Pairing up

China’s appetite for high-tech investment and Israel’s emergence as a global innovation hub make them an ideal match

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July 10-16, 2017
in Tel Aviv
For China Daily Asia Weekly

Chinese companies searching for high-tech investments are increasingly making their way to Israel, a country that in terms of innovation mirrors the East Asian giant’s economic prowess.

China is huge, has an enormous population, very deep pockets and a virtually limitless appetite for investment in later-stage startups that can be scaled up into world-class businesses.

Though Israel is relatively small, it has what may be the best innovation pipeline in the world and tens of thousands of startups powered by an overabundance of serial entrepreneurs. The country is also a hotbed of early-stage innovation in areas as diverse as technology, healthcare and agriculture.

China has 1.4 billion people spread over 9.6 million square kilometers. As the second-largest economy in the world, it was worth more than $12 trillion in 2016.

Israel has a population of less than 9 million (just more than 0.5 percent of China’s huge number), is spread over 20,770 square kilometers (about 0.2 percent of China’s vast landmass), and has a GDP of around $300 billion.

Though Israel is the 42nd largest economy in the world, it is just 0.025 percent that of China’s.

“China is kind of like the mirror image of Israel in many ways,” said David Malek, chief business officer at BioLineRx, an Israeli biopharmaceutical company.

“It is a great opportunity for a lot of global and general players because you have all this innovation and all this untapped innovation. China is, I think, looking for this type of innovation.

“We are talking about having all this innovation but not the infrastructure. They have the infrastructure (in China) but not so much innovation,” said Malek.

BioLineRx has a year-old joint venture with Chinese company I-Bridge Capital, called iPharma, to invest in new technologies.

Chinese investment and trade with Israel has been rising for more than two and a half decades. However, a steady growth in the relationship started to surge in 2013 after the launch of China’s Belt and Road Initiative — an ambitious plan to develop infrastructure networks across the ancient Silk Road trading routes — in which Israel would play a key role.

President Xi Jinping and Israel’s Prime Minister Benjamin Netanyahu shake hands in Beijing on March 21. The Israeli leader described China as his country’s ‘perfect partner’ in developing a wide variety of technologies. Credit: AFP

Changes in the global investment landscape last year, which prompted Chinese companies to look for opportunities outside the United States, benefit countries like Israel.

In 2016, Chinese investment in Israel jumped 10 times to $16.5 billion, as Chinese investors flooded the country.

Many analysts point to a regulatory crackdown in the US — leading to a slowdown in deals and curbs on investment — as a key factor that helped to drive investments in Israel.

The massive spike in Chinese investments in 2016 capped steady increases in the total volume of trade between the two countries. Their bilateral trade multiplied several hundred times from the comparatively minuscule $50 million recorded in 1992 — when the two countries first set up diplomatic relations — to more than $11 billion in 2016.

In a recent study, economic intelligence firm Dun & Bradstreet found that as much as 20 percent of all venture capital entering Israel today comes from China.

The level of mutual interest is visible in the number of events and deals, not to mention investment and trade, between the two countries.

The third China-Israel Investment Summit was held in Hong Kong and the southern city of Zhuhai from June 25-28. The summit was organized by Innonation, a company that has created a database of 2,000 Chinese investors and about 6,000 Israeli startups.

Chinese investors are increasingly making moves in Israel. TCL, a Guangdong-based electronics conglomerate, is reportedly considering 10 investment targets in the country. China Everbright Group, a State-owned financial enterprise, has an Israel-focused fund. And telecoms giant Huawei has a bid for Israeli cybersecurity company HexaTier.

ChemChina paid $605 million for Adama Agricultural Solutions a couple of years ago. As of June, Hong Kong-based and Israel-focused fund MizMaa Ventures plans to invest as much as $100 million in Israel.

In 2016 alone, Chinese government and academic institutions signed more than two dozen agreements that covered areas as diverse as visa requirements, academic exchanges, joint stem cell research, agricultural research, and the creation of a Chinese cultural center in Israel.

WuXi AppTec, the largest clinical contract research organization in China, opened an office in Israel and is looking to invest further.

“Israel is a very interesting place,” said Tong Zhang, vice-president and head of corporate business development with WuXi AppTec. “The reason I’m interested is that it is probably the most concentrated place in terms of country startups.

“It seems that everyone is an entrepreneur (in Israel). Everyone is looking for an investment and partnership. And there is great basic research here,” said Zhang.

“We see a lot of value added … just because of the nature of innovation and the stage of the companies. There are many more small companies. Some are underfunded.”

Israel has more startup companies per capita than any other country in the world, averaging one for every 1,800 people.

Ask around the cities of Tel Aviv, Jerusalem or Beersheba and the response is always the same: People would rather start a business than work for someone else.

