How the Strong Shekel Is Threatening Israeli High-tech

Multinationals with development centers in Israel could bolt due to the rising cost of manpower

Omri Zerachovitz
Omri Zerachovitz
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Empty offices in a Tel Aviv high-tech center amid the coronavirus pandemic, June 16, 2020.
Empty offices in a Tel Aviv high-tech center amid the coronavirus pandemic, June 16, 2020.Credit: Eyal Toueg
Omri Zerachovitz
Omri Zerachovitz

Last Thursday, the Bank of Israel announced that it would be buying $30 billion in a bid to counterbalance the shekel’s dramatic appreciation against the U.S. currency over the past several months. “We don’t want the exchange rate to push international companies to transfer their operations to other places. Therefore we decided on this unusual step for unusual times,” stated Deputy Bank Governor Andrew Abir on Thursday.

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The Bank of Israel made its decision after weeks of bids from high-tech players and other exporters pushing it to intervene in the foreign exchange market. The dollar did indeed gain 4 percent against the shekel on Thursday in the wake of the decision and was trading at 3.24 shekels to the dollar as of Tuesday morning. It’s still 6% under the 2020 average and 10% off its 2019 average.

High-tech companies are so sensitive to the dollar exchange rate because most of their cash flow is in dollars, namely investments from foreign investors and sales abroad. Most of that money is ultimately converted into shekels in order to pay salaries and other expenses.

Abir is concerned that further salary increases in Israel would push foreign companies to stop expanding their Israeli development centers and even close some of them.

Bank of Israel Deputy Governor Andrew Abir in his office in Jerusalem, July 8, 2020.Credit: Ammar Awad/ REUTERS

“The shekel’s appreciation is an ongoing process, which is getting worse and dramatically increasing the cost of development and operations in Israel,” says Gil Golan, CEO of General Motors’ Israeli development center. These companies hedge their foreign currency exposure, but that only helps them for a somewhat limited period of several months to a year.

“The average Israeli programmer earns more than a programmer in California – something that never happened in the past. I’m fighting to bring some operations to Israel and hope the higher salaries won’t drive those operations to be set up in California,” states Golan, who is also a board member of Israel Advanced Technology Industries, which represents hundreds of multinational companies with operations in Israel.

Israeli programmers’ salaries were high even without the most recent appreciation of the shekel, due to the lack of highly skilled workers in the country. While the government has tried to increase the number of graduates with relevant degrees over the past several years, the number of multi-national companies with operations in Israel also grew, thus further increasing the shortage of workers and pushing salaries upward.

Industry sources said in the past that Amazon and other companies that wanted experienced workers offered attractive salary packages and thus pushed up salaries in Israel’s high-tech industry as a whole. Even the coronavirus pandemic didn’t push down salaries, said one source, noting the shortage of engineers in Israel.

“Engineers’ salaries have been on a steady increase,” he said. Coupled with the low dollar, the salary cost for employers is even higher now.

Israel’s high-tech industry creates jobs for some 300,000 people, or 9% of Israel’s employees, and is responsible for half of all exports. Some 400 multinational companies employ 68,000 people alone, just under one-quarter of all high-tech employees, or about 2% of Israel’s workforce.

The government aids these companies due to the prevailing belief that they bring important knowledge into the country that filters in to the local high-tech industry via partnerships, or employees changing jobs or founding their own startups.

Industry sources say that having a development center in Israel makes foreign companies more likely to acquire local startups. “Without the multinationals our entire high-tech industry doesn’t hold water,” says Golan.

The offices of General Motors' development center in Israel, May 24, 2012.Credit: Uzi Porat

These companies are also responsible for increasing Israel’s tax revenues. A report by IATI and the GKH law firm published about a year ago found that multinational tech companies created some 27 billion shekels ($8.3 billion) in tax revenues that year, or 16% of Israel’s direct taxes.

If these companies set up shop in Israel due to the talented local manpower and their own business interests, would they really close or cut back on their Israeli operations?

“It kills us, it’s the talk of the day among CEOs,” said the manager of an Israeli development center for a multinational firm. “The foreign management still isn’t pressuring me personally, but the CEOs of the Israeli centers are being forced to adapt. We’re telling the management that this is temporary but we need to find other ways to cut costs. The combination of the dollar exchange rate and the high salaries is a big problem for the high-tech industry.”

Another industry source said they’d started hearing of requests to move jobs abroad, but said it wasn’t clear if this was a one-off or a broad trend.

Golan notes that these kinds of decisions aren’t made overnight. Rather, the international companies set strategies on an annual basis, and look at the average exchange rate over the past year when deciding where to work. “These companies are like aircraft carriers. If they make a decision to change direction, it’s very hard to stop them,” he said.

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