Gaza war jeopardises Israel's high-tech growth

Israel’s war on Gaza is proving costly for the country’s economic health, impacting one of the central pillars of the country’s growth – its high-tech sector.

The tech industry is now grappling with significant losses, both financially and in terms of its global partnerships.

According to Times of Israel, many workers in the tech industry are facing a grim job market, with companies quietly laying off employees after a brief pause in firings in the past 10 months of war.

In June alone, approximately 200 employees were laid off each week. Industry insiders estimate that over the past four months, between a quarter and half of the companies have cut their workforce by five to ten percent.

Simultaneously, local startups, once the hub of Israel's innovation ecosystem, have been severely impacted by the ongoing tensions surrounding the judicial overhaul and the war in Gaza.

Data from Rise, (formerly SNPI) reveals that investments in Israeli companies plummeted from $15 billion in 2022 to around $7 billion in 2023. The Israel Innovation Authority reported a staggering 70% decline in domestically raised venture capital last year, with the number of active investors dropping by an additional 20% this year.

The layoffs temporarily stabilised when 360,000 reservists were called up for duty after October 7, prompting the Defence Ministry to cover their salaries and halting further job cuts. However, as these reservists return to civilian life, companies are once again facing the difficult decision to reduce jobs in an already shrinking market.

“When many employees are on reserve duty, those who stay behind work more at a salary that has stopped rising. Employees who got used to the consistent rise in salary have a hard time getting used to this, but raises aren’t possible,” Moran Chamsi, a managing partner at the Herzliya-based Amplefields Investments, told Times of Israel.

The impact on Israel's high-tech workforce is becoming increasingly clear as more companies and entrepreneurs choose to relocate abroad.

“Development centres have been moved abroad, companies have registered abroad, and Israeli entrepreneurs have started companies abroad instead of in Israel.” said Tali Shem Tov, CEO of programming and cloud service companies Well Done, Code Value, and Cloudex, in an interview with The Times of Israel.

The decisions by firms like Bright Machines and Chegg to leave the country after the war began to admit the increasing challenges facing Israel’s high-tech sector, which is growing more unstable each day.

Tech Giants' Retreat

As the crisis continues major tech companies are reevaluating their commitments to Israel. Intel, as a major player in Israel’s tech landscape, has decided to halt its plans for a $25 billion factory, a move that demonstrates the escalating uncertainty.

The chipmaker, which employs nearly 12,000 people across its development and production sites in Israel, including the prominent Fab 28 plant in Kiryat Gat, was slated to open the new Fab 38 facility in 2028. Now, that project has been put on indefinite hold, bringing uncertainties on the future viability of such tech investments.

Following Intel's move, Samsung Next, the innovation arm of the Korean company, announced it would close its operations in Tel Aviv and shift activities abroad. This decision reflects broader concerns among international companies about the risks of maintaining operations in Israel amidst growing economic instability.

Similarly, Google’s health and data company, Verily, has also decided to shut down its research and development centre in Israel by the third quarter of 2024, just three years after opening.

As the war drags on, this exodus from major global tech players signal a troubling trend for Israel’s high-tech sector, which indicates a struggle to maintain its previously solid international partnerships.

‘Brain-drain’

The tech sector's challenges extend beyond high-profile exits and investment declines. Eden Shochat, Equal Partner at the Aleph venture capital fund, indicates a deeper, systemic issue in an interview he gave to Calcalistech.

“There is definitely a problem,” he says, “and it can significantly harm Israel, especially in the field of AI where extensive collaboration with academia takes place. It can definitely hurt the state's capabilities.”

Adding to this, Shochat observes a trend among entrepreneurs:

“I see many entrepreneurs leaving Israel. This is a danger that can lead to a drop in the critical mass, something very significant when talking about entrepreneurs and talent and that's what worries me, it's not a flood, not significant amounts, but the real challenge in Israel is inside, not what the outsiders are doing to us”.

“We hear that there are many cancellations of scientific and technological collaborations, and for every one that is done publicly, there are five that are done under the radar. No one will admit it, but it is clear to everyone that they do not want to work with Israel.”

Job cuts and economic despair

With Israel’s bombing showing no signs of easing, the country is also heading toward a major economic crisis, touching every other sector.

"Israel's GDP contraction was much worse than had been expected and highlights the extent of the hit from the Hamas attacks and the war in Gaza," said Liam Peach, an emerging markets economist at Capital Economics, providing a sobering assessment of the situation.

Looking ahead, Peach adds that the country's growth prospects for 2024 "now look likely to post one of its weakest rates on record."

In an interview with the Hebrew newspaper Maariv, the CEO of the Israeli information services and credit risk management firm CofaceBdi stated, “Around 60,000 Israeli businesses could shut down by the end of 2024.”

This situation is further exacerbated by the current war, which has already led to the closure of 46,000 businesses struggling to stay afloat, with many hurt by high interest rates, more expensive debt financing costs, a shortage of manpower, a sharp decline in turnover and operations, logistic and supply disruptions, and insufficient government assistance.

He also added that the trade sector has been severely affected, including the service sector and industries such as fashion, furniture, housewares, entertainment, transport, and tourism.

“This is a very high number that encompasses many sectors. About 77 percent of the businesses that have been closed since the beginning of the war, which make up about 35,000 businesses, are small businesses with up to five employees, and are the most vulnerable in the economy” said Amir.

Amir emphasises the broader implications of these shutdowns, stating “The damage to the Israeli economy is extensive on all fronts. When companies close and cannot meet their financial obligations, it ripples out to affect customers, suppliers, and others within their ecosystem.”

This ripple effect is further complicated by Türkiye's boycott, "raising concerns that other countries may follow with similar moves as importers are looking for alternative suppliers from other countries” adding another layer of pressure to an already affected economy.

Moreover, the situation is further aggravated by the disruption in the labour market. Before October 7th, over 150,000 Palestinian workers from the occupied West Bank crossed into Israel daily, forming a crucial backbone for various sectors. With this labour force now largely absent, the economic challenges have deepened, leaving businesses scrambling to sustain their operations without this workforce.