The Israeli tech industry is facing a critical challenge as the strong shekel poses a significant threat to jobs and operations. This issue is not just about numbers and exchange rates; it's a complex situation with far-reaching implications for the country's economic landscape. As the shekel strengthens, the cost of labor soars, putting immense pressure on tech companies and potentially leading to a wave of layoffs and business relocation. The situation is so dire that it has prompted high-profile meetings between government officials and industry leaders, highlighting the urgency of finding solutions.
The crux of the matter lies in the historical exchange rate and the average monthly salary of tech workers. With an average salary of 30,000 shekels and an exchange rate of 3.53 shekels to the dollar, each tech worker costs around 8,500 dollars per month. When the shekel strengthens to 3 shekels per dollar, this cost skyrockets to 10,000 dollars, an increase of 1,500 dollars. This calculation, made by Ronen Nir, reveals the staggering impact on the industry. With 400,000 employees, the added labor cost amounts to a staggering 21 billion shekels, equivalent to the number of jobs at risk of being moved abroad.
The situation is further complicated by the Trump administration's policies, which have weakened the U.S. dollar and driven the exchange rate. This, coupled with a rally in U.S. equities and a decline in Israel's risk premium, has made the shekel's strength even more pronounced. The Bank of Israel acknowledges that this time, the situation is beyond their control, and the central bank's efforts to influence the exchange rate are limited.
The impact of this strong shekel is already being felt across the industry. A survey conducted by the High-Tech Association among dozens of companies revealed alarming figures. Most firms are bracing for a margin erosion of 15% or more, leading to layoffs and the relocation of operations abroad. This affects companies of all sizes, from large multinationals to early-stage startups. The diversity of the tech sector means that any solutions must be tailored to meet the unique needs of each company.
One proposed solution is the possibility of paying corporate tax in dollars, as negotiations between Nvidia, Google, and the Finance Ministry suggest. However, this may not be feasible for startups that are unprofitable and have limited tax obligations. The urgency of the situation is underscored by the need for quick action, as layoffs and job relocation are imminent. Arik Kleinstein from Glilot Capital warns that the industry's funding situation is shrinking, and companies need to raise more capital immediately.
Kleinstein proposes reactivating a mechanism developed during the COVID-19 period, where grants are converted into loans repaid as a percentage of revenue. He suggests allocating at least 1 billion shekels to support startups, covering a fixed share of their monthly expenses. The High-Tech Association has also proposed creative solutions, such as municipal tax discounts for major exporters and easing the cost of tax credit points, allowing employees to maintain their net salaries while reducing employer costs.
The association's chairman, Alon Ben-Zur, emphasizes the need for swift action and highlights the worrying data from the survey. He notes that the rise in average salaries, driven by global companies, is concerning as it leads to the relocation of simpler development work and a decline in hiring junior engineers. Ben-Zur warns that this situation could result in knowledge leaving Israel, harming not only the tech sector but the broader economy.
The strong shekel is seen as the final trigger in a series of challenges that have already impacted the tech industry. Three years of turbulence, including domestic uncertainty and the war, have contributed to a decline in R&D jobs and an increase in startups registering abroad. The Aaron Institute's data and the Israel Innovation Authority's annual report confirm this trend, with a first-ever decline in R&D jobs and more than 50% of startups registering abroad in the past year.
The urgency of the situation is now evident in government circles. The Budget Division's exceptional tax revenues from company exits have reduced the deficit, but the fear of future revenue loss is a growing concern. The meeting between Finance Ministry officials and tech industry leaders is a positive step, but the team must now move quickly to implement immediate decisions. The challenge is immense, and the consequences of inaction could be devastating for Israel's tech sector and the economy as a whole.
