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CHINA’S NEW SILK ROAD LEADS TO ISRAEL

By: Dave Gordon



Rallying against China’s alleged unfair trade practices, earlierthis year President Donald Trump became tangled in a China-US trade war, involving dueling tariffs and banned Chinese products.

Though the political heat has cooled off somewhat, the White House remains leery aboutthe communist regime undercutting American interests.

Although the Chinese find friction in the West, they have begun partnering more and more with Israel, with a strong interest in start-ups, entrepreneurs, and hi-tech. The two countries are cooperating and collaborating on billions of dollars of business, technology, and investment.

Both warming relations between China and Israel and the Jewish State’s meteoric rise in the tech industry have helped to spur this positive partnership.

The growth is rapid. According to Thomson Reuters’ data, Chinese investment in Israeli corporations tripled in the past few years to $16 billion – with about $600 million directed specifically towards startups. Israel’s IVC (Israeli Venture Capital) Research Center concludes that with each passing year, some 16 per cent more companies will have at least one Chinese investor.

The Jerusalem Postbelieves that it will be no time before China surpasses the US as Israel’s main foreign investor.

The phenomenon was discussed at length in January at a summit in Tel Aviv, dubbed Silicon Dragon Israel. Rebecca Fannin, Forbescontributor and author, is founder of Silicon Dragon, which boasts a 30,000-strong network of executives, entrepreneurs, venture capitalists, andangel investors. “A good foundation has been built by these two tech superpowers over the past few years,” notes Fannin.

Mutual Benefits

Founders of tech startups, with recent investment by China tech leaders, say their businesses are progressing faster with Chinese capital, and through introductions, collaborations, and easier access to the large Mainland markets.

Hagai Tal, CEO at Tel-Aviv-based Taptica, an Israeli-based mobile advertisement company, noted that the Chinese “are leveraging Israeli tech to fuel their economy. Israel is held in high esteem as a hub of innovation.” 

Tal asserts, “China is set on learning as much as it can in order to position itself as an innovation economy. Many Israeli companies also see important opportunities in the East, and the meeting point of these two approaches is what produces such successful business partnerships. We've heard over and over from ourChinese partners that the Israeli 'can do' attitude is something they can easily identify with.”

Lee Branstetter, Professor of Economics and Public Policy at Carnegie Mellon University's Heinz College, explained just how far the Israelis have come in thetech world.

As an expert in international trade, economic growth in East Asia, and productivity in the economy, Branstetter notes that since the 90’s, “Israel has created a very impressive cluster of high-tech companies, centered on the Tel Aviv-Haifa corridor. Some of the firms in this cluster are doing truly world-class research. Areas of strength include information security, machine vision, and some areas of semiconductor chip design.”

Branstetter cites the political clamp down sweeping through the United States, notably concerns over security, trade, foreign debt, and foreign corporate control, as additional reasons why there has been a cooling off of Chinese investments in the US, which has led to increased Chinese and Israel collaboration.

That collaboration has been echoed on the political level, when President Xi Jinping and Israeli Prime Minister Benjamin Netanyahu signed a memorandum in 2015, agreeing to partner in the technology sector.

For the past three years, the China-Israel Innovation Summit has taken place, with the support of their respective countries’ governments.

Giant Steps Forward

In the past two years, for the first time two Israeli companies entered the Chinese stock exchange: Alma Lasers (bought out by XIO Group in 2013), and Sisram Medical, in part owned by China’s Fosun Pharmaceutical.

In 2016, a Chinese consortium, led by Giant Network Group, paid $4.4 billion to acquire Playtika, an Israeli video game company. A year prior, China’s XIO Group paid $510 million for medical device
firm Lumenis.

In 2014, Tnuva – not just an iconic Israeli dairy, but a beloved national company – was gobbled up by Chinese-owned Bright
Food Group.