So, why is Israel home to such a powerful innovation engine?

Some point to the fact that most Israelis spend between two and three years in the Israel Defense Forces at a relatively young age, where they are often forced to learn high technology.

Then there is the sheer amount of funding that the government earmarks for early-stage companies at various levels, from the idea stage to startup and market launch.

Even before that, children as early as primary school-age are exposed to entrepreneurship programs.

Moreover, entrepreneurship is a very basic need in Israel, said Dana Gavish-Fridman.

“We need to exist. It is a survival mechanism. We need to be quick with ideas to stay alive here,” said Gavish-Fridman, vice-president of marketing at Yissum, the technology transfer company at the Hebrew University of Jerusalem.

Yissum was the third technology-transfer company ever set up in the world. The first was the Wisconsin Alumni Research Foundation at the University of Wisconsin-Madison in the US. The second was Yeda Research and Development Company at Israel’s Weizmann Institute of Science.

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The fact that Israel is home to two of the three oldest technology-transfer companies associated with academic research institutions, both set up in the 1960s, is telling of the role innovation plays at the very base of the country’s economy.

“The mission is, first, to let the public enjoy the fruits of the innovation that are discovered at the labs,” said Gavish-Fridman.

“The first idea behind starting Yissum as a company was that the public should enjoy the fruits of the innovation. That means drugs. That means seeds. That means coatings. That means smart materials.”

Anything that can be created in the labs should reach the public in the shape of products, she said.

“To do that, you need to make business from that. You need R&D partners to make money from the innovations,” she added, referring to research and development.

At the same time, Israel has emerged as an important component of the Belt and Road Initiative since it was first put forward in 2013.

One proposal, the 350-km Red-Med railway project, which would link the Red Sea and the Mediterranean, is happening in part due to Chinese labor and $2 billion in Chinese capital toward the expected cost of around $6.5 billion.

In March, Israeli Prime Minister Benjamin Netanyahu visited China when he met with President Xi Jinping.

Speaking during his visit, Netanyahu said: “Israel can be a partner, a junior partner, but a perfect partner for China in the development of a variety of technologies that change the way we live, how healthy we live, the water we drink, the food we eat, the milk that we drink — in every area.”

Innovation at the heart of success story Israel’s high-tech boom is powering the economy, with Chinese investment playing an increasingly important role as business activity evolves

July 10-16, 2017
in Tel Aviv
For China Daily Asia Weekly

Over the past year or so, Limor Epstein has been looking for funds to take her Israel-based big-data startup to the next level.

She reached out to investors around the world. Eventually, the fastest sum of money, close to $1 million, came from Chinese investors through a Hong Kong fund. Epstein’s company, Data2Life, is a big-data processing firm that mines and maps healthcare data.

“It was the fastest investment I’ve ever had,” Epstein said. “They are coming in waves,” she said of Chinese investors, traders and interested visitors to Israel. “I wouldn’t say it’s millions, but it’s a lot.”

Attending a conference at a hotel near Tel Aviv’s stunning beachfront, she is sitting on a high stool at a table filled with papers, a laptop and a phone — and as she speaks, she multitasks.

For the past couple of days, she has kept Data2Life running by staying in touch with her team, pitching the company to investors and attending meetings. It is clear that she is on track to turning an idea into a multimillion-dollar business.

“We saw a concrete problem that we wanted to solve,” said Epstein of her company’s big-data services.

In many ways, she is the typical technology-savvy entrepreneur increasingly driving the Israeli economy and turning the country into one of the world’s most powerful innovation centers.

Having grown steadily over the past few decades, innovation and entrepreneurship are at the very core of the Israeli economy.

Trade and investment from China to Israel rose steadily in the decades following 1992 and spiked last year, tracking the evolution of both countries’ economies.

Israel has a population of fewer than 9 million people and an economy valued at around $300 billion.

The per capita national income topped $35,000 in 2015, according to the World Bank. And the Organization for Economic Co-operation and Development says that as many as 45 percent of Israelis have a university education.

It is, however, difficult to apply traditional metrics for a country that is quite unique.

A 1960 report by the International Bank for Reconstruction and Development (the precursor to the World Bank), titled The Economy of Israel, pointed out that “Israel’s circumstances are so unusual that it is difficult to apply the normal yardsticks to measure the economic progress that has been made in the past or the prospects for the future”.

Israel was founded on May 14, 1948, generally following a plan set out six months earlier through United Nations Resolution 181 that sought to divide the territory among Jews and Arabs.

Phones of different models are stored at an Israeli research laboratory to enable researchers to detect vulnerabilities that would allow hackers to crack into them. Innovation and entrepreneurship are at the core of the Israeli economy. Credit: AFP

By 1958, Israel had a population of 2 million, about half of whom had immigrated between 1948 and 1957. Through the 1950s, the country’s GDP grew by 10.5 percent and the GDP per capita by 5.9 percent.

