Three years ago, Kibbutz Yizre’el-based Maytronics (TASE: MTRN), a world leader in swimming pool cleaning robots, was enjoying positive momentum: demand was growing, as were profits, and the share price was on the up.
The company’s second quarter 2024 financials, however, released the other week, indicated the reverse trend, one that in fact has been evident for a while. Year-on-year sales were down and profits were eroded. Maytronics’ share price is down 85% from its November 2021 peak, wiping NIS 7.8 billion off the company’s market cap.
Besides high interest rates, accumulated stock at the company’s distributors, and climatic factors, a further reason for the downturn in Maytronics’ fortunes is competition from Chinese companies. In its financial statements, the company states that it has observed "the advent of a large number of Chinese players (on online sales channels, S. H-W.) presenting value propositions at a wide range of prices, amid significant investment in digital marketing."
Maytronics is just one example of an Israeli company that has developed a winning product, grown, and achieved a substantial slice of a global market, only to find competition from China (among other factors) hurting its business and its share price.
Other companies that, to varying degrees, can serve as examples of the phenomenon are,: SolarEdge (Nasdaq: SEDG), which develops and produces systems for maximizing output of solar installations, and has seen its share price plunge 93% from its 2021 peak, wiping over $17 billion from its market cap; Caesarstone ((Nasdaq: CSTE), a manufacturer of countertops from quartz and other materials, with a share price down 93% from its 2015 peak, wiping $2.4 billion off its market cap; and privately-held irrigation equipment company Netafim of Kibbutz Hatzerim.
Of course, it isn’t only Israeli companies that are affected by growing competition from China, which sometimes begins with local cooperation between the two sides, until the Chinese player learns the market and the technology and sets up its own company that takes market share from the original company. In other cases, Chinese entrepreneurs simply identify an attractive technology or product, and develop a similar one of their own.
China expert Yuval Weinreb, who presents the podcast "Understanding China", says that competition from Chinese companies occurs in almost every industry. "One of the most famous instances is water management technology, one of the first areas in which Israel succeeded in exports to China, with Netafim and other companies," he recalls.
"Netafim had great success with its drip irrigation and smart management technology. When there’s something in great demand, they study it, and then copy it amateurishly, and improve over time. Since the Chinese are capable of doing something that provides 80% of the quality at 30% of the price, they take over large market shares in China, and the ones who are left to sell to (the original technology, S. H-W.) are those for whom quality technology is important. In water technology, Israeli companies are considered high quality, but the gap is narrowing."
Carice Witte, founder and executive director of SIGNAL Group, a think tank on Israel-China relations, believes that competition from Chinese players will only grow in the future, because China’s economy today is not in a good state. "Unemployment among young people is high, and every year millions more young people enter the labor market. The adjustments that the government is making to improve the economy are working slowly. In China, there are people with highly entrepreneurial temperaments, many of them well educated, and they are looking for any way to make money. The phenomenon will expand, because the economy is weak and the economic situation is challenging."
Witte cites as an example Chinese competition in China’s backyard, South East Asia. "In Thailand, there are factories that produce local ceramic objets d’art. Today, the Chinese produce them, it flows to Thailand, and leads to the closure of local factories. In China there’s cheap labor and large production capacity, and so they can bring down prices even in industries in which there are no government subsidies as there are for electric vehicles."
Witte also mentions the power of Chinese state-owned businesses, some of which don’t even need to be profitable. "Every industry in areas that the government considers important to it from the security point of view, such as transport, food, energy, is a well-subsidized industry," she says, and as an example points out that the Chinese supply 80% of the derrick cranes at ports around the world. "Of course, microchips, nanotechnology, robotics and cyber are prioritized for support in the central government’s budget."
"The Chinese government identifies strategic markets that are important for it to enter, and then gives very large subsidies to companies, chiefly at the early stages," Weinreb adds. "Companies are given benefits to enable them to compete effectively overseas, and they can thus often offer prices that are lower than the cost of production. At a certain stage, when the market is sufficiently mature - the electric vehicles market, for example - there is no longer any need for subsidies.
"There are several very large companies that can manufacture at very large scale, and that take advantage of the benefits of scale and of labor that is cheap in comparison with the West. These are efficient and good companies, and because there is competition between the Chinese companies themselves, they produce more than local demand requires, and export at very low prices that Western companies find hard to deal with."