Last year, China’s Kuang-Chi Group, whose stated aim is to “invest in and collaborate with innovative technology projects worldwide,” said it was stepping up activities and looking to open an office in Tel Aviv to serve as its International Innovation Headquarters. The Kuang-Chi Group holds a $250 million USD investment fund, reports Forbes. Its chairman, Dr.Ruopeng Liu, told Forbesthat it all had to do with Israel’s “global reputation for innovation,” coupled with China’s strength in the global market.

Forbesreports that Ogawa, a healthcare leader in China, is earmarking $10 million for wellness technology investments in Israel.

Managing China’s Image

An Israeli governmental advisor on Asia partnerships and leading consultant on Chinese corporate marketing, Roi Feder says that as a result of big takeovers the Chinese now have an image issue.

“This stems mostly from negative perceptions of an aggressive global Chinese investment and acquisition spree,” notes Feder, the managing director of Israel-APCO Worldwide, and board director of the Israel-Asia Center.

“They are building stakeholder relationships; conducting social responsibility programs, and working with the media, to better position themselves, as they grow globally.”

Feder is a guest lecturer on Israel-China affairs at The Hebrew University of Jerusalem, Bar Ilan University, and the Institute for National Security Studies, and has assisted in the Israeli government’s effort to support companies seeking to enter the Chinese markets.

 

Complimentary Cultural Differences

An Israeli academic believes the two cultures complement each other in unique ways.

"It's different in organizational culture. The educational system in China places great emphasis on discipline and obedience to the superiors, while the Israeli educationalsystem and the Israeli army encourage students and soldiers to think about new ideas, and to solve problems in situations of uncertainty,” noted Daniel Galily, a former business lecturer at Beijing-Geely University.

“The Chinese understand that, and so they strive to integrate the Israeli creativity to their economy."

Peggy Mizrahi, a Chinese citizen who now lives in Israel, sees both cultures as having a similar view of the world. Mizrahi is the Vice President of Indigo Global, an Israeli boutique investment advisory firm, with operations in Africa, Asia, and the Middle East. She notes that the Chinese are known for long-term planning, for their conservative outlook, and for their hierarchical society. Israelis, on the other hand, are recognized as havinga quick mindset, as being fast movers, innovative, impatient, flexible, and showing a lack of respect for authority.

Mizrachi focuses on the shared commonality. “Both countries share the refugee mindset – suffering for decades in wars, exiles, and Holocaust/massacres. Most importantly, both Israelis and Chinese believe that economic progress and technological advancement will ultimately bring peace and prosperity to the world.”

Proceed with Caution

Many entrepreneurs caution that there can be some challenges working within a communist country.

In 2016, business interaction from China was at an all-time high until Chinese authorities cracked down on the outflow of currency, causing tremendous uncertainty for 2017. In the past year, some of those restrictions have eased.

Furthermore, the challenge can also include a tightly followed hierarchical structure of decision making, meaning, several “rubber stamps” up the ladder are required – and consequently, an unusually high dose of patience, warns David Maman, CEO and Co-founder of Binah.ai, an Israeli company.

Maman recently sold one of his companies, HexaTier, to Chinese conglomerate Huawei.

According to Maman, scores of delegations visit Israel each month from the biggest corporations in China, including Fosun, Huawei, Alibaba, Tencent, and Baidu, exploring investments and collaboration with Israeli startups.

Constantin Overlack, co-founder of ScieCoin, a joint Chinese-Israeli company, states, “The Israeli side can profit from the large market and big money in China, while the Chinese can profit from the high skill set of the Israeli workforce.” He acknowledges, however, “As a foreigner, it’s sometimes tough to get into inner (Chinese) circles.”

For Yoav Oz, co-founder of Spotad, the Israeli mobile adtech startup, success hinged on due diligence, homework, and a methodical, slow process.

After the closing of a $3.5 million Series “A” funding round lead by VLTCM, a private investment firm based in Hong Kong, Spotad became the first Western demand-side platform to enter China, and the only Western mobile advertising platform connected to all the major Chinese ad-exchanges, like Baidu, Alibaba, Sina, and Weibo, as well as Western ones like Google AdX, Rubicon, and others.

