Tech Execs Take Stand Against R&D Grants

In recent weeks, the newspapers have been full of headlines on technology companies announcing or threatening to take their development centers out of Israel to India, Eastern Europe or any other fashionable hot spot.

The timing of the news items is no coincidence: The major technology companies are waging a campaign against cuts in the Industry and Trade Ministry chief scientist's budget. The grants, which amounted to NIS 1.8 billion two years ago, were cut back this year to NIS 1.3 billion and are slated next year to give up another NIS 500 million.

The public relations battle and lobbying by technology companies like Intel, Motorola, Applied Materials, ECI Telecom, Alvarion, Amdocs, Comverse and Teva is starting to bear fruit. On Thursday, Industry and Trade Minister Ehud Olmert announced at the chief scientist's research and development conference that the budget cuts should be revoked.

"We are in a race against time, as we could lose our technological edge in a few years to countries like India and China," he said.

Olmert warned that "many countries, including India, China, Singapore, Germany, Ireland, Canada and, of course, the U.S. are adopting intensive strategic support of industrial development, while we are acting aggressively to slash that support."

Despite support for the technology industry being the bon ton among the financial elite, there are at least two senior executives from the sector - heading two of the most successful technology companies - who are not joining the chorus of wails and moans: DSPG chair Eli Ayalon and M-Systems chair and CEO Dov Moran.

One of them has a strong record as being unafraid to take strong public stands - and succeed. Ayalon, who heads one of the most successful technology companies in recent years, called on Finance Minister Benjamin Netanyahu a year ago to stand up to pressure from Israeli venture capital funds to inject government aid. Ayalon claimed it was unnecessary aid to the industry, which didn't need the subsidy. Netanyahu told Haaretz that Ayalon's comments made a big impression on him - and he eventually rejected the calls.

Ayalon's opinion of the chief scientist's grants is similar.

"The PR battle to increase the chief scientist's support is a smoke screen in which the heads of the industry are using pieces of information. If you examine the financial impact of the chief scientist's monies on the major technology companies, you find it is unnecessary," Ayalon states.

Ayalon: "What are we talking about? Where does the money come from? We are going to a nurse in Afula who makes NIS 4,000 per month and saying to her: We want you to subsidize my engineers, who make NIS 40,000 per month. Because if you don't pay for my engineers, I'll take my operations to India. And I say that running a profitable company with $300 million in its piggy bank."

Ayalon differentiates between supporting big technology companies through grants, which he feels are entirely superfluous, and support for startups, which is positive.

"There is economic logic in tax relief to foreign investors and technology companies that have to face the wide world. Similar tax rates to global rates is part of the infrastructure a government should create to attract business; a comfortable tax environment is like roads - necessary infrastructure. On the other hand, to expect the government to participate in operating costs for development is superfluous and doesn't contribute anything; it just adds a few cents to earnings per share of the companies seeking the grants."

Research and development isn't a kind of infrastructure?

Ayalon: "Nonsense. The base research is done by universities. Technology companies invest in development like they invest in marketing and logistics. Every dollar that goes into R&D is based on how many dollars in revenues it will produce according to the business plan. That's not infrastructure; it's development of products that have markets."

Large technology companies say they need to compete in other countries.

Ayalon: "That's nonsense. The chief scientist's money doesn't help compete in other countries. Look at the numbers. The quality of development in Israel, the speed of development - these are things that have real financial significance. The chief scientist will never make development more worthwhile - it is just a little help to cut the costs.

"There are those who see a giraffe and say, `there is no such animal.' I look around and see many giraffes - technology companies that manage not to take the chief scientist's money: DSPG, Mercury, M-Systems. But the PR and shouting from the technology companies, which are just seeking government help with their operating expenses, are working; there are government officials, some very shallow, who are affected by it. They are threatened, a few slogans are tossed around, like the future is technology, a few yells that there is money for the ultra-Orthodox - it's all demagoguery. What have the ultra-Orthodox got to do with development costs?"

The technology sector CEOs who want the chief scientist's money say "technology is the engine of growth."

Ayalon: "True, but they are a little confused. When I say technology is the engine of economic growth, I think of the car as technology and the passengers are citizens and taxpayers. For the CEOs who want to milk the government, the citizens are outside the car pushing it uphill because they want an engine that doesn't know how to inject gasoline by itself."

The claim is that support for R&D decreases risk and increases the feasibility of investments.

