Ofer Shoshan wants his visitor to understand something. Contrary to appearances–pleasant offices in one of this city’s gleaming skyscrapers–this outfit is operating on the cheap.
Shoshan and his colleagues at Qlusters, a software start-up, are subletting at bargain rates from a technology company that has drastically downsized. The desks and computer monitors came with the space.
In 1998, when I first visited Israel, this nation of 6 million was recognized as one of the world’s most vital technology centers, with strong ties to Silicon Valley and other U.S. economic centers. There seemed no limit to what a talented population–seemingly on the road to peace with its neighbors–could accomplish.
Nothing fundamental has changed in terms of Israeli talent and quick thinking in difficult situations. But plenty of other things have changed.
More than most places, Israel enjoyed the fruits of the late-1990s tech boom. So it has suffered harshly from the crash of the Nasdaq and the debacle in the telecom industry.
Global economic trends were troublesome enough before the Sept. 11 attacks, which added uncertainty. The Middle East political stalemate and spiraling violence–what everyone here calls “The Situation”–dominate the national dialogue and have deepened the economic gloom.
“We have good times and bad times,” says Ami Erel, current chairman of Israel’s Association of Electronics and Information Industries. “This is a bad time.”
How bad? Technology sales and exports are way down. Companies have gone bust, or have had to shrink drastically. Foreign investment has plummeted, though current investors are holding on for the most part.
The currency is losing value against the dollar, causing the central bank to sharply raise interest rates. The government is struggling to reconcile a wartime budget with social needs and its longstanding investments in education and research.
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For all the difficulties in Israeli technology, times are even tougher in other sectors of the economy. The hardest hit has been the tourism industry, the most direct economic victim of the violence. Hotels have become ghost towns. Cafes and restaurants, which have been targets for Palestinian suicide bombers, are almost empty much of the time.
Worry certainly shines through in conversations with business executives, government officials, academics, technologists and scientists. So, however, does determination.
Looking at long-term trends and barring a monumental calamity, “I see the downturn as a hiccup,” says Amir Elstein, general manager of chipmaking giant Intel’s manufacturing plant in Jerusalem. “I just hope we will be focused enough to catch the upturn.”
Elstein was speaking of Israel as a whole. Of Intel’s presence in Israel, he was more certain. The company employs more than 5,000 people in various locations in the country “and we’re still recruiting.”
The technology ties between Israel and the United States remain strong, even if American venture capitalists have pretty much curbed their visits. Many Israeli-born companies have shifted their sales and marketing divisions, if not their corporate headquarters, to the United States while keeping research and development in Israel.
BackWeb, a San Jose, Calif.-based enterprise-software company that was started in Israel, does research and development in a Tel Aviv suburb. Like so many other companies, it’s been through the best and the worst of times, losing most of its stock value and about half its staff.
The falling value of the Israeli currency has one benefit, noted Chief Executive Officer Eli Barkat. It’s making the company’s R&D unit, based in a Tel Aviv suburb, more cost-effective–saving more than $1 million a year, a considerable sum for a company with 2001 revenues of about $20 million.
Israeli tech labor costs are down locally, too. As in the United States, the bubble spurred rapid job-jumping and extravagant compensation. By late last year, job applicants were pleased with any offer.
Moshe Matitya, a programmer who had his pick of jobs during the boom, was laid off late last year from a Jerusalem software company. The timing hurt, with a new home under construction. He’s still looking for a position in Jerusalem, but now thinks he may have to find something in Tel Aviv, a tedious commute.
The job market was sparse, to put it mildly, earlier this year. “In the last couple of months, things seem to be looking a little better,” Matitya says. “I’ve had some interviews.”
Many here see biotechnology and life sciences as a foundation of Israel’s future economy. The nation already boasts a major drug company as well as several innovative medical-technology firms, and university research scientists are making global waves with their discoveries.
In the meantime, at least one portion of the Israeli technology sector is still growing–security and defense. Exports of defense equipment, for example, were up more than 35 percent in the first quarter of 2002 compared with a year earlier.
Foreign Minister Shimon Peres played a key role in establishing Israel’s defense-electronics and aircraft industries.
Peres acknowledges that the current situation has forced Israel to shift government spending and attention from social programs and other local needs to defense. But defense spending will boost the economy, he says, through civilian spinoffs and exports of its expertise.
“Since Israel suffers so much in terror,” he says, “she will be among the pioneers in how to fight terror.”