“This growth record was achieved without the benefit of rich natural resources and in the face of formidable obstacles, particularly the absorption of more than 1 million immigrants,” said the 1960 report.

Much of the growth came from external support, basically cash from the United States, Great Britain and the Jewish diaspora around the world.

Despite a lack of natural resources and the fact that a large part of the country is desert, Israel developed industries in agriculture and manufacturing, particularly in research-intensive high technology.

Until the 1970s, according to Israel’s Ministry of Foreign Affairs, sectors such as food processing, textiles and fashion, furniture, fertilizers, pesticides, chemicals and metal products made up most of the industrial output. A lot of this was aimed at improving food production.

The next phase of industrialization focused on arms manufacturing and technology. Through the 1980s and 1990s, multinationals set up shop and Israel ramped up international trade to a much greater degree. Trade with China started in earnest in 1992.

“Twenty-five years ago, trade was mostly the exchange of basic goods. Products manufactured in China were sold to Israel. A few Israeli exports,” said Yariv Becher, head of the international financing department at the Foreign Trade Administration of Israel’s Ministry of Economy and Industry.

In the intervening decades, Israel developed one of the most powerful engines of innovation in the world, which is changing the way the economy works.

Today, services account for about two-thirds of GDP and industry for a little less than a third. The country also engages in a fair amount of trade, which adds up to about 56 percent of its GDP by value. Israel’s economy grew an estimated 3.8 percent in 2016.

Although the US is still the largest trade and investment partner, China is playing an increasingly important role in Israel’s economy. A stronger relationship with China fits into Israel’s economic need for more capital to drive a powerful innovation engine.

Speaking to China Daily Asia Weekly, Becher noted the strong activity in technology and innovation in the country today.

“We see Israeli companies going to China and establishing a presence and joint ventures and working with Chinese technology companies. And we see Chinese technology companies coming to Israel and investing in high-tech companies,” he said.

“We also see investments, not just in technology companies … We see a sea change in the business activity between Israel and China.”

Becher said a lot of Chinese capital is flowing into Israel. Raising capital is not an easy task for companies in Israel, he said, as most funding comes from the US. So for Israeli companies to raise funds in foreign markets, Chinese capital is welcome, he added.

“China is moving more toward an innovation-driven economy based on technology, and that aligns more with the strengths that Israel has.

“Israel is a small country. There are a lot of startups, a lot of innovation and a lot of technology,” Becher said. “It is important for us to make sure we don’t miss out on the growth that is going on in China … as a government we have placed it a very high priority.”

Up to 2010, Israel had just one commercial office in China, located in Beijing. Today there are five — in Beijing, Shanghai, Chengdu, Guangzhou and Hong Kong — comprising the largest number of trade offices in any single country.

The future is even brighter for bilateral trade as Israel and China are in talks to negotiate a free trade agreement, which could lead to a “tremendous increase in trade between the two countries”, said Becher.

Still, for all its growth, Israel remains a small economy with a small population. It is unlikely to make much sense as a market destination on its own any time soon. The real value of Israel for its partners, like China, is in its ability to innovate.

“When Chinese look at a map, they don’t see a market in Israel, they see a source for innovation,” said Becher.

Speaking the same language Chinese investors and Israeli entrepreneurs are steadily coming to terms with the differences in their approaches to business

July 10-16, 2017
 in Tel Aviv
For China Daily Asia Weekly

Up on a mountain above the Dead Sea is the ancient fortress of Masada. Mostly in ruins, it overlooks the hot and dry desert land where much of Judeo-Christian history unfolded.

Very few people walk up to Masada; most take the cable car and take in the spectacular views while avoiding the heat.

To get to the cable car, they have to walk past an Ahava store. Ahava is an iconic Israeli cosmetics company that makes products laden with minerals from the Dead Sea, just a few hundred meters away.

Ahava is now owned by a Chinese conglomerate. Fosun International bought Ahava in the first half of 2016 for $76.5 million.

A fairly long negotiating period underscored the cultural differences that can sometimes slow growth in the relationship between Israel and China.

“There is a very big cultural gap — in business culture as well — and not just the language barrier,” said Yariv Becher, head of the international financing department at the Foreign Trade Administration of Israel’s Ministry of Economy and Industry. “There are different ways of doing business.

“It took us, Israeli industry, many years, a few decades, to understand how to work in the US: To understand how to raise funds; to understand how to give a pitch; to understand how to work with investors,” said Becher.

“There was a lot of trial and error. And probably we will see the same thing in China,” he said. “You will hear a lot of stories and there are a lot of failures, mainly because of that gap.”

