Investors and analysts are predicting that tech companies in Israel will need to enhance their security measures due to the potential for disruptions. This concern arises following recent attacks by Hamas militants in which several Israelis were killed, and others were abducted.

Israel’s high-tech sector, which has been a significant driver of economic growth, is seen as particularly vulnerable, as it accounts for a substantial portion of jobs and GDP, contributing to 14% of employment and nearly one-fifth of the country’s gross domestic product.

Israeli stock and bond markets experienced a decline, and numerous businesses shut down on Sunday following a rampage by Palestinian group Hamas gunmen in Israeli towns on Saturday.

Additionally, militants launched thousands of rockets into Israel in an unexpected assault. Some of these rockets reached as far as Tel Aviv, leading to the suspension of airline flights to and from Israel. In response, Israel conducted airstrikes on Hamas targets in Gaza, resulting in a significant loss of life, with hundreds of casualties reported.

Jack Ablin, Chief Investment Officer and Founding Partner at Cresset Wealth Advisors, described the situation as a significant disruption to normal business operations. He noted that in the short term, resources might need to be redirected if the conflict escalates, such as tech company employees being called up for military reserve duty.

Quincy Krosby, Chief Global Strategist at LPL Financial in Charlotte, North Carolina, anticipated a substantial effort to protect physical facilities of Israeli-based companies from attacks. This heightened security focus is driven by the fact that some technology spending is linked to military-related purposes.

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A spokesperson for chipmaker Intel Corp (INTC.O), Israel’s largest private employer and exporter, stated on Sunday that the company is closely monitoring the situation in Israel and taking measures to protect and support its employees. The spokesperson did not disclose whether the chip production has been impacted by the ongoing situation.

Nvidia(NVDA.O), the world’s leading producer of chips used in artificial intelligence and computer graphics, announced the cancellation of an AI summit scheduled to be held in Tel Aviv the following week, where CEO Jensen Huang was set to speak.

Israel-based Tower Semiconductor(TSEM.TA), a provider of analog and mixed-signal semiconductors primarily for the automotive and consumer sectors, reported that it was operating normally.

Other major tech companies like Meta Platforms(META.O), Alphabet(GOOGL.O), and Apple(AAPL.O) did not respond to requests for comment, while Microsoft(MSFT.O) declined to comment.

Israel’s tech sector had already been experiencing a slowdown in 2023, further exacerbated by internal political conflicts and protests. As a result, an increasing number of Israeli tech startups have been incorporating themselves in the United States.

MILITARY, AI SPENDING BOOST

The history of Israel’s technology sector traces back to 1974 when Intel first established a presence, but the real boom in startups occurred during the 1990s, gaining recognition as the world’s second-largest tech hub after Silicon Valley. This growth led to the emergence of thousands of companies, forming a robust ecosystem.

Presently, Israel hosts 500 multinational corporations, primarily focused on research and development activities after acquiring Israeli startups. These multinationals include major players like Intel, IBM, Apple, Microsoft, Google, and Facebook.

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In June, Prime Minister Benjamin Netanyahu unveiled Intel’s plans to invest $25 billion in a new manufacturing facility located in Kiryat Gat, approximately 42 km (26 miles) from Gaza. This significant investment is set to open doors in 2027 and is regarded as the largest-ever international commitment to Israel. It is expected to generate employment for thousands of people while contributing to the country’s chip manufacturing capabilities and design centers.

Looking ahead, the technology and artificial intelligence (AI) sector, where Israel has consistently demonstrated leadership, may witness increased investments. This growth is driven by the sector’s close alignment with military spending, potentially resulting in greater financial resources allocated to technology, which could subsequently benefit private-sector tech companies, as noted by LPL’s Krosby.

Krosby suggested that “there is a likelihood of increased investment in AI, pointing out that when a country faces unexpected challenges, one of the first areas to review, besides addressing intelligence issues, is the evaluation of gaps in security systems.”

“This could lead to additional financial support being channeled into technology for military purposes, which may subsequently benefit private-sector tech companies.”

The tech sector has demonstrated its resilience in the past, successfully navigating through various conflicts with Hamas in Gaza.

Apjit Walia, the Managing Director at DVN Capital, highlighted that the Israeli tech sector has a history of recovering from geopolitical setbacks.

Reporting by Max A. Cherney in San Francisco, Mica Rosenberg in New York, and Steven Scheer in Jerusalem;

Editing by Kenneth Li, Megan Davies, and Jamie Freed.

 

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