China's infatuation with Israeli technology deepens

Omer Kreisel

Poalim Capital Markets CEO Omer Kreisel discusses the Chinese money that is pouring into Israeli tech companies.

At the end of the first quarter of 2015, Shanghai-based food and beverages multinational Bright Food Group Co. Ltd. completed its acquisition of the controlling interest in Israels Tnuva Food Industries Ltd. at a company value of NIS 8.6 billion. This deal, which was financed by a syndicate led by Bank Hapoalim (TASE: POLI), marked a new high point in a campaign of acquisition and collaborations between Israeli and Chinese companies in recent years.

It began small, in early 2010, when Pegasus Technologies Ltd., which develops and sells a digital pen for the computer environment, was sold to Chinas Yifang Digital Co. Ltd. (Poalim Asia Direct Ltd. managed the deal). A year later, China National Chemical Corporation (ChemChina) acquired Adama Agricultural Solutions Ltd. (then called Makhteshim Agam Industries) at a company value of $2.4 billion. The flow of investments and collaborations has subsequently only grown.

A sampling since 2014 includes the acquisition of high-tech company TravelFusion Ltd. by Chinese site Ctrip.com, the acquisition of Natali Healthcare Solutions Ltd. by SunPower Co. Ltd., an agreement to build the new Ashdod port by China Harbour Engineering Company Ltd., at an investment of more than $3 billion, a series of financing rounds by Israeli venture capital funds and start-ups from Chinese investment companies, and expanded collaborations between Israeli and Chinese universities to set up advanced research centers in which more than $100 million will be invested in the coming years.

A sampling since 2014 includes the acquisition of high-tech company TravelFusion Ltd. by Chinese website Ctrip.com, the acquisition of Natali Healthcare Solutions Ltd. by SunPower Ltd., an agreement to build the new Ashdod port by China Harbour Engineering Co. Ltd. at an investment of more than $3 billion, a series of financing rounds by Israeli venture capital funds and start-ups from Chinese investment companies, and the expansion of collaboration between Israeli and Chinese universities to set up advanced research centers into which more than $100 million will be invested in the coming years.

These investments show that the Israeli-Chinese market, which previously mainly interested Israeli companies seeking to gain a foothold in China, has become a two-way street, and that this trend is not unique in Sino-Israeli relations. In fact, it is the result of Chinese government policy to encourage Chinese companies to invest more outside the country. It is estimated that a quarter of investment, $25-30 billion, is currently channeled to destinations outside China.

Israel has a relative advantage

Another reason for capital outflow is that Chinese investors are struggling to make profits on domestic investments at rates similar to what they achieved in the past. In this context, Israel has relative advantages over other countries which attract Chinese investments, mainly thanks to technological innovation.

Investors expansion beyond Chinas borders is connected to other processes underway in the country: the growth rate is still high compared with the West, but has fallen to 6-8%. China current economic dialogue focuses on quality rather than quantity, and the main objective of decision-makers is to support more technological development in order to make the rapidly growing domestic consumption market more sophisticated. At the same time, Chinas government is pushing private initiative more strongly and is fighting a fierce battle to reduce corruption.

The Chinese mainly tend invest in more advanced-stage companies rather than start-ups, but there is growing interest by Chinese Internet giants Baidu Ltd. (Nasdaq: BIDU), Alibaba Group Ltd. (NYSE: BAB)m and Tencent Holdings Ltd. (HKSE: 700) - in new technologies, which are expected to result in greater investment by these and other companies in Israeli technologies companies at different life stages.

In addition, it is believed that, like leading US technology companies, Chinese giants will set up R&D centers in Israel on the basis of Israeli companies that they will acquire or in some other format. These trends should draw the attention of Israels high-tech industry. The focus of Israeli technology on the US as the main target market will remain in the years ahead, but new opportunities that will emerge in China will broaden the diversity of options for Israeli companies. This is a welcome trend, and Israeli companies that spot the business potential of China early will reap the rewards.

Entering China, step by step

An estimated 1,000 Israeli companies are currently operating in China. Our experience accumulated through Poalim Asia Direct indicates that the right way to enter China is through linking up with a local professional organization with excellent ties and experience in the relevant businesses. This might sound trivial, but our people in China still encounter managers of Israeli companies who erroneously think that the Chinese market is so big that anyone can find a suitable area of business.

Our first piece of advice is that you must study the relevant market for the companys activity. Learning about China takes more time than other target markets in the world, but it is not necessarily a factor that will prolong gaining a foothold in the country. This is because China has an advantage for those who need to set up factories and infrastructure projects, the set-up process of which is much shorter than in Israel. In other words, more time spent in study and preparation, but less time is spent in set-up and construction.

Another important piece of advice is that it is worthwhile to operate in stages. Do not rush to set up a local office, but begin with activity through distributors and outsource. Only if that succeeds should you open an office in China, and when operating in a country like China, local managerial skill is very important.

The principle of gradualism is also connected to the concept of friendship. Israelis, like other foreign businesspeople, quickly learn of the importance of friendship in business relations and the fact is that the status of friendship is no less, and usually more, important than a written contract. However, the way we perceive friendship is not necessarily the same way the Chinese see it, and it cannot be built immediately.

Achieving the status of friend of a Chinese businessperson requires thought, time, and attention. If you ask Israeli businesspeople what they invested the most time in China, they will usually say: in developing a network of relations with potential Chinese partners.

Negotiating tactics are different from the West

In addition, relationships with the Chinese are constantly tested. It is important to conclude the details before signing a deal, and not to leave room for misunderstandings.

Quite a lot has been written about negotiating tactics in China. In contrast to Western codes, in which a concession during negotiations might be perceived as a gesture to close a deal, the Chinese interpret concessions by the other party as a sign of weakness, which is liable to end up in undesirable results.

For Israeli companies, which usually sell technological knowhow, one of the most important objectives in contracting with a Chinese company is to stay relevant and needed over time. If the contract results in the Chinese being able to use Israeli intellectual property, the contribution of the Israeli side is reduced, and no contract will protect you standing in the future.

In conclusion, here are some more tips: the Chinese love written material. Therefore, when you embark on a business venture, equip yourself with as much written material as possible (catalogues, examples, and so forth), preferably translated into Chinese. Hire a good translator in advance (with the recommendation of other businesspeople). You should also give thought to the cultural differences that exist between Chinas different regions, between the big cities and smaller ones, between companies in different businesses, and so on. In addition, prepare for many meals. The way to a Chinese businessmans heart is through his stomach; i.e. business meals.

Omer Kreisel is the CEO of Poalim Capital Markets Ltd.

Published by Globes [online], Israel business news - www.globes-online.com - on May 31, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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Omer Kreisel
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