Conservative Japanese cos turn to Israeli innovation

Prime Minister Benjamin Netanyahu hosts Japanese Minister of Economy, Trade, and Industry Hiroshige

A 200-strong Japanese business delegation to Israel continues a trend of warmer ties.

A delegation of 200 senior executives from 100 leading Japanese companies, including Mitsubishi and Toshiba, is visiting Israel this week, accompanied by the Japanese minister of the economy. The delegation is the largest from Japan to visit Israel to date. At a conference in honor of the visit, the warming of relations between the two countries was celebrated, reflected above all in the growth of Israeli exports to Japan, which grew 42% to $1.16 billion in 2018.

Leading this trend are exports of medical equipment, optical equipment, and metal products, but the two countries are making efforts to increase the high-tech and innovation element. Many of the agreements signed refer to this sector, a large proportion of the delegation members come from large technology companies, and a large proportion of the visits to Israel by Japanese representatives include meeting with Israeli high-tech companies and startups. Japanese companies have acquired or bought stakes in Israeli companies to the tune of billions of dollars in recent years, including NeuroDerm, Ormat, and Viber.

In addition, 70 Japanese companies have scouting activity in Israel. The Japanese have made over 200 venture capital investments in Israel since 2014. Japanese company Softbank, which founded a $100 billion investment fund and is currently the leading player in global high-tech investments, also cannot be ignored. Softbank also invested in Israeli company Cybereason (and in a number of other companies that are not registered as Israeli).

A new fund, Magenta Venture Partners, launched only this week, hopes to raise $100 million. The fund is an equal partnership between Mitsui & Co., one of the largest trading and investment companies in Japan, and Israeli venture capital managers Ori Israely and Ran Levitzky. Japanese holding company SBI founded another fund for investments in biotechnology, in which Israeli fund Vertex Ventures is a partner in management, in 2017.

Nevertheless, in comparison with the big money being invested in the Israeli high-tech industry, the Japanese investments are still limited. Japan, the world's third largest economy, accounted for an average of only 2% of foreign investment in Israel in the past five years, according to figures from the IVC research company, which studies foreign investments in Israeli high-tech in 2013-2018. The figures show that investments by Japanese investors totaled $40 million in 2016 and rose to a peak of $186 million in 2017, almost all of which was by Softbank. Investments fell 50% to $92 million in 2018, which was still much higher than in earlier years.

Less Japanese dependence on Arab countries

Consolidation of relations between Israel and Japan began in 2014, with reciprocal visits by the prime ministers of the two countries. The Israeli government decided to reinforce economic relations with Japan in 2015, with trade offices of the Ministry of Economy and Industry opening in Tokyo and Osaka. The Ministry of Economy and Industry consular offices in Japan are conducting a campaign to promote Israeli innovation in Japan, with an extra NIS 10 million being allocated for the purpose in the three years following the decision. During the visit, cooperation on achieving a free trade agreement was also agreed. Japan, which formerly did not sign such agreements, has signed one with the European Union.

The Ministry of Economy and Industry also cites increasing exports of business services to Japan, 90% of which are computer services and royalties on the use of intellectual property. These exports totaled $130 million in 2017, compared with $114 million in 2016.

"Since 2014, Japan has changed its attitude towards Israel. This resulted first of all from the reciprocal visits by the prime ministers in that year," Economic Minister Noa Asher, head of the economic and trade mission at the Israeli Embassy in Tokyo and in charge of development of economic relations between the two countries, told "Globes". "At the same time, Japanese dependence on the Arab countries for oil has been lessening in recent years, and they also understand that international companies working with Israel also work in Arab countries. Japan also saw the South Korean and Chinese companies coming to Israel, and they also wanted Israeli innovation."

According to the Ministry of Economy and Industry, the main areas in which Japanese concerns are interested in adopting innovation are Industry 4.0, medicine, and agriculture. In addition, a new interpretation of the Japanese constitution was approved in the past year enabling the Japanese army to operate outside the borders of Japan for the first time since World War II. As a result, a new agency was set up in the Japanese Ministry of Defense responsible for imports and exports of defense equipment. These two processes are creating an opportunity for foreign companies to cooperate in this field, and many of the meetings between concerns from Japan and Israel are about defense technologies and homeland security technologies.

Will the volume of Japanese investments in Israel continue to grow, and will Japan become an important investor and customer in Israeli high tech? Conversations with sources in the government and the high-tech industry indicate that the constraining factor here is Japan, but there is reason for optimism.

"This is a period of courtship between Israel and Japan. Relations have improved since the prime ministers' visits, but not enough time has passed to put these relations on a sounder footing," says Israel Innovation Authority senior director of Asian-Pacific operations Avi Luvton. "Japanese companies realize that cooperation with Israeli companies has value for them, and some of them have taken the big step, such as NEC, which has gone from two employees in Israel to 45 within two and a half years. Besides them, there are dozens of other companies here examining what they can gain from such cooperation. The Japanese are very cautious, so they do things slowly, but all in all, I believe that the trend is positive."

