China to be Israel’s biggest infrastructure partner

Photo: Avi Ohayon

Chinese is becoming the dominant force in Israel’s transport infrastructure as it seeks to establish new trade routes in the region.

“Independence” is a very popular concept in Israel, however, the concept is a very flexible one. In reality, Israel’s strategic geopolitical position has made it the political and economic playground of foreign powers throughout history, leaving very limited room for the judgment of the “local” residents. The establishment of the State of Israel in 1948 did not change the big picture much.

Until last decade, for example, the dominant force that molded Israel’s financial-political “independence” was the United States. US interests still carry significant weight in Israel’s economic and political conduct, but over the past five years, the beginnings of what may be termed the “Chinese chapter” in the history of the Israeli economy have become apparent.

We’re not just talking about high-profile business mergers and acquisitions, like the buying control of Makhteshim-Agan or Tnuva. The Chinese are entering Israel today via the roads, tunnels, ports, and train tracks that are under construction, and in the coming years the Chinese will build and manage transport projects totaling tens of billions of shekels.

As usual with us, in order to put together and understand the big picture from the scattered puzzle pieces, we must take three steps: examine the narrow picture, place it in the context of the bigger picture, and, of course, apply the “iron rule”: follow the money.

The narrow picture: conquering by land and by sea

Even the “narrow” picture is very impressive. In the past five years, the Chinese have become one of the strongest powers in Israel’s transport and infrastructure sector. All this has transpired while maintaining a low business profile, practically undercover, considering the scale.

Following is a partial list: On land, the “great adventure” began with the Carmel tunnels project, which was built by a Chinese government contractor for a total of billions of shekels starting in 2007. The adventure continues with the excavation of the tunnels on the Akko-Karmiel train line, at a cost of NIS 700 million, which is being carried out through a partnership between Danya-Cebus and a government-controlled Chinese construction company.

At sea, a Chinese company recently won a tender to build the future Ashdod port at a cost of NIS 3.6 billion. In parallel, another Chinese company won a license to operate the new deep-sea port, to be built in Haifa.

There are currently two Chinese manufacturing giants competing in the railway market, together and separately, for two projects worth billions. The first is to supply electric locomotives to Israel Railways under the Ministry of Transport’s electrification project - between 62 and 78 locomotives are needed, at an average cost of €3.5 million per locomotive. The second is to supply 90-120 cars for the “Red Line” light rail in the Tel Aviv metro area, at an estimated cost of NIS 2 billion.

And all this is just a prelude to the flagship future Eilat train construction project, at a cost of NIS 20-50 billion. This project is still being enthusiastically advanced in the halls of government, and it was reported, among other things, that there is an option to exempt it from the tender-obligation law and to carry it out as a direct agreement between the Israeli and Chinese governments. Chinese banks will also take part in financing the cost.

Should such a project in fact happen, it will be a triple-Chinese contract: Chinese contractors will build the train line to Eilat, trains and locomotives from China will provide the “hardware” - locomotives, train cars, and infrastructure at a cost of billions of shekels - and, in addition, it’s possible that a direct link to the new Ashdod port will be built, which will also be built by a Chinese company. This will create a “direct land bridge” of sorts on one track, bypassing the Suez Canal, and connecting the Red Sea to the Mediterranean Sea.

The Chinese are doing well with busses as well. In 2011, when China’s Yuotong busses first arrived in Israel, many in the sector were doubtful as to whether they could leave a significant mark on such a conservative market. However, Yuoyong has since put more than 400 busses on Israel’s roads - a very significant share of the heavy (over 10 ton) bus market, and last year, another Chinese manufacturer, Golden Dragon, came on the scene, and is also doing well.

The two companies launched advanced Euro 6-emissions-standard busses, and the sales charts from the beginning of the year indicate an upset: despite the strong dollar, in the first two months of the year, the two companies seized nearly 39% of the sales in the sector, and established themselves in second and third places on the chart. At least two more “established” bus importers - Colmobil and Mayer Group - both of which market Western brands, plan to begin marketing Chinese busses by year end. In addition, the government companies, Egged and Dan, are considering buying hundreds, or even thousands of “regular” or electric Chinese busses.

After the busses, came an appetite for trucks, and in the coming months, China Motors, the importer of Yuotong busses, will begin to import also heavy trucks from China. According to the company website, the trucks will be made by Schanxi, and their import will “Change the face of the market in the coming years.” The heavy truck market is the backbone of Israel’s infrastructure sector, and is territory that has been dominated by the European brands, with a great deal of brand loyalty. But a combination of attractive specs and bargain prices, in typical Chinese fashion, may do the trick.

