The structure of the Israeli hi-tech industry makes it especially suitable to the trends now developing in the world hi-tech industry. Israel’s hi-tech sector is well-positioned to ride out the current global technology crisis, according to Ilana Treston, head of the Merrill Lynch technology research department.

A position paper Treston prepared for the Herzliya Conference held earlier this month in Israel said that the Israeli hi-tech industry is not waning, despite the impact the situation is having on the performance of major Israeli hi-tech export firms. In fact, the structure of the local industry makes it especially suitable to the trends now developing in the world hi-tech industry.

Israel’s advantages, she wrote, include the fact that its companies are positioned to adapt to the rapid growth of the business market compared to that of the consumer market. Other factors that should help the local industry to cope is that smaller and more flexible Israeli startup companies, are rapidly entering new growth fields such as wireless data communications or data storage.

Merrill Lynch’s report is part of a research project conducted by Eli Ayalon, CEO of DSPG, Yehuda Zisapel, president of the RAD Binat Group, Doron Kochavi, a senior partner at Ernst & Young Israel, Yair Seroussi, who manages the activities of Morgan Stanley in Israel, and Treston. The study portrayed a Israeli hi-tech industry as one that is capable of flourishing even during a recession.

Ayalon told participants in the Herzliya Conference that the hi-tech industry could increase exports by $7 billion within a decade, if the state works sufficiently to increase the number of high school and university graduates with an education in science and engineering. Ayalon noted that meeting this goal will bring the state to budgetary balance, as the budget deficit today stands at $7 billion.

“Israel is in first place in the world in scientists and engineers per capita,” says Ayalon, “ahead of Japan, the United States and Germany, and with three times as many as Britain. Israel’s national expenditure on R&D is also the greatest in the world. With such an infrastructure it is natural that a good technology industry should develop.”

Ayalon said hi-tech exports, half of national exports in 2002, were produced by less than 3% of the country’s workers and were made possible thanks to high production in the hi-tech industry, which averages $230,000 per worker annually. “There are software companies that reach production of $600,000 per worker, and top manufacturers that even reach $800,000 per worker,” he said.

“We were astounded when we saw the figures for foreign capital raising in Israel,” continued Ayalon. “Between 1997 and 2002 Israeli raised $1.8 billion in government bonds. During the same period the stock market raised $8.5 billion, while venture capital funds raised about $8.37 billion. Merger and acquisition deals, including the Chromatis deal, totaled $18.9 billion. These figures show that we have a very strong growth engine, but if it goes wild on us we have to check ourselves.”

In 2001 worldwide purchases of technology products totaled $988 billion, of which Israel’s share was only about 1%. Even if the calculation is narrowed to include the relevant areas in which the Israeli hi-tech industry is active, Israel’s share is still no more than 2%.

The figures compiled during the study showed that most Israeli hi-tech companies are making advances in areas in which the giant companies are not active, so their main competitors are other little companies. In many cases the latter control only a small share of the market, so the Israeli companies have greater chances of capturing a larger share of the world market.

One example can be seen in the assessment by the Fabless Semiconductor Association (FSA), which found that three Israeli companies, DSPG, Zoran and M-Systems, belong to a group of 10 fastest growing fabless companies in the world. VersaMed and Schema, which were rated by Deloitte Touche among the 10 fastest growing companies in the world, have a good shot at large market shares in their fields.

The Merrill Lynch report’s main conclusion is that there is an advantage to being small. Israel’s market share is so small that it can expand it significantly without affecting the whole market or being affected by the global crisis.

IDC, a research firm, feels Israel is strongest in the telecommunications market, in which it has a 3% global market share. Israel’s software companies have a 1% market share, thanks mainly to Check Point.

The authors of the report therefore believe Israel’s minute share of the world hi-tech market makes it possible for local companies to streamline and penetrate new niches without waiting for the crisis to pass.

(Based on a report in Ha’aretz)