Will turbulence devastate Israels high-tech industry

The recent wave of violence has already affected Israel economically. Tourism is practically paralyzed, and those sectors of the economy that are heavily dependent on Palestinian labor have been hit badly.

But will it affect the high-tech industry, one of the pillars of the economy?

The high-tech industry in this country is global in its conception. Its markets are overseas, its sources of finance outside the borders of the Middle East, so why worry?

The investment banking firm of Tamir Fishman recently held its fourth annual Growth Conference on High-Tech in Tel Aviv. One of the main topics among its 1,800 participants was the consequences the situation would have on the industry.

The effect on the conference itself was marked. Eldad Tamir, joint president and CEO of the firm, said that more than 250 overseas companies confirmed their participation and paid their fees, but only 150 arrived. "In normal circumstances about 5 percent of overseas participants do not show up. It is obvious that the 60 percent absence rate was caused by the current situation.

The fact that 40 percent did show up is avid proof of the importance of the Israeli high-tech industry," he continued.

"I firmly believe that things will calm down. But Israel got a lot of negative publicity in the world press," said Tamir's partner, Dani Fishman. "This has created a picture of uncertainty and instability, which may affect raising of funds in the short term."

The industry is worried about how the situation will affect the fund-raising activities of the high-tech companies of local venture capital companies. Although many claim the effect would be minimal, it is difficult to disguise their concern.

Carl-Friedrich von Schumann is a corporate finance associate with the private German bank Sal Oppenheim Jr. & Cie, which was established in 1789. As head of the Israel desk, he makes frequent visits to the Jewish state in search of interesting companies that either need cash or want to go public.

"It is still very difficult to assess the influence of what is happening from the point of view of the foreign investor…Foreign investors may be influenced negatively, as the situation creates a feeling of instability and investors shy away from such things.

"Nevertheless, I believe that any repercussions will be temporary and rather small," he added.

"Israel is very important in the global high-tech industry, with immense investment potential. Unless something dramatic and totally unexpected occurs I do not think that foreign investors can afford to steer clear of Israeli high-tech."

Reassuring words, echoed by many Israeli high-tech executives. Most believe that the impact of the existing violence on fund-raising depends on the length of the crisis.

Edouard Cukierman, president of the international finance company Cukierman & Co., believes that if the situation does not last, the effects will be limited. Amir Gal-Or, managing partner of the Infinity 2 venture capital fund, believes that even if the situation lasts longer than expected, the influence on fund-raising will be limited.

"Investors are divided into smart professional investors and ad hoc investors. The first will be less affected by the turbulent situation and will concentrate on facts — on the potential of the investment and the advantages of the technology. Less savvy investors will be influenced by the situation," said Gal-Or, adding that a combination of the two will make fund-raising "a bit more difficult."

Harry Fox, CEO of the Jerusalem-based high-tech company Versaware said he doesn't think there is a problem, despite contrary media portrayals.

"Local venture capital funds have a lot of liquid cash in their kitty. And one must not forget Jewish capital, especially in the U.K., the U.S. and other Western countries. They could very well finance Israeli high-tech, and it would not be an act of philanthropy; it would be an advantageous investment, since Israeli high-tech companies have given investors excellent results in the past and will continue to do so in the future."

But even the optimistic Fox is worried by the long-term implications. "If this situation were to go on indefinitely, we could have a problem."

The fund-raising problem is the one most highlighted when assessing the influence of the current situation on local high-tech companies, but there are others. The situation may not affect relations between high-tech companies and their clients, but it will affect cooperation with the Palestinians.

Amiram Shor, chairman of the high-tech company Malal and chairman of the software and electronics division of the Manufacturers Association of Israel, said that relations between high-tech companies and their customers overseas will not be affected.

"The high-tech industry has proven over the years that it is reliable. We have stood by our agreements, to our customers. We have maintained our agreed timetables, and the quality of our products and our technology has remained high at all times," said Shor, adding, "It is these things that count."

According to Shuky Abramovitch, chief economist and head of the Manufacturers Association economics department, "The industry is strong and well respected overseas…Most local companies have had reassuring calls from their overseas customers."

While overseas relations may not be affected, there is one little known aspect of the local high-tech scene that will most certainly be influenced by the violence between Israel and the Palestinians — the burgeoning cooperation between Israelis and Palestinians on high-tech issues.

A few weeks ago at the COMDEX exhibition in Tel Aviv, more than 10 Palestinian high-tech companies exhibited their products and technologies. On the last day of the conference, the Palestinian delegation held a one-day conference in which details on the cooperation between the two sides were made public. The main areas of joint interest are those of finance and human resources. If there is no cooperation with the Palestinians, then the costs of the Israeli high-tech industry will remain high.

Bassem El-Wazir, vice-chairman of the Palestinian Information Technology Association, confirmed there was a lot of cooperation and more was planned, such as Palestinian companies doing research, and joint ventures of Palestinian and Israeli high-tech companies.

The Palestinians, he said, were gearing themselves to cooperate on this matter. They are building an industrial park within a pre-1967 cease-fire line called Khadoury Information Technology City. Just 15 minutes from Netanya, the rentals are much less expensive than in Israel itself and taxation is much lower.

And there is more. According to Wael Zahab, marketing and investment promotion director, investors in Khadoury are entitled to a 15-year insurance policy of up to $5 million, which will cover losses that may be incurred because of political problems.