At the Israel Venture Association (IVA) conference two weeks ago, quite a lot of attention was devoted to the Far East, or to be more exact, China, which is a hot topic in the US. Given the inconceivable number of talented engineers trained each year in China, and the low costs there, almost every leading technology company has a presence there. It started five years ago, with the transfer of production to the region, and is now developing into R&D centers in India and China, which are becoming technology empires.
Shrem Fudim Kelner Technologies (SFKT) CEO Yehoshua Gleitman says that SKFT already has offices in Taiwan, South Korea, Singapore, and Palo Alto. Opening an office in China is under consideration, in view of the development of business there, which at this stage is based on partnerships with local concerns.
Vertex Venture Capital Group invests in Chinese companies. Vertex Management vice president KT Wan says that the successful IPO on Nasdaq and the Hong Kong Stock Exchange in February by Chinese company Semiconductor Manufacturing International Corp. (SMIC) constitutes further proof that China is establishing itself as a technological power.
To make his point, Gleitman cites some amazing statistics: “China’s GDP is $1.4 trillion, giving it the world’s eight largest economy. In partial priority prices (PPP), however, China is number two in the world, after the US. China’s economic growth, an especially rapid 9%, is focused in a number of specific provinces, such as Guangdong and Shanghai, and is not spread all over the country. China is opening itself to the world in foreign trade - its imports exceeded its exports last year and the first sector being opened is technology.”
Israel Consul General to Shanghai Ilan Maor says that China’s rapid growth is hard to analyze. “No one knows how long this growth rate will continue, or what its effects on the world will be. Up until recently, Israelis thought of China as a country that manufactures cheap plastic toys. That’s still true, but now they also produce technology from wireless telephones to refrigerators and television sets. One proof of China’s growing power is that the US recently begin talking about levying customs duties on Chinese TV sets in order to protect its own products,” Maor comments.
”Globes”: Do they only manufacture, or do they also develop?
Maor: ”Five years ago, they only manufactured. Today, they also develop.”
Wan says that Vertex began looking at and investing in Chinese companies as early as the beginning of the 1990s. He says, “I can say that China has taken the place of Taiwan for us, even before it produced low-cost technology products. It’s important to realize that China is huge. When we talk about its technology and growth rate, what we say applies only to a few provinces. China has technology foci. Technological industry developed in China after manufacturing was transferred there, but rapidly changed its character.
”All the world’s major technology companies now have offices in China. I think that most of this industry is confined to Shanghai. Foreign investors are now traveling to China to invest in Chinese companies. We invested in SMIC. Most of the investors were foreign.”
SMIC is an amazing example of a company founded in 2000, which became a public company in February 2004. Except for Motorola (NYSE: MOT) and Shanghai Enterprises, about half of the company belongs to the employees, and to SMIC CEO Dr. Richard Chang (Zhang Ru-jing).
Maor: ”Ten years ago, China did not have a single semiconductor company. The Chinese IT industry grew 70% to an estimated $2 billion last year. For all intents and purposes, SMIC is a start-up. The semiconductor industry is growing rapidly, not only because personnel is inexpensive, but because the semiconductor industry is actually in China.”
Should Israel entrepreneurs be concerned?
According to Gleitman, it is impossible to compare Israeli and Chinese high tech, mostly because China is a huge market. “It’s something completely different. China leads the world in the number of broadband Internet users. Last year, South Korea was number one in the world, while China had four million users. Now, it’s ten million. I don’t think any other country has experienced such a growth rate; it’s inconceivable.”
What about restrictions and the political establishment?
Maor: ”Where economics is concerned, China is completely liberal.”
Gleitman says that it should be kept in mind that China doesn’t just manufacture chips: “Their technology is advanced.”
Wan points out that in economics, China is completely capitalistic, despite the communist political environment. “Foreign investors can easily invest, and regulation is improving. Furthermore, quite a few Chinese who went to the US and Europe during the high-tech boom returned to China following the global high-tech crisis. People with experience are returning to China and setting up companies, which is expediting the process,” Wan says.
Maor states, “The process is visibly penetrating Chinese society. Young Chinese are dreaming of founding a start-up. It can be compared to what happened in Israel in the second half of the 1990s. That’s why China is very curious about Israel and its high-tech industry.”
Gleitman and Maor agree that China could be a huge opportunity for Israel companies, particularly because China has fewer investors than Europe and the US. Maor says that quite a few companies have spied the potential in Shanghai: “Israel has reason to be concerned. The rules of the game are changing in front of our eyes. Israel can no longer look at US markets only. While only 15 Israeli companies a month asked the consulate for help two years ago, 80 companies per quarter are now examining the Chinese market. In 2003, 270 Israeli companies, from shoe manufacturers to high-tech companies, asked us for help. Israel now realizes that Europe and the US are not the entire world.”
So we don’t have to worry.
Gleitman: ”Chinese companies mostly threaten the giants, such as Cisco Systems (Nasdaq: CSCO) and Nokia (NYSE: NOK). They aren’t a threat to small companies, and the small companies don’t threaten them. It is entirely possible that, on their way to the top, they will need the technologies that small Israeli companies can sell to them. I believe that it could happen, because Israeli companies’ ability to work in a different and distant environment gives them an advantage.”
What are Chinese companies looking for?
Maor: ”Chinese companies are looking for technology that doesn’t exist anywhere else. If you have that, they’ll listen. You have to offer them something that will help them make rapid progress.”
Interest in China is not confined to the companies themselves. Maor says that the Israeli venture capital community is definitely interested in China. Without mentioning names, he says that 15 funds have contacted him. In addition, the IVA itself is scheduled to conduct an event in Shanghai in June 2004.
Wan adds that US venture capital funds are working in China with local partners, although some of them are considering opening offices. “Direct foreign investment in China amounted to $53 billion last year. 70% of Chinese exports currently come from original equipment manufacturer (OEM) agreements. That’s how the industry started in South Korea and Taiwan. China’s main interest lies in increasing its exports and manufacturing. I think it will happen quickly, and take 15 years, as recently predicted by Morgan Stanley Dean Witter Hong Kong.”
Published by Globes [online] - www.globes.co.il - on April 14, 2004