel (INTC) announced that it was building a $3.5 billion chip plant in Israel, the largest investment ever by an industrial company here (see BW Online, 11/29/05, "Intel's Mobile-Chip Play in Israel"). The plant will be Intel's second 45-nanometer plant in the world, with the first being built in Arizona.
Israel has become a major center for the semiconductor giant and was responsible for the development of Intel's Centrino mobile technology that powers millions of laptops. Other big names in high tech -- including Cisco, Hewlett-Packard (HPQ), Vishay Intertechnology (VSH), IBM (IBM), and Siemens (SIE) have all announced large-scale investments or have acquired Israeli startups in recent months.00
DOUBLE-DIGIT GROWTH. "The competition for foreign investment dollars is getting tougher, but our big advantages still remain engineering quality and the level of innovation," says Yair Ofek, deputy director general of the Israel Export Institute.
Foreign companies paid $2.5 billion for local acquisitions in the first three quarters of 2005, compared with $1.8 billion in all of 2004. High-tech outfits are also tapping local and foreign stock markets. "While Nasdaq remains the most prestigious, the higher threshold has forced many Israeli high-tech companies in the past year to go public on London's AIM or the Tel Aviv stock market," says Daniel Meron, a technology analyst at RBC Capital Markets in Tel Aviv.
Most projections are for Israel's economy to grow at more than 5% in 2006. A big reason is the expected double-digit expansion in high tech. But with a small home market, growth at Israel's high-tech industrial parks will depend almost exclusively on the continued strong performance of the U.S., European, and Far East economies.
Sandler is a correspondent for BusinessWeek in Jerusalem
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