Ayalon: "What? That the money comes from the teacher in Afula, out of her taxes - that decreases risk? Someone is going to do more R&D because he got money from the public kitty? That's nonsense. Look at all the technology companies in the world and in Israel: They all invest 15 percent to 20 percent of revenues in development - because they have to. The teacher from Afula's money won't change the risk or the feasibility. Those who believe that technology companies increase their development spending because of the chief scientist don't know what they're talking about."

How can one compete with the cheap labor in India, China and Eastern Europe?

Ayalon: "Why doesn't the government help finance wages for the regular workers who get NIS 4,000 per month? It only has to subsidize those who get NIS 40,000 per month? Do you think that helps compete in Singapore, India or Ireland? The efficiency and quality of the development is 10 times more important than the chief scientist's money."

Moran: "My biggest competitors - Japanese and American companies like SanDisk and AMD - keep most of their development centers in the U.S., despite the high cost of engineers there. They don't have financial considerations? They do."

Ayalon: "Undoubtedly, there is a growth trend in Indian and Chinese development centers. Over time, we need to deal with that. But solving the problem by subsidizing the companies with the chief scientist's money is like building a wall near a house as a hurricane approaches - completely irrelevant. A cash injection. What must be done is to make sure there is a greater supply of engineers graduating from university every year. The idea of chief scientist's money basically subsidizes high wage earners - it is a distortion that makes no real financial contribution to the technology sector's competition. The declarations of the past few months on taking R&D out of Israel because of the chief scientist are R&D threats - those for whom it is worth it to do R&D in India will do it, with or without the chief scientist's money."

DSPG also received chief scientist's grants in the past. Now that you have $300 million in corporate coffers, it seems unnecessary to you.

Ayalon: "True, DSPG got the grants - when it was a small company - [which is] a model that makes sense: giving more to startups where it really can help them and stopping money to huge corporations."

If there are going to be subsidies, then technology is surely the right direction.

"There must be a media adviser who told technology sector CEOs to mention the ultra-Orthodox in their scare tactics. Told them: Attack the ultra-Orthodox so you'll go down in history with the `good people.' But what do they want? Instead of the nurse from Afula giving her money to the ultra-Orthodox, she would give it to my engineers, who make NIS 40,000 a month, to improve my profit and loss report."

Other countries, very successful in attracting technology companies, like Ireland, are increasing their support for R&D.

"That is an important point. The technology sector CEOs waging the PR campaign give officials partial and misleading information. I checked out a little of what's going on in Ireland and learned some interesting things:

"R&D expenses in Ireland right now are 1.4-2 percent of GDP, while the government has set a target of 3 percent in 2010. In the European market, the average today is 2 percent. In Israel, we are already at 4.7 percent. In other words, Ireland's target, which everyone waves around all the time, is to reach in 2010 a figure that is 30 percent below where we are now. If we look just at business R&D, then we find Ireland's target is to reach business R&D of 1.7 percent by 2010, while in Israel we are now at 1.8 percent of GDP.

"In Ireland, the government subsidizes 4.5 percent of the business sector's R&D. In Israel, after the huge budget cut being threatened, the government will subsidize 10 percent of the technology sector's R&D - more than twice the Ireland norm."

Moran: "I want to emphasize that the chief scientist's staff are honest and decent professionals, and the companies getting the grants are for the most part honest and decent. But the chief scientist's money is corrupt and corrupting. There is an entire industry of wheeler-dealers whose business is how to get money out of the chief scientist - which is just expense repayment for R&D costs. The idea of subsidizing operating expenses is distorted. In technology, development is an operating expense like marketing, logistics and all the surrounding systems. By the same account, one could demand financing for logistics expenses. There are times when we see wages for the CEO, his wife, his friends, and all sorts of weird expenses - all going on the books as "development."

The chief scientist's money doesn't help R&D?

Ayalon: "For the big companies, the chief scientist serves only one purpose: adding a few cents to earnings per share. Executives at major companies tell us that the money comes back and is a good investment. In other words, it is just a loan the state gives the companies, and I say, Motorola needs a loan from the State of Israel? I don't think so. I do not believe that Motorola or any other technology company really does R&D because of the chief scientist's money."

R&D shouldn't be supported?

"For research and development, we have venture capital funds. They know better than Trade Ministry officials where it is worth putting money and where not. Israeli VCs aren't lacking money - they lack good companies. Essentially, they have surplus capital."

How should the technology sector be supported?

"The universities have to create more engineers, more project managers, good logistics people, industrial and management engineers. There is a huge shortage of experienced professionals in those areas. I need people, I need a more supportive tax environment in which my engineers don't pay too much tax, I need more cheap flights abroad for my marketing and development people. In contrast, the chief scientist's budgets have no real importance, not for me and not for any technology company."