Luvton says that the Japanese interest in Israel is not an exceptional trend. "The Japanese are very good in factories and industry, but they lack innovation. They recently realized that this is holding them back, and now they are becoming open to innovation from outside. There's nothing special about it; the entire world has realized that innovation is important for each country's growth engine. All countries, including Japan, are scanning the globe, and Israel is on everyone's map. Business will come in one way or another."

Why should money be invested in tempting the Japanese to invest in Israel? Luvton explains: "The importance of this delegation lies in two areas: both the business and the national spheres. People in Japan think that Israel is a desert with tanks. In contrast with the West, where the CEO is usually far more individualistic and dominant in each company, company management decisions in Japan are usually made by senior managers. Telling them the truth about Israel will help encourage managements to do more business here. Innovation is our calling card now."

Series of agreements

In recent years, the two countries have signed several memoranda and conventions. Among other things, a memorandum for cooperation in cyber was signed last year by the Japanese Ministry of Communications and the National Cyber Directorate. Before that, in 2017, a memorandum were signed for cooperation in cyber between the Japanese and Israeli Ministries of Economy, and the countries issued a joint declaration about the founding of a Japan-Israel Innovation Network (JIIN). An open skies agreement, an investment protection and promotion agreement, a memorandum for industrial R&D, and a declaration of economic cooperation were also signed.

During the visit of this year's delegation, Minister of Economy and Industry Eli Cohen and his Japanese counterpart, Minister of Economy, Trade, and Industry Hiroshige Seko, signed a joint economic declaration and an agreement to strengthen digital health cooperation in order to induce Japanese companies to start joint activity with Israeli startups in this sector. Another agreement was signed by the Innovation Authority and two Japanese research institutes in order to bring innovative Israeli technology to the institutes and conduct joint research that will culminate in manufacturing of products in Japan aimed at the Japanese market.

These agreements have so far supported a limited number of actual deals, but they were designed to provide a platform to facilitate joint economic activity of various types through both aid for concerns from Japan and Israel in creating connections with each other and through agreement on organizing meetings and delegations. In addition, certain projects include a budget for government aid in financing various types of cooperative efforts. According to the Ministry of Economy and Industry, before the current visit ends, commercial agreements between Israeli and Japanese companies amounting to over $100 million will be signed, including the investment by Mitsui in Magenta Venture Partners.

Cultural differences between Japanese and Israelis

One concern familiar with Japanese investors is Israeli venture capital fund Vertex, which manages $1 billion and has 31 Japanese investors. The investors include financial institutions and corporate-strategic investors who have invested hundreds of millions of dollars in the fund. The most prominent investor in the fund is SBI, a Japanese holding company that began in 1999 as part of Softbank, and is now an independent company listed on stock exchanges in Hong Kong, Osaka, and Tokyo.

"This is currently the most Japanese investors in any Israeli fund, and the largest amount of money from Japan managed by an Israeli fund," says Vertex general partner David Heller. Heller studied law and did his internship as a lawyer in Tokyo. When he returned to Israel, he entered the venture capital field, and raised money from Japanese investors as early as the 1990s. "I can tell you that there were few deals between Japan and Israel up until five years ago. Vertex was responsible for over 90% of the Japanese venture capital investments in Israel. Today, there are more and more."

He adds, however, especially in view of the intense competition between Japanese companies and companies from South Korea and China, "Today, we are starting to see more and more involvement by them in Israel. There isn't yet a phenomenon or a major deal that you can point to, but I think that while the Japanese media used to be very negative about Israel, today they are very positive."

Ori Israely says the goal of his venture capital fund, which invests in startups in the early stages, is first of all financial, but also to help its strategic investors. "One of our investors is Koito Manufacturing, the world's leading manufacturer of headlights. This is a large, serious, and somewhat conservative concern. It invested in us for the economic aspect, of course, but also for the strategic aspect. They're looking ahead to what will happen to headlights for autonomous cars 10 years from now, and they seek for both added value and the future." Israely explains that most of the investors are corporations looking for artificial intelligence and machine learning technologies for adapting their products to the future market.

Israely says that one of the important difficulties in business between large Japanese companies and Israeli startups is barriers arising from cultural differences between Israelis and Japanese. "Our customs are very different, and that is liable to create friction. For example, when the Japanese look at an Israeli startup that says it has a product, the Japanese assume that it is finished product that works perfectly. It's clear to us Israelis that the first product is a pilot, and we'll improve it later on," Israely says.

Published by Globes, Israel business news - en.globes.co.il - on January 17, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Prime Minister Benjamin Netanyahu hosts Japanese Minister of Economy, Trade, and Industry Hiroshige
Prime Minister Benjamin Netanyahu hosts Japanese Minister of Economy, Trade, and Industry Hiroshige
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