He added: “Israelis are often very direct, and quick, and often impatient. They are, I would say, the exact opposite of businessmen in China.

“And the subtleties of understanding the non-words, the subtleties of a message being conveyed — there’s a lot that we need to learn, I think, going both ways.”

Other challenges are more practical. For example, a typical round of investment for a young Israeli company that is heading to market could be around $5 million. Chinese funds, on the other hand, typically look for investment opportunities in the $50 million range.

“For companies here, it is like drinking from a fire hose. That is something that we need to learn how to manage,” Becher said.

The numbers would suggest that these cultural differences are little more than speed bumps. After all, trade between Israel and China has grown by several orders of magnitude from a mere $50 million back in 1992 to more than $10 billion last year, while investment from China into Israel spiked to over $16 billion last year.

Li Ka-shing, Hong Kong’s richest man, has been investing in Israel for two decades. His Hutchison Telecom company won an operating license there in 1999, and in 2008 Hutchison Whampoa set up a water treatment firm. Horizon Ventures, a venture capital arm of Li’s empire, has made more than two dozen investments in the country.

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Most of the investments and deals that have succeeded are between big companies, said Jordan Zhao, marketing director at Innonation, a Chinese company that organized a China-Israel investment summit in June that attracted 1,400 people to meetings in Hong Kong and the South China city of Zhuhai in Guangdong province.

“There are some gaps between China and Israel, and in particular between (the Chinese mainland), Hong Kong and Israel. There are three different cultures,” Zhao said. “Many, many Chinese have visited Israel to see what opportunities there are, but many Chinese take a long time to make a decision.”

In China there is a lot of interest in ventures across a wide range of fields — from fintech and cyber technologies in Hong Kong to the Internet of Things, water treatment, cleantech or agriculture. That is the observation of Ester Burke, who heads up the economic and trade mission at the Israeli consulate in Hong Kong.

“Most of my work is to get investors, to introduce them to startup companies,” Burke told China Daily Asia Weekly.

She said there is a lot of Chinese interest in Israel — to the point that there is little to do in promoting Israel itself. The focus instead is on specific companies.

“People come to me all the time and ask me about Israel and Israeli technologies. It is not hard to invite people to Israeli events,” Burke said.

But she, too, cites occasional gaps in understanding and culture.

In broad strokes, Israeli entrepreneurs tend to sell companies at earlier stages than what Chinese investors are typically looking for. This is not always the case, but it happens frequently enough to be something of a trend.

Also, there are different approaches to doing business — differences that are greater between Israeli and Chinese businesses than those between Israeli and American or European operations.

For some companies, such as Shanghai-headquartered WuXi AppTec, the need for a bridge creates an opportunity. The company, a clinical research organization, opened an office in Israel in 2014.

“We did that to bring our capability close to the customers. Because of the nature of the projects, although it has been very seamless for us across the oceans to work with customers, it is nice to have local program management and leadership in place,” said Cai Hui, head of public relations. “That’s what we see as adding additional value.”

Israel is a hub of innovation, said Cai, and she feels WuXi is unusually well suited to bridge the gap between China and Israel.

“Associated with the WuXi platform, of course, is our huge insight into the China market. We know China extremely well,” she said.

For a long time, Israeli companies embarking on their first venture outside the country have focused on the United States or Europe.

Now, however, as the flood of Chinese investment reshapes the Israeli economy and powers its innovation engine, there is a trickle of Israeli companies and investors heading into China.

“There is a joke here that half of China walks in here … I have met so many Chinese companies that I give talks to, and many of them come here to our offices,” said Oren Tamari, CEO of UPnRIDE Robotics, a northern Israel-based maker of robotic mobility products — upright, Segway-like devices that can be used by quadriplegics.

“We meet many companies that are looking to invest in Israel,” he said. “All of them speak about manufacturing.

“I tell them, if you invest, then we become a partner and we consider together how to bring the product into China, how to sell it and then, if needed, how to manufacture it. But the first action won’t be manufacturing. (That) would be the result of a relationship with a company there.”

“We’ve met tens of companies, if not more than that,” Tamari said. “There are a few that have already invested in Israeli startups. They look for something that is interesting.”

But finding something interesting is not the same as closing a deal. At times, differences in the approach can get in the way.

Burke from Israel’s Hong Kong consulate said: “What I’ve heard from companies many times is that they come (from Israel) and they start at the lower rank, they mingle and talk and they go to karaoke — (but) then they need to fly (here to China) again and move on to a higher rank.

“You need to fly back and forth many times before you even start to talk about business,” she said.

“The Israeli companies that come here (to China) … they ruin (the relationship) for the long run because they come, they speak too direct, they go too fast to the business and they don’t put enough (emphasis) on relationships.”

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