VZCZCXYZ0000
RR RUEHWEB

DE RUEHTV #0984 1241348
ZNR UUUUU ZZH
R 041348Z MAY 09
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 1640
INFO RUCPDOC/USDOC WASHINGTON DC
RUEHSS/OECD POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEHJM/AMCONSUL JERUSALEM 1954
RUEHAM/AMEMBASSY AMMAN 5890

UNCLAS TEL AVIV 000984 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
DEPT FOR OES/STC, NEA/IPA and EEB/OIA 
USDOC FOR FCS - Wiegler and Loustaunau 
AMMAN FOR ESTH-Bhalla 
 
E.O. 12958: N/A 
TAGS: TSPL EINV ECON ENRG PINR IS
SUBJECT: Israeli High-Tech Surviving the Global Downturn 
 
REF: Tel Aviv 653 
 
¶1. (SBU) Despite fears that the global economic recession would 
severely impact Israel's high-technology sector, industry analysts 
and participants are pleased with the resilience it has shown. 
Though potentially vulnerable on several fronts, both the production 
and R&D facets of the sector are surviving and looking forward to an 
upturn in 2010. Action by the government to increase support for 
Israeli R&D spending was welcomed by the sector. 
 
¶2. (SBU) The vulnerability of the sector, which accounts for nearly 
half of Israel's export earnings, stems partly from the country's 
highly-focused trade.  Almost 37 percent of Israel's exports are 
sent to the United States, and the lion's share of high-tech 
industrial goods, making the American-based recession daily news in 
Tel Aviv.  The large U.S. companies that buy from Israel (e.g., 
Apple, Motorola, Microsoft) are down five or six percent in sales, 
and Israeli exports have shown about the same marginal slowdown. 
First quarter 2009 technology exports from Israel were down by 6.3 
percent from the same 2008 period, $3.84 billion versus $4.1 
billion.  Unemployment in the tech sector in Israel, however, has 
risen to an estimated 8 percent, implying that job losses have been 
focused on the labor-intensive R&D side of the sector rather than 
production.  Analysts expect another 10,000 hi-tech workers may yet 
lose jobs this recession. 
 
¶3. (SBU) Israeli dependence on foreign venture capital is an even 
more serious vulnerability; with banks globally in low-lending mode 
and private venture capital firms stunned by market losses, 
investment angels are hard to find.  Nonetheless, the final tally of 
venture capital raised by Israeli firms in 2008 was USD 2.08 
billion, an 18 percent increase over the 1.76 raised in 2007.  This 
may be explained, in part, by Israelis choosing to invest at home, 
given the poor returns and high risk in major foreign markets. 
However the chief reason analysts offer is the sector's variety of 
expertise; Israel's strong presence in the still growing area of 
heavy bandwidth technology to handle the growing internet traffic in 
on-line video has kept demand for Israeli innovations growing on the 
IT side.  The country's medical technology sub-sector also expects 
strong growth; exports of medical technology and pharmaceuticals 
grew from $3.64 billion to $4.97 billion from 2007 to 2008.  The 
greentech/cleantech area is also growing strongly, although some 
analysts believe it will have less impact than expected, possibly 
because implementing such technologies will entail large government 
or corporate investments which are less likely in the recessionary 
climate.  Only in the first quarter of 2009 does the global downturn 
show its teeth, with a 33 percent drop in capital raised by Israel's 
technology sector compared to the previous quarter. 
 
¶4. (SBU) One area of vulnerability - progressive reductions in 
government support of the high-tech sector in general - might be 
avoided by timely GOI action.  The new Israeli government plans to 
greatly increase (possibly double) the R&D budget of the Chief 
Scientist of the Ministry of Trade, Industry and Labor, and to 
expedite payments due researchers already engaged under the Chief 
Scientist's program.  Previous years have seen this important source 
of innovation seed capital cut back (reftel), and industry 
executives welcomed the government's move to reverse this trend. 
Although this Ministry's support is small in global capital terms, 
it has proven itself effective in cultivating start-ups that have a 
commercially viable future.  More important to the new government, 
it holds the prospect of future job creation in a country that is 
experiencing its highest unemployment in the past five years -- 7.5 
percent, expected to rise to 8 percent before year end. 
 
CUNNINGHAM