"You don't have to go the US to find people and ventures to cooperate with. For me, Israel is Europe's Silicon Valley, so I decided to initiate this tour," says Kristina Sinemus, Minister of Digital Strategy and Development for the German state of Hessen. She was speaking during a tour, in which she headed a group of politicians, academics, and businesspeople.
During the visit, which was called a "discovery tour," not a delegation, 30 delegation members visited Israel technology companies and startups. The itinerary included the Israeli branch of German pharmaceutical giant Merck, in which Sinemus previously worked. Merck has its headquarter in Darmstadt, capital of Hessen. They also visited Israel Aerospace Industries subsidiary Elta Systems, where they learned about the company's cybersecurity activity, and reviewed the Tel Aviv municipality's smart city ventures and activity.
"I want us to adopt an Israeli perspective"
The tour organized by Sinemus, her first since taking office, is a good representation of Germany's growing interest in the Israel ecosystem. More and more major companies are opening offices in Israel, as are German cities and states, which are striving to advance their commercial ties with Israel: investments in startups, acquisitions of companies, conferences and tours, and inviting startups to accelerators in Germany.
The connection between Germany and the Israel ecosystem began in 2015 with a spurt in the number and size of deals involving a German investor. The process has since expanded. The German presence in Israel is still dwarfed by the US presence, but Israel-Germany Chamber of Commerce and Industry general manager Grisha Alroi-Arloser says, "60% of DAX30 companies have branches in Israel looking for technologies." The DAX30 is an index of the 30 leading companies listed on the Frankfurt Stock Exchange.
According to data collected especially for "Globes" by the IVC research firm, both the volume and number of investments involving German companies or funds in Israel has risen since 2016.
According to IVC, deals with German participation accounted for 30% of the number of European deals in the local ecosystem in the first half of 2019. The rate of acquisitions of Israeli companies involving German concerns has been one or two a year in recent years, except for 2017, when seven Israeli companies were acquired. Two Israeli companies were acquired in the first half of 2019, and nine German companies have invested in 10 Israeli venture capital funds since 2013. 36 Israeli companies participated in 11 accelerators in Germany in 2014-2019.
Data compiled by Start-Up Nation Central (SNC) especially for "Globes" show a significant German presence in the Israeli technology industry. Germany was rated fourth in 2018 in the number of deals with participation by a German concern - 5% of the total of deals with foreign participation, between the UK in third with 7% and China in fifth with 4%. 58% of the deals were by corporations or corporate funds and 36% by venture capital or private equity funds.
Guy Hilton, general manager of SNC, which is itself promoting cooperation with German companies, says, "The German investments feature investments at the early stages, indicating a desire to establish infrastructure for real work, rather than mere financial investment. In order to work with the local infrastructure, companies open an innovation center, acquire companies and turn them into a local development center, or open an innovation laboratory. In quite a few cases, the Germans are adopting all of these tactics at once."
Connecting German know-how with Israeli innovation
It was not always this way, as shown by Alroi-Arloser's remarks to "Forbes" in 2015: "It took time for the Germans. Once upon a time, when we would ask German representatives, 'What about the economy?', they asked in response, 'What do you need? How can we help?' Today, however, they want this cooperation for their own benefit."
What has changed? Hilton, who has been going back and forth between Germany and Israel over the past year, and has attended quite a few closed events, tries to explain the change: "Germany has a broad spectrum of opinion and desire to work with Israel. In recent years, however, processes have taken place at the macro level that have expedited the connection with Israel. Chinese and US customers of "mittlestand" companies (a German term referring to medium-sized companies in German terms) have become competitors. The slowdown that this has caused is not yet visible, but is already beginning to disturb German core business. The feeling there is that they fell asleep on watch. They say, 'We'll bring our many years of knowledge of how to produce and what to produce, and we'll connect it to Israeli innovation in forecasting analytics, maintenance, operational optimization, production line analytics, cybersecurity for industry, and industrial Internet of Things.'"
