High-tech sector making a recovery in Israel

BACK ON TRACK: The dot-com crash together with the Palestinian uprising hurt the Jewish state's high-tech sector, but things are finally starting to look up again

NY TIMES NEWS SERVICE , KIRYAT GAT, ISRAEL

Tue, Dec 27, 2005 - Page 12

Israel's high-tech sector is having its best year since the dot-com implosion in 2000, and the evidence includes this working-class town, where bulldozers are rapidly clearing hectares of land for a huge, state-of-the-art chip-making plant.

The Intel Corp, the world's largest chip maker, announced this month that it would invest US$3.5 billion to build a new plant, adjacent to an existing one that makes Pentium 4 chips, at an industrial park in this town in southern Israel, which has long struggled economically despite the money poured into it.

Intel already has six design and production facilities scattered across Israel and more than 6,000 workers, making it one of the country's largest private employers. It will be adding at least 2,000 jobs at the new plant, which will produce 12-inch chip wafers, the company says.

"Intel has a long history of high-tech manufacturing in Israel, and this is a natural continuation of that," said Alex Kornhauser, the general manager of Intel's operations in Israel. "When the manufacturing requires highly skilled people, we believe we have a competitive advantage here."

The Intel project is a leading example of the overall resurgence of the high-tech sector, which generates more than US$13 billion of annual exports, or about 40 percent of Israel's total exports, according to government figures.

From large manufacturers such as Intel to startups financed by venture capital firms in the Tel Aviv suburb of Herzliya, the industry appears to have largely recovered after taking a pounding five years ago. Israel now has more than 70 companies listed on the NASDAQ, more than any other country outside of the US.

5 percent growth

With high-tech companies playing a significant role, Israel's economy is expected to grow about 5 percent this year, after growing about 4 percent last year. This follows three years of economic turbulence during which the country suffered one of its worst recessions.

Throughout the 1990s, the technology industry modernized and reshaped an economy with socialist roots and many large state-run companies. The sector established a reputation for producing innovative startup firms that are often incorporated in the US. But in 2000, Israel was hit not only by the dot-com collapse, but also the Palestinian uprising, which drove away foreign players who had been crucial to high-tech development here.

"Before the crash, money was just flowing here, madly," said Joseph Morgenstern, a business consultant who has published The Israel High-Tech and Investment Report for 21 years. "Venture capitalists were investing in startups that had no chance of showing black on their balance sheets. A lot of people lost money and jobs."

The number of high-technology workers in Israel peaked at more than 66,000 in 2000, then fell to around 53,000 in the years 2001-03, and has rebounded to reach 61,000 this year, according to the government's Central Bureau of Statistics.

Unwilling investors

For several years, Israeli venture capital firms did not even hold their annual meetings here because so few foreigners were willing to attend, said Yossi Sela, a managing partner at Gemini Israel Funds, a leading venture capital firm.

"Things have changed dramatically in the past couple years," Sela said. "Investors are again flocking to this country."

Pointing to a recent success, he cited Saifun Semiconductors, which makes flash memory systems used in digital cameras, mobile phones and other consumer electronics. In 1998, Sela's firm began investing in Saifun in its early stages. Last month, the company was listed on Nasdaq and raised US$121 million in its initial public offering.

Israelis point to several factors in the nation's high-tech success.

Israel's military has been a leader in adopting new technology, and it works closely with civilian companies. One example is Elbit Systems, which makes night-vision equipment and has customers that include the US military.

Also, Israeli men and women are required to perform military service after high school. Many gain experience in a variety of high-tech systems, which leads directly to future careers.

And Israel's close ties with the US have made it a natural choice for young companies searching for investors, stock listings and marketing guidance.

The Israeli government, meanwhile, has sought to tap the high-tech sector to develop isolated areas such as Kiryat Gat.

Kiryat Gat is a development town, one of many established by the government over the years with the intention of directing immigrants to more sparsely populated areas. Such towns have usually fared poorly.

The Israeli government provided substantial subsidies for Intel to build its first plant here, which opened in 1999. This time, the government's benefits package is even larger, with incentives totaling US$525 million.

Technicians lacking

Kiryat Gat lacks enough engineers, technicians and other skilled workers to meet Intel's needs. Fewer than half of the more than 3,000 workers at the existing plant live in the town, according to Kornhauser. He is among those who commute an hour each way to homes in Jerusalem.

But the company has been able to recruit from the cities where the high-tech industry is clustered, including Tel Aviv, Jerusalem and Haifa.

While most Intel factories are in the US, Intel's chief executive, Paul Otellini, said earlier this year that federal corporate taxes had led the company to consider new plants in countries with lower tax burdens.

Israel has long been regarded as a high-tax country, but the Israeli government offered Intel a 10 percent tax rate, compared with 35 percent in the US, Otellini said.

"The benefit package put forth by the Israeli government was part of the equation," Kornhauser said. "This is a good investment for Intel and for the state of Israel."