Today Spotad works with major players in the Chinese market, and touts itself as setting an example among Israeli startups on how a small start-up from a small country can make it big in China.

It began with something as simple as market research, when Oz arrived in China in 2015 to learn more about the local ad tech industry.

Oz approached Shimi Azar, then managing the social media accounts of the Israeli embassy in China, and invited him to join Spotad.

“Arriving in Beijing in 2011, I saw China becoming an innovation power in only a few years, and wanted to be an active part of it,” says Azar, who was hired to run Spotad Asia-Pacific operations.

In no time, Azar was able to meet with Baidu, a Chinese multinational tech corporation. “They were pretty shocked when I started to speak Chinese with them, which led the meeting to be very positive and efficient.” By the end of the year, Spotad was chosen by Baidu as one of its “top quality partners.”

“We believed that our technology is better than the local competitors, and in order to prove it, we had to be as much local as possible,” noted Oz.

Market Size

The biggest advantage of working with China is obvious – market size.

For Israelis, the sheer market share catches their attention. Ronen Mense, AppFlyer's VP of Asia, an Israeli-based mobile marketing analytics and attribution platform, went to market with a firm Asia-first model.

“In today’s digital and mobile-first world, the Chinese mobile market is like no other. The numbers are staggering: about 800 million
mobile users, nearly 500 million users making payments with their phones, nearly $2 billion quarterly revenue in the Chinese iOS App Store – more than any other country in the world. The list goes on. When you combine the scale and the quality of Chinese mobile users, a clear picture emerges: China is one of the world’s most exciting markets for app and mobile businesses,” notes Mense.

“In our industry, where the mobile phone is the number one platform, if you don’t work in China, you are basically giving up a billion potential clients. On the Chinese side, when they encounter foreign technology that can help them grow, they will adopt it,” says Azar.

Val Kaplan is an Israeli/Canadian who has worked in China for thepast 10 years. His high-tech company, CIMS, has recently been spun off an Israeli NASDAQ listed company called Camtek and sold to a group of Chinese investors for $35M.

They are fairly unique in this market, with products originated in Israel, manufacturing in China, with a management team a mix of Israelis, Chinese, and Taiwanese, and main R&D in Israel. They employ nearly 200 people, the majority in China.

Kaplan noted, “The decision-making culture in most businesses is often centered on a single individual, a company boss, or a technical leader, and is less about building a consensus within a group. Therefore, getting access to that individual and bringing him or her to your side is what sales strategy is often based on. Targeting a wrong person or misreading the inner company politics could be one of those pitfalls.”

Possible Downside
of Collaboration

Although technology can be utilized for the common good, one expert has reservations about increasing binational collaboration.

Jason McNew, founder and CEO of Stronghold Cyber Security, suspects that the Chinese army has eyes on Israeli technology
and “will steal the designs, and use them for whatever they see fit.This is especially true of advanced military technology, an area where Israel excels.”

McNew previously worked for the White House communications agency, where he held one of the highest security clearances.

Professor Branstetter added that while Israeli firms welcome the enthusiasm of Chinese investors and partners, there must be care involved ensuring the technology isn’t misused.

“The Pentagon is increasingly worried that artificial intelligence capabilities acquired by Chinese firms through civilian investments or licensing deals could find their way into a new generation of Chinese weapons that would threaten American troops and American allies,” notes Branstetter.

“If an American pilot were ever shot down by a Chinese missile powered by Israeli technology, it would be a real problem for the Israeli government.”

Bright Future Ahead

The influx of Chinese investment into Israel since 2011 demonstrates China’s keen interest in Israeli technology. Chinese investment in Israeli technology topped $15 billion in the past seven years, where there was almost none previously. Market estimates expect $500m – $600m in Chinese venture capital coming into Israel annually as China becomes an important funder of Israeli technology. Last December the Technion – Israel Institute of Technology became the first Israeli university in China when it opened its campus in Shantou, southern China.

As Robin Li, CEO of Chinese internet giant Baidu said when meeting Prime Minister Benjamin Netanyahu, “Investing in Israel is investing in technology.”