Two Chinese private car manufacturers have also been operating in Israel for a number of years, but have not as of yet had the breakthrough they are hoping for, primarily due to regulatory issues, price, and the conservative nature of the local market. This is liable to change in the coming year.

The big picture: The “Silk Road” project

China’s success in penetrating the Israeli transport sector, impressive as it is, is just one piece - though significant in its own right - of the global transport-economic puzzle, which the Chinese government is working diligently to complete. This puzzle is called the “New Silk Road” project, and was launched personally by China’s Premier under the slogan “One belt, one way” (which presumably sounds better in Chinese).

This project is intended to create two trade routes, the goal of which is to expand China’s economic, and presumably also political, influence. One route will be land-based, and will pass through 20 countries and is intended to connect China to Europe, more or less along the path of the Silk Road of yore. This is a very expensive and difficult avenue to implement, both in geographic and in political terms, due to the many wars and conflicts in the regions through which it passes.

The second route, which is more relevant to us here in Israel, is a strategic maritime trade route that will connect the primary ports in China with the biggest shipping terminals in Africa and the Middle East.

Here, Israel plays a key role thanks to the “land bridge” bypassing the Suez Canal, and its access to the Mediterranean Sea. This would be a significant change in dynamics between the powers, and the US is keeping more than one eye on the matter. A recent study by Washington's Institute for National Security Studies (INSS) stated, “It is reasonable to assume that Chinese efforts to implement this initiative will have an important impact on the economy in the region and on regional trade configuration, investments, and infrastructure development.”

Israel, as mentioned, is just a piece in this Chinese plan. Other links already exists not far away. The Chinese shipping company COSCO, for example, already manages the Port of Piraeus and is expanding it, after having acquired partial ownership five years ago for hundreds of millions of dollars.

The Chinese government is also actively involved in the operations of the Chinese companies dealing with strategic contracts in the region. In December of this year, for example, a $26 billion merger began between the two leading train manufacturers in China, CNR and CSR (both of which incidentally competed separately for contracts in Israel). The stated goal of the merger is “To improve China’s ability to compete for international contracts.”

The Chinese entry into infrastructure in Israel was warmly received at all levels of government, and particularly in the Ministry of Transport, has been steady and consistent in its declarations all along the way. Already in 2012, after Minister of Transport Yisrael Katz’s visit, he issued a press release, stating, “Israel and China began preliminary talks today regarding the possibility of establishing a train line to Eilat, through the Chinese government, which will serve to transport passengers and freight from Eilat to central Israel.”

The announcement continued, “According to the agreement, the National Roads Company of Israel will be responsible, on behalf of the Ministry of Transport, for the implementation of the Memorandum of Understanding (MOU), and China’s infrastructure and transport company CCCC will represent the Chinese. CCCC is very advanced in the planning and construction of transport infrastructures and undersea excavation. The company was involved in the planning and establishment of big ports and navigation channels along China’s coast, and the construction of highways, bridges, and tunnels in China, Asia, Africa, and South America.”

In March of this year, after a Chinese company won the tender to manage the Haifa port, Yisrael Katz said, “This is a historic day,” and “The Chinese group that won the tender will bring competition to the sector, and represents a vote of confidence on the part of a superpower in the State of Israel, in that it has decided to invest billions of shekels in Israel and to transform it into an international transport center for goods from around the whole world.”

In parallel, the two countries are working towards signing a free-trade agreement between Israel and China, and in March of this year an “Israel-China negotiating team,” headed by Professor Eugene Kandel was established.

Follow the money

There is no dispute regarding the long-term economic benefits for the Israeli economy as a result of becoming a strategic “trade hub” for the Chinese economy with Europe. But also in the short-term, there’s nothing to complain about. The Chinese government already formally allocated a theoretical budget of roughly $140 billion for the New Silk Road project, $40 billion of which is a formal government investment, and another $100 billion that is to be raised by the Asian Infrastructure Investment Bank (AIIB). Analysts, however, believe that the real budget will be triple the amount; close to half a trillion dollars. Even a small portion of these unfathomably large sums, which will trickle to Israel, can contribute a non-negligible amount to the local economy, and of course will pave a sort of a private “Silk Road” into the (silk) suit pockets of brokers, bigwigs, people with government connections, retired politicians, and a long list of other “middlemen.”

There are those who will claim that this is not at all some Chinese master plan, rather just a side-effect of the Chinese economy’s financial and competitive “natural force,” or at the very most, a business coincidence. But reality has taught us that coincidences are rare when talking about business of this scale, and certainly when the business is with the Israeli government. So perhaps we should all begin learning the Chinese national anthem, just in case, and of course, for the glory of Israel.

Published by Globes [online], Israel business news - www.globes-online.com - on April 29, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Photo: Avi Ohayon
Photo: Avi Ohayon
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