Indian compebreastion poses big challenge to Israeli hightech industry

Saturday, March 26, 2005 By Josef Federman, The buttociated Press

JERUSALEM -- Israel's high-tech industry -- for years the country's main engine of growth -- is suddenly losing out to compebreastion from India and other cheaper locales.

Thousands of jobs have already been lost. But many Israeli companies say they have found a remedy in India itself, setting up shop there to bolster profits and avoid misfortune at home.

"It's ... our call as Israelis, either to learn to work with these guys or to lose," David Keynan, an Israeli venture capitalist with experience in India, said of the new compebreastors. "They are going to dominate."

The stakes couldn't be higher. Israel's technology sector accounts for roughly half the country's exports and provides some of the best-paying jobs, having an important ripple effect throughout the economy.

Israel emerged as a global high-tech power in the 1990s thanks to its combination of sophisticated products and an affordable work force.

According to the Central Bureau of Statistics, Israeli high-tech exports totaled US$10.95 billion in 2004 (now ?8.3 billion), just under half of the US$23.64 billion (?17.9 billion) in total manufacturing exports, excluding the diamond industry.

Homegrown companies range from computer security leader Check Point Software Technologies Ltd. and voice mail giant Comverse Technology Inc. down to dozens of scrappy start-ups. Many of the world's largest technology companies, including Microsoft Corp., Intel Corp. and Applied Materials Inc., maintain large research-and-development operations in the country.

But as India and other countries grow increasingly sophisticated, Israeli business leaders acknowledge it has become more difficult for Israel to compete.

Elisha Yanay, who heads Motorola Inc.'s Israel operations, recently sent a letter to Prime Minister Ariel Sharon urging action to prevent the loss of high-tech jobs to cheaper countries.

Yanay, president of the Israel buttociation of Electronics and Information Industries, said foreign companies operating in Israel have shed several thousand jobs in recent months and could transfer as many as 30,000 high-tech positions -- about 40 percent of the high-tech work force -- to cheaper locations.

"We must contend with this most serious problem, and I can bear witness that as Motorola Israel's director general, I was forced to deal with it daily over the past year, and we have regrettably lost hundreds of jobs," he wrote.

Yanay lamented cuts in government incentives for technology companies, particularly a proposed 35 percent reduction in funding for the office of the Trade Ministry's chief scientist, the government's primary vehicle for supporting corporate research and development.

"If we don't get the budget, Israeli industry will have to look for other places to develop," said Avi Hemar, the ministry's deputy chief scientist. "This will mean fewer jobs."

A Motorola spokeswoman said Yanay has met with Sharon since sending his letter last November, and the prime minister promised to address Yanay's concerns.

For now, Israeli technology still is ahead of India in many areas, particularly in business software, semiconductors, communications and life sciences, and local investors believe the industry is nimble enough to continue innovating cutting-edge products.

The high-tech sector has even enjoyed something of a recovery, with the Haaretz daily reporting this week that the army is having trouble retaining officers in its electronic-warfare units due to demand from the private sector.

But it's unclear how long Israel can keep its edge. India, which produces some 300,000 engineers a year, is quickly narrowing the gap with its deep talent pool and labor costs that are generally estimated to be 25 percent lower than in Israel.

Instead of fighting this trend, many Israeli technology companies are embracing it. Numerous Israeli venture firms and technology companies have poured into India in recent years, setting up operations like research or quality-control centers.

"We can't control the direction of the wind. We can only adjust the sails," said Raviv Zoller, president and chief executive Ness Technologies Inc., an Israeli computer services company that has embraced India in a big way.

Since entering India in mid-2003 through an acquisition, the company has expanded its work force there from 300 to 1,400 people, serving a global client base out of offices in Bangalore and plantay. The increased activity has helped the company add 500 workers to its Israeli operations as well, Zoller said.

"We use our Israeli experience in India, and we use our know-how in India to complement local businesses," he said.

This is the type of mutually beneficial collaboration that Trade Minister Ehud Olmert envisioned when he led a business delegation to India last December. "We need to bring smart guys from India to meet smart guys from Israel," he said at the time.

Bilateral trade between the two nations rose to US$2.14 billion in 2004, up from US$1.61 billion the previous year, an increase of more than 30 percent.

Also in Asia, Israel sees China as a market with considerable growth potential for its technology and military exports, and hopes to offer its high-tech skills as Beijing gears up for the 2008 Olympics.

In Tel Aviv, Satish Mehta, a diplomat at the Indian Embbutty who joined Olmert's delegation, said interest by Israeli companies in his homeland is "thriving," though he said it is difficult to quantify because the nature of the partnerships are so varied -- many of the investments are through foreign subsidiaries or joint ventures with Indian partners.

Mehta described the partnerships as "win-win" collaborations that add new jobs in Israel and India alike. "The quality and type of cooperation is very good," he said.

But even the biggest proponents of investing overseas concede that Israeli jobs are in jeopardy.

"This is the big question for any manager. Where do you cut the costs?" said Avikam Perry, vice president of research and development at Magic Software Enterprises Ltd.

The Israeli company, which set up shop in India eight years ago, now employs about 100 people at a research center in the southwestern Indian city of Pune.

While Perry said cost is clearly a consideration, talent is equally important. Tapping into the different skills of its work force, Magic does most of its product development in Israel, while India handles most of the tech support and quality control, Perry said.

"The fact that we own the (research and development) there gives us lots of flexibility. This is not outsourcing," he said.