Israel on Edge

Middle East violence worries tech industry

Hassan Kassem, general manager at a Palestinian information technology company, recalls attending the Comdex Israel trade show last September in Tel Aviv and meeting with other IT companies — including those based in Israel, home to numerous high-tech companies.

Kassem says he was excited by discussions with Israeli business executives about cooperation and the possibility of working together on joint projects.

But on the very same day, Ariel Sharon, who was later elected as Israels prime minister in February, visited the Temple Mount, a site sacred to both Jews and Muslims in Jerusalem, and made comments that enraged Palestinians. While Israelis dispute that the visit was the catalyst, it was one of the events that has fueled months of violence between Palestinians and Israelis — including a suicide bombing by the Islamic militant group Hamas that killed at least six people at an Israeli shopping mall earlier this month.

Regardless of who is to blame, Kassem says that since the violence erupted "everything has collapsed." His company, Arab TechnologySystems, has seen its business go south. Potential investors have backed off, the company is having trouble soliciting new customers, and employees face difficulties traveling to and from the companys office in the West Bank town of Al-Bireh.

"It was an excellent idea, bringing people together, cooperating, opening new markets," Kassem says in reference to his meetings at Comdex. "But unfortunately, things went in the wrong direction."

Nearly eight months of violence in the Middle East is taking an economic toll on the region. While Palestinians appear to be suffering the brunt of the economic effects, Israeli government officials are beginning to worry about the potential impact on the countrys vaunted high-tech sector, and are taking steps to reassure investors that the business environment is safe.

It certainly didnt help that the U.S. Department of State issued a warning at the beginning of the year urging Americans to defer travel to Israel, Gaza and the West Bank. The warning forced some foreign business officials, who must adhere to such warnings, to avoid visiting Israel.

Most Israeli industry and government officials insist the impact so far has been marginal, and that the downturn in the U.S. economy is having a greater effect. They say business goes on despite the violence, which for the most part is confined to the Palestinian-controlled areas of Gaza and the West Bank. The attributes that have attracted billions of dollars in foreign venture capital to Israeli technology companies, such as a skilled work force, remain intact, says Ron Chaimovski, Israels economic minister for North America.

"One may ask a reasonable question: Is Israel still a good place to do business in? The answer is definitely yes," Chaimovski says. "Our high-tech economy is still booming . . . Life is not as is seen on CNN. Our economy continues."

And yet business leaders also say some investors — particularly first-time investors — have expressed some reluctance to invest in Israeli companies, given the political instability. Last month, Israeli Finance Minister Silvan Shalom acknowledged during an interview with the Associated Press that the government is concerned that "foreign investors no longer want to come and invest here because of the intifada," the Palestinian uprising.

Tech Innovator

In the 1990s, Israel emerged as a leading center for technology start-ups and innovation. Much of the countrys strength stems from its need to develop cutting-edge technologies for its own national security, and many of Israels high-tech entrepreneurs got their start in the Israel Defense Forces.

Israel has also benefited from the many engineers who have emigrated from the former Soviet Union in the last decade, giving the country the highest number of engineers per capita in the world, according to Israeli officials. Now, the high-tech sector is a major part of Israels overall economy, accounting for 15 percent, Chaimovski says.

At the same time, Israeli IT companies have grown increasingly interdependent on the U.S. market. Many companies founded in Israel have moved their headquarters to the U.S., where much of their customer base is located, but often leave their research and development operations in Israel.

Israel has the third most companies listed on the tech-dominated Nasdaq stock exchange, behind the U.S. and Canada, Israeli business and government officials say. As a result, the slump in the U.S. economy has hit Israeli companies almost as hard as American companies, and is a bigger concern at the moment than the violence.

"The situation on the Nasdaq has had much more of an effect [than the recent violence]," says Eran Tirer, CEO of Intercomp, a software company founded in Israel but now based in the U.S. "The problems we have with the Palestinians have been there for many years."

Industry executives say that most technology companies in Israel are not located near the violence. Shlomo Sadowsky, CEO of Nexus Telocation Systems, a maker of location-based technologies, says his company has two sites in the Tel Aviv suburbs, and neither office has lost a day of work because of the violence.

Some U.S. investors that have done business in Israel before are not deterred by the violence. Benchmark Capital, a Silicon Valley venture capital firm that has invested in Israel before, announced this month that it had raised $220 million for a new fund focused on Israeli technology companies.

"We certainly considered the political situation in Israel when we decided to do the fund," says Steve Spurlock, operating partner at Benchmark. "It has not and we do not expect it will impede the conduct of business in Israel."

Nevertheless, Israeli government officials and others acknowledge that they are concerned about the perception outsiders may have about the situation.

"The longer the situation is prolonged, the worse it will get," says Etan Hillman, general manager at the Israeli Venture Capital Association, an association of Israeli venture capital firms. His group has reported that foreign investment in Israel decreased in the last quarter of 2000, after steadily increasing in the three previous quarters.

"There is definitely going to be an impact on the Israeli economy," says Zeev Holtzman, chairman at Giza Venture Capital, which invests in Israel-related tech companies. "There already has been some negative impact on the tech sector."

If the violence has had any effect, industry officials say, it has been on the willingness of first-time investors to consider investing in Israeli tech companies.

"Those who have never invested in Israel before dont know the situation first-hand," says Glen Schwaber, general partner at Jerusalem Venture Partners, an international venture capital firm that invests primarily in technology companies. "Its understandable why they are nervous or are putting their decision-making on hold."

The Israeli government is taking steps to try to reassure foreign investors that may be concerned about the political instability. Shalom, Israels finance minister, announced during a recent U.S. visit that the Israeli government was moving ahead with reforms to its tax system that will help foreign investors.

Furthermore, given the State Departments travel warning, the Israeli government is helping technology executives from Israel meet with potential investors and customers in the U.S. For example, several Israeli companies are expecting to attend SuperComm, a communications technologies trade show, next month in Atlanta. Also next month, Sharon will travel to New York to address business leaders; his message will be that the Israeli economy is "strong, stable and standing on its own," Chaimovski says.

Common Ground?

In the wake of the continuing violence, Palestinians may be hurting the most economically, though both sides differ on who is to blame for the situation.

Bassem El-Wazir, managing director at Sidata, a Palestinian IT company and the Palestinian Information Technology Associations board vice president, says his company has faced a variety of obstacles that have caused a decline in revenue. Sidatas plans to launch a joint portal with an Israeli company have also been dropped since the violence began, he says.

El-Wazir worries not only about his companys survival, but about the future of the Palestinian IT industry, saying it is "falling behind our neighbors, Jordan and Egypt, who have taken strong steps towards penetrating the IT market and [becoming] regional and international players."

Still, some cooperation has managed to continue. The Peres Center for Peace, founded by Israeli Foreign Minister Shimon Peres in 1997 to promote social and economic cooperation between Israelis and Palestinians, has been quietly trying to move ahead with about five technology projects, says Naftali Moser, the centers director of technology.

The centers projects include the launch of a joint software training center and a $63 million international venture capital fund for investments in technology companies in Gaza and the West Bank. Moser says none of the projects have died and both sides continue to talk, even though new investments from the fund have been put on hold.

"Eventually, the violence will go down," Moser says. "There is definitely a joint economic interest between Israelis and Palestinians. There are areas where we definitely complement each other. There are things we need to be doing together."