The media headlines suggest that Chinese companies are waiting in line to invest in Israel high-tech. However, data gathered by IVC Research Center suggests that China is a relatively minor player in Israeli high-tech and that Chinese companies mainly invest for strategic purposes.
One Israeli insider with years of experience dubbed the Chinese strategy as “drain the brain.” Put simply, explains IVC, Chinese companies invest in innovative Israeli technology that they can utilize for their own specific needs.
As an example, IVC discusses Alibaba whose founder and chairman Jack Ma will visit Israel in May. Alibaba recent acquired Visualead, an Israeli QR codes startup and announced plans to set up an office in Tel Aviv as part of a $15 billion global R&D initiative. The Chinese retail giant has also invested in several other Israeli startups in the past two years that focus on strategic technologies for Alibaba. Two years ago, Alibaba also invested in Israeli VC JVP’s $160 million seventh fund. No exact amount was given at the time, but it was thought to be around $20 million.
IVC continues, "Alibaba is typical of Chinese investors who are primarily interested in Israeli innovation, while the local high-tech sector views China as a huge potential and largely untapped market. An apparent win-win situation for both sides, the data paints a very different picture."
In recent years China has become a more significant player in Israel’s technology sector, though IVC data shows that its role is still relatively minor. Chinese direct investments and M&A and buyout activity accounts for at most 5% of the total, and while the percentages and dollar amounts have risen from 2013 levels they have changed little over the past few years, while few Israeli high-tech companies have successfully cracked the Chinese market.
IVC’s data found that the actual number of Chinese companies that invested in Israeli high-tech companies has gone from 18 in 2013 to 30 in 2015 and to 34 last year, and they invested on average annually in about 40 startups. The dollar amount invested in those startups ranged around $500 to $600 million in 2015-2017. This represented on average around 12% of the total capital raised by all Israeli startups in those years.
Few would dispute the fact that the Chinese market represents a huge potential for Israel’s high-tech sector and specifically startup companies. However, this market is extremely complex for Israeli high-tech companies, far more familiar with the US and European markets, where they face far fewer cultural and language barriers and more familiar business practices. IVC asks if this will change. In November, 10 Israeli startups were selected to take part in the first-of-its-kind accelerator program in Beijing. They were chosen from 100 startups that applied, based on their chances of cracking the Chinese market. The accelerator was established by Israel’s Ministry of Economy and Industry and ShengJing Group, one of China’s largest management consulting and private equity firms, and DayDayUp, a group that focuses on connecting international and Chinese investors. This represents a small but significant change that could start a trend, which could have long-term impact on the China Israel high-tech equation.
Startups generally raise from several investors during a round, IVC observes. They also do not usually detail dollar amounts invested by each participant in a round. In fact, the lion’s share of the investments was by Chinese venture capital funds or high-tech companies and was in startups described as having strategic importance. Even if the Chinese accounted for 50% of the funding in those startups (which is highly unlikely), that would still only translate into 6% of the total.
There have been relatively few financial investments by Chinese companies. Chinese participation as investors in Israeli venture capital funds peaked in 2014 and has dropped considerably since then both in actual numbers of investors and actual dollar amounts. Investors in venture capital funds usually take a maximum position of around 10%. In this category as well, Chinese investment clearly played a relatively minor role.
In M&As and buyouts of Israeli tech companies, Chinese firms have taken a backseat position to US, European, and even Japanese firms, adds IVC. The only exception was in 2016 when China’s Giant Interactive paid $4.4 billion for Israeli gaming company Playtika, which accounted for 44% of all M&A activity that year. The year before and after, Chinese interest waned sharply, accounting for 8% and 1.1%, respectively. Even if the huge Mobileye-Intel deal is excluded from 2017’s record tally, the percentage would only rise to 3.5% and three M&A deals done by Chinese.
Published by Globes [online], Israel business news - www.globes-online.com - on February 22, 2018
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