The phrase "trade war" sounds like a dramatization of a common economic phenomenon. Like a real war, it is a deliberate and violent clash aimed at strategically damaging the other side's vulnerable points, weakening it, and disrupting its plans. Also, as in real wars, a trade war generates prodigious opportunities - and also risks - for third parties who are not directly involved. In the case of the trade war between the US and China, which is currently escalating, Israel is a third party in a very sensitive position.
Israel is currently in the midst of an unprecedented red-hot affair with China focusing on the efforts to make Israel a key intersection in the Chinese government's Belt and Road Initiative for opening a maritime and land trade route to Europe and the Middle East. Chinese investments totaled $16 billion last year and Chinese government companies are deeply involved in several large and sensitive infrastructure projects, including the strategic port in Haifa Bay, which a Chinese company will manage for 25 years. Senior Chinese delegations visit Israel almost weekly and are welcomed by Israeli leaders with words of enthusiasm and self-depreciation that long ago went beyond accepted diplomatic politeness.
The technology's military side
This is not the place for a thorough analysis of the triangular relations between Israel, China, and the US. In any case, most of the current trade war's effects will be in the long term. It can be assumed, however, that its effect on the growing and developing autotech sector will come far sooner and will be more tangible.
Up until recently, involvement by the Chinese players in the local autotech industry was fairly minor, certainly in comparison with the activity of companies and investors from the West. The logical scenario is that, in a trade war, the volume of Chinese investment in Israeli autotech will increase substantially as Chinese investors and auto manufacturers transfer their focus, either by choice of under pressure from the US administration, from companies in Silicon Valley to Israel.
This scenario has already materialized to some extent, but those awaiting a flood of Chinese venture capital investments being diverted from the US to Israel will probably have to adjust their expectations. One important player in the local autotech industry who is very familiar with the Chinese market says that the picture is more complicated than that.
"China's accelerated opening to the West is generating the feeling that it is a free market economy. The truth is that the governing party still has overt and covert means of control reaching into many levels of business activity. The Chinese government is currently hungry for technologies classified as strategic, such as artificial intelligence (AI), super-processors, cyber defense, new-generation sensors, and so forth, in order to strengthen China's standing as a global power. Therefore, together with 'ordinary' venture capital investments, and these exist, some of the Chinese strategic investments are being channeled from above into specific channels, while the return sought is exclusivity in end technologies, and sometimes even moving the R&D and production base to China."
Concerning the potential that the Chinese see in the Israeli autotech industry, there are two levels within the broader picture. On the overt level, the Chinese auto market is currently in the midst of a transportation revolution aimed at making road transportation more environmentally friendly, safer, more efficient, and smarter - i.e. autonomous. This revolution, which is being directly guided by the central government through incentives and subsidies for manufacturers and consumers, gives Israeli autotech companies a huge opportunity to plant their flag in the world's largest and liveliest auto market. Signing a supply contract with one medium or large auto manufacturer in China can result in sales of millions of units a year.
The other level, which sources in the sector avoid mentioning, is the technological building blocks level. Realizing the vision of a smart autonomous vehicle currently requires development of new breakthrough end-technologies, most of which have military potential, sometimes at the strategic level.
What does this mean? As it is currently taking shape, the future of transportation will be silent and efficient propulsion based on a miniature energy conserving super-processor that will function as a centralized brain. With the help of artificial intelligence, ultra-smart long-range sensors for all weather conditions, and high-speed internal and external communications with protection against cyber threats, this vehicle will be capable of reading the complicated surroundings, positioning itself relative to objects, and making independent decisions in real time in order to reach the destination in the optimal lane while avoiding dangers. The technological building blocks needed to realize this vision are equally necessary for creating autonomous weapons and armaments on land, air, and sea that operate by the "fire and forget" method. Any expert will tell you that this is the future of the modern battlefield.
If we take into account that much of the core technology that has propelled the Israel autotech sector in recent years grew out of the IDF and Ministry of Defense's enormous investment of resources in development and training (no patents are registered for classified technologies of course), it is possible to understand why, theoretically, ambitious foreign powers are likely to show great interest in the advanced technological know-how derived from it, especially in the Israeli sensors and AI sector.
There are still red lines and security measures, including those anchored in relations with the US, designed to prevent sensitive technologies from leaking. The current dividing lines between the civilian and defense markets, however, are very blurred, and money is king.
Relations with China at a boil
With or without connection to security affairs and the trade and technology walls that the US is currently building against China (and vice versa), relations between the Israeli autotech industry and China are on a high flame. Several investor conferences took place in recent weeks, with meetings between dozens, even hundreds, of Israeli high-tech companies, many of which were companies in the auto sector, and thousands of potential companies and investors from China. The Technion, Israel Institute of Technology opened a branch in Guangdong last December and almost every large Chinese province now offers Israeli entrepreneurs a red carpet of well-developed and well-funded incubators and development centers.
The latest was Shanghai Mayor Ying Yong, who made a quiet visit to Israel in early June accompanied by senior Communist Party officials. The Chinese press reported that he expressed his wish to found and fund Israeli research and development parks in his city, a proposal that won enthusiastic support from Minister of Science, Technology, and Space Ofer Akunis. The Chinese press reported that one of the main purposes of the visit was to officially inaugurate work on the new "Chinese" port of Haifa accompanied by a mention of its connection to the Belt and Road Initiative.
At the same time, the presence of Israeli autotech companies in the Chinese auto and IT industries is expanding. One of the high points of this was the announcement by Chinese Internet giant Baidu, a company with an $88.5 billion market cap, of its adoption of Mobileye's responsibility-sensitive safety (RSS) and sensory technologies in the Apollo autonomous car project in which Baidu is investing billions.
Adoption of Mobileye's RSS technology - a sensory kit that includes a peripheral systems of cameras and processing units designed to provide regulators and insurance companies with tools for verifying that the autonomous vehicle is not responsible for an accident - has important symbolic value and is likely to also have an important commercial impact in the short term on Baidu's autonomous public transportation project, which will be launched next year in China and Japan. The greatest importance of Baidu, however, is its role as a gatekeeper for the entire Chinese auto industry. Through Baidu, Mobileye's technology will reach dozens of auto manufacturers that are partners in the Apollo plan and which manufacture tens of millions of cars a year.
We do not forget for a moment that Mobileye is now part of Intel, a US company subject to restrictions by the US administration on exports of sensitive technologies. Here, however, the complicated Israel-China-US triangle is likely to prove a business advantage, not an obstacle.
In any case, as we said at the beginning, trade wars pose both opportunities and risks. The enthusiasm with which the Israeli high-tech sector and government are taking the economic bait of China shows which side of the conflict is preferred right now. It is doubtful, however, whether the last word has been said on the subject. We can only quote the summary of US foreign policy as formulated by Theodore Roosevelt: "speak softly and carry a big stick."
Published by Globes [online], Israel business news - www.globes-online.com - on July 15, 2018
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