The presence of the auto industry among the German companies is naturally attracting the most attention, with the founding of Volkswagen's innovation center last year, followed by Porsche, which opened a scouting office, soon to be followed by BMW with its own innovation center. In an unusual step, BMW last month sent to Israel one of its directors, Peter Schwarzenbauer, to a meeting with Israeli auto press correspondents in order to acquire a thorough knowledge of the local scene. Israel's connection to the auto industry arises from the idea that the car of the future will be autonomous and connected to the Internet, and companies will compete with each other in creating the user experience. The technologies in which the local ecosystem excels, and which are relevant to the auto industry, include driver support systems, especially in safety; electric car technologies; car-connected technologies; facial and traffic identification technologies; and of course cybersecurity.
Who should lead: The private sector or the government?
A week ago, Rolf Wirtz, CEO of ThyssenKrupp Marine Systems, ThyssenKrupp's submarine and ship division, which is building submarines for the Israeli navy, visited Israel. The company obtained a foothold in the local ecosystem with a NIS 1 million investment in theDOCK startup accelerator, innovation hub, and investment fund. Under the agreement, the Israeli company will serve as ThyssenKrupp's innovation arm in Israel, and will find startups for the German company. The volume of this deal is negligible, but it may be a sign of future investments by ThyssenKrupp in the framework of its reciprocal procurement commitment for the amount spent by Israel in the submarines deal.
The big companies are not the only ones coming to Israel. "What is new in recent years is the arrival in Israel of mittlestand companies, some of them family-owned companies that have existed for a century or more, but which in Israeli terms are important companies like Teva," Pearl Cohen Zedek Latzer Baratz partner Guy Lachmann tells "Globes." "What's nice now is that companies that formerly didn't look at Israel are now hungry for Israeli solutions, and are investing in specific technologies, such as a large German corporate venture capital firm from the Munich region, which is now in the process of investing in an Israeli blockchain startup. The Germans are interested in fintech - blockchain and regular fintech, smart cities, and senior citizens technologies. These companies historically avoided Israel because of the Arab boycott, but now the boycott objects are Iran, China, or Russia."
It would be an exaggeration to talk about a German "conquest;" it is more an awakening process, explains investment and entrepreneur Gilli Cegla, who early this year organized the Europe Days conference at the Dubnov Gallery in Tel Aviv, an event that attracted hundreds of guests from Israel and from German-speaking countries. Cegla, one of the veteran players in the local ecosystem, told "Globes" that all of the activity is not yet showing up in the statistics, but that we are definitely witnessing a consolidation of the German presence in Israel this year.
Cegla divides the activity according to the source of the concerns that are active here. At the country level, he explains, there is inter-governmental cooperation, for example in cybersecurity, but most of the economic activity is at the German city or state level. "Berlin is showing a constant presence, and Cologne, Frankfurt, and Dusseldorf are making efforts here and there. The German states active here are Hessen, North Rhine-Westphalia, Hamburg, and Bavaria. Bavaria's offices are the most developed of all; it has an entire team handling political and commercial ties," Cegla says.
At the same time, Cegla shows a little skepticism about the effectiveness of political delegations. "There are many delegations coming to Israel from Germany every year, just like they go to Silicon Valley and China. Here you have to distinguish between politicians from the countries coming to see, get an impression, and learn, but not to do business, and companies, large and small, which come to do business or look for startups. It is worth noting the fact that dozens of startups are already being hosted in German accelerators, which is interesting, because most of the accelerators prefer to promote startups from their own states," he comments.
On other other hand, Germans understand very well that they will have to change, and that it will not be easy. At a political salon event in Jaffa in late July, the Prime Minister's Office of the Bavarian state government hosted Israelis and Germans under the heading, "Israel and Bavaria: Shared Values and Challenges." Bavarian state minister Dr. Florian Herrmann, who was on the stage at the event, spoke about the cultural differences, and how Germany should adapt itself to the changing reality.
Herrmann said, "It is essential for us to create an environment suitable for the development of startups. The government should facilitate it, but the private sector should be the ones actually doing it. The medium-sized companies are searching for new markets and products for those markets, and want to preserve jobs and the standard of living, but we can complete only if we are speedy and innovative. China, Russia, and Trump do not want Europe to be strong and an important global player. The problem is that our character is to avoid risks. That has to change; otherwise, we will not succeed."
Published by Globes, Israel business news - en.globes.co.il - on August 12, 2019
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