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Israel to invest heavily in military tech, AI, tech businesses to see major disruptions

Israel is home to some of the biggest tech companies in the world. For example, Intel, one of the biggest CPU manufacturers, has one of Israel’s most significant design and fabrication facilities.

However, because of the ongoing Israel-Hamas war, Israel’s tech industry faces significant disruptions as recent events have shaken investor confidence.

Tech companies operating in Israel are expected to fortify security as they could face disruptions, said investors and analysts, after Hamas gunmen from Gaza killed hundreds of Israelis and abducted an unknown number of others, per a recent Reuters report.

High-tech industries have been the fastest-growing sector in Israel for a few decades and are crucial for economic growth, accounting for 14 percent of jobs and almost a fifth of the gross domestic product.

Israeli stock and bond prices slid, and many businesses were closed on Sunday after gunmen from the Palestinian group Hamas rampaged through Israeli towns on Saturday; militants also fired thousands of rockets into Israel in a surprise attack.

Some rockets reached as far as Tel Aviv, prompting airlines to suspend flights to and from Israel.

Israel retaliated with air strikes on Hamas targets in Gaza, and hundreds of people have died.

“It is a huge disruption to business as usual,” said Jack Ablin, chief investment officer and founding partner at Cresset Wealth Advisors. He said resources could be diverted in the short term if the conflict expands, such as staff at tech companies being called up as military reservists.

Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina, said there will likely be a “tremendous effort” to guard physical installations for companies based in Israel from attacks because some technology spending is tied to the military.

A spokesperson for chipmaker Intel Corp, Israel’s largest private employer and exporter, said on Sunday the company was “closely monitoring the situation in Israel and taking steps to safeguard and support our workers.” The spokesperson declined to say whether the situation affected chip production.

NVIDIA, the world’s largest maker of chips for artificial intelligence and computer graphics, said it had canceled an AI summit scheduled for Tel Aviv next week, where its CEO Jensen Huang was due to speak.

Israel-based Tower Semiconductor, which provides customers with analog and mixed-signal semiconductors, mainly for the automotive and consumer industries, said it was operating as usual.

Other tech giants, Meta Platforms, Alphabet, and Apple, did not respond to requests for comment. Microsoft declined to comment.

Israel’s technology sector had already been facing a slowdown in 2023, exacerbated by internal political conflict and protests. Many of Israel’s tech startups have been incorporated in the United States.

MILITARY, AI SPENDING BOOST
Israel’s tech sector dates back to 1974, when Intel established a presence. Still, the start-up scene took off in the 1990s, earning a reputation as the world’s second-largest tech center outside of Silicon Valley, with thousands of companies and developing a significant ecosystem.

There are now 500 multinationals operating in Israel – mainly research and development centers after buying Israeli start-ups – from Intel to IBM, Apple, Microsoft, Google, and Facebook.

In June, Prime Minister Benjamin Netanyahu said Intel planned to spend $25 billion on a new factory in Kiryat Gat, some 42 km (26 miles) from Gaza.

Due to its opening in 2027, he called it the largest-ever international investment in the country that could employ thousands of people and would add to its chip plants and design centers there.

In the longer term, the tech and AI sector, where Israel has been a leader, could see increased investment because of the industries’ close tie-in with military spending, LPL’s Krosby said.

“They will probably increase the investment in AI,” Krosby said. “When a country is caught off guard, the first thing they look at – besides the obvious problems with intelligence – is what was missed within the security systems.”

“It could bolster support for more financial resources for tech for the military, which then ultimately transitions to the private sector tech companies,” Krosby added.

The tech sector has shown resilience, overcoming several conflicts with Hamas in Gaza.

Ajit Walia, the Managing Director at DVN Capital, said the Israeli tech sector “has historically bounced back from geopolitical tragedies.”

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