Weinreb cites as an example SolarEdge, which, as mentioned, is active in technology for the solar energy industry, producing converters, optimizers, and so on. "SolarEdge hasn’t become worse, but what it can do uniquely, there are now other companies - not just Chinese incidentally - that can provide something near enough. And if it’s sufficiently cheap, that’s attractive to an appreciable portion of the market," he says, in an explanation that apparently also applies to what hit Maytronics, and, in the past, Caesarstone.
From well-paying customer to competitor
Sergey Vastchenok, a senior equity analyst at Oppenheimer & Co., says that the companies that are most vulnerable to Chinese competition are those in hardware, on which profit margins are low. "They’re less strong in software, but in hardware, they’re second to none. They make any hardware in the cheapest possible way, and that’s why stocks in that field, not just Israeli ones, have underperformed over the years.
"In the end, what helps Israeli and US companies in competing with the Chinese is the regulators. The US regulator forbids the import of Chinese telecommunications equipment, for example. There are all kinds of customs duties and trade wars, and Europe is also beginning to go in that direction.
"The more that a company is active in the Western world, especially the US, the less Chinese competition it has. The Chinese are currently advancing in the technology value chain to sell not just consumer electronics and electric cars, but also things with high added value, such as chips. Many Chinese companies are looking for technology, and work with Israeli companies. At the beginning, they can be a well-paying customer, and then they become a competitor. It is therefore important to protect intellectual property and to be alert."
For his part, Weinreb argues that the Chinese are very strong in software as well, although he does say, "There’s no doubt that they have greater advantages in hardware. In software, they have no special advantages apart from a few of the engineers, but they are certainly capable of producing software of very high quality. The thing is that that China’s focus as an economy is on ‘the real economy’ and not on digital. China’s five-year plan and its strategic programs, at this point in time at least, put the emphasis on hardware, because that is what’s important to them. At the macro level, the emphasis is on achieving a strategic advantage in green energy, electric vehicles, high-speed trains, transport infrastructure, power plants. In these areas, the companies receive support from the government, and that helps them to build a lead. These are areas in which producing innovation takes time, and from development to implementation the timescale is long."
What can be done?
What Israeli companies have encountered competition from China and have succeeded in coping with it? Vastchenok mentions Caesarstone, which, as mentioned, met with Chinese competition a few years ago that led to a collapse in its share price. "But the US regulator did their work for them and blocked imports of products from China, although then completion arrived from India," he says.
Another example, one that does not include assistance from a regulator, is Israel telecommunications equipment company Ceragon Networks (Nasdaq: CRNT). It encountered competition from China, but, Vastchenok says, "it understood where it was living" and succeeded in maximizing its market by turning to other geographies that the Chinese had not taken over.
Weinreb mentions Innoviz Technologies (Nasdaq; INVZ), a developer of LiDAR technology for vehicles. "It operates in China as well. The company produces more innovative and advanced products than its Chinese competitors, and maintains its technological advantage, but through very high investment in R&D and in effective work with its customers, and it has managed to keep a nice market share. This is as opposed to companies that make batteries for electric vehicles. The Chinese have overtaken them, and now produce high quality batteries that don’t just compete on price."
In effect, these are the two ways of dealing with competition from China: finding other niches or markets, or substantial investment in maintaining a technological advantage. Weinreb believes that dealing with competition with China in a market without tariffs and restrictions is complicated and difficult. "Israel and China are essentially very different industrial powers. Israel is best at innovation, at producing unique things with added value, and until they are copied there is the advantage of the special value," he says.
"The Chinese are the best in the world when it comes to scale. There’s something that exists, that’s a commodity or on the way to being one, and they know how to produce it in very large quantities and very efficiently, with local and international distribution. They have access to local companies in the supply chain, which helps efficiency. When it comes to things that are almost a commodity, it’s very hard to compete with companies from China. I tell companies with which I work that the way is to preserve the technological edge, to offer a roadmap of improvements and technological developments all the time, and to win thanks to the value, the innovation, and the ability to solve problems."
"Israeli companies need to present better branding," adds Witte, "to strengthen the customer network, and to advertise effectively, whether their competitor is Chinese, German, or Australian. Everyone has access to the market. The only special thing about China is that there are so many of them, and many of them very much want to succeed."
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2024.
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