High-tech R&D centers facing big cuts

When Amdocs decided to close its Jerusalem development center and fire 200 of its workers, it was a very serious sign that the global economic crisis was about to change the Israeli high-tech industry.

Even though the billing software giant was born as an Israeli company before turning into an international firm that was traded on the Nasdaq, Amdocs has now decided that it prefers to hire Indian programmers and engineers over Israeli ones (whom it has fired), because they are cheaper.

That famous Israeli creativity may be important, but it is certainly no longer an insurance policy against lower-paid overseas workers.

Without a doubt, the world economic crisis and recession in the technology industry have hit the big international tech firms operating research and development centers here in Israel. If until a few months ago, the common wisdom was that the weak dollar and credit crunch would mostly hurt small startups and their venture capital backers, now it is becoming much clearer that even those who thought they were protected from the crisis were wrong.

The development centers of the large foreign and international firms employ 51,000 in Israel, and the crisis seemed to pass them by until just a few months ago. These include such giants as HP, Microsoft, Intel, IBM, Cisco and Google among the 220 such center here. Nine of these centers have been closed so far in 2008, and only two new ones opened. The firings have started as many of the parent technology firms cut back their workforces, and Israel is no longer protected in any special way.

Freescale announced it was firing 10% of its employees, and the Israeli branch will be parting with the same percentage: 60 out of 600. Intel may be firing 8,300 around the world, which is likely to affect the Israeli offices, too. BMC fired 350 in total, including 25 here.

So far, excluding startups, under 500 people have bee fired this year in such R&D centers. But many more are now expected, certainly hundreds, if not thousands.

The big technology companies, such as Intel, Comverse, Motorola, and even Amdocs, which has already had one round of firings, are expected to to be hit hard, and possibly soon.

Other extremely well-known technology sector names are also shedding staff: Sony is cutting 8,000 jobs, British Telecom fired 10,000 and AT&T is getting rid of 11,000. These companies may not have centers in Israel, but their cutbacks will certainly be felt in the high-tech industry here.

Last week computer storage supplier and developer NetApp closed its Haifa development center, which was based on its purchase of startup Topio. Neustar fired 40 of its workers in its Haifa R&D center.

Are the Israeli research and development centers of the big technology companies really in danger?

The answer seems to be yes. However, that does not mean every closure or firing is truly the result of the present crisis. There are processes behind the firings that have been going on for some time behind the scenes.

Take NetApp, for example. The company admitted that its Haifa development center failed as its main product never took a hold in the market. Even if the present crisis has had an effect on sales, the closure of the Haifa center has been under consideration since November 2006.

Messaging software firm Neustar also felt the effects of the crisis, but it is certainly not an Israeli-only phenomenon. This was only part of 110 workers let go in the company around the world.

Sometimes Israelis forget that we do not live at the center of the universe, certainly when it comes to high technology. In the case of these mass worldwide layoffs, Israel is only a minor player.

The crisis caught the Israeli development centers of foreign companies in an already difficult situation. In addition to the recession and dropping sales, the weak dollar has also taken a big toll.

The dollar's fall increased the costs of employing Israelis much more than the firms had planned. If such companies had once preferred to set up such development centers in Israel, due to the "Jewish genius" plus relatively low costs, today the situation is quite different.

The cost of an Israeli engineer is now almost the same as for an American, and much higher than in Eastern Europe and the Far East. This even applies to areas that were once off limits, such as software.

Zohar Zisapel, the chairman of high-tech firm Rad-Binat, which employs 3,000 in Israel, thinks that the firings will further hit development centers here, especially since they are far from headquarters: "When they need to cut back, the natural tendency is first to fire those who are farther away. True, it is not easy to fire in high tech. There is an atmosphere of friendship and teamwork, but it is easier to decide on firings when it is far away from you," he said.

There is a smaller chance that the wife of someone who was fired will meet the person doing the firing in the supermarket.... They get rid of their far-away operations. They suddenly realize they cannot manage branches in Israel, China and the U.S. Even the Rad group, which has distant operations, will cut them back. It is natural. We are not different from anyone else," said Zisapel.