China and Israel – the Next Phase
"Israeli technology, Israeli technology, and Israeli technology" – the three things in which China is interested, according to Israeli Prime Minister Benjamin Netanyahu after his visit to China in 2013. The relationship has long since expanded to cover trade, investment, construction, educational partnerships, scientific cooperation, tourism and more, and this November, negotiating teams will meet for a further round of talks on finalizing a free trade agreement between Israel and China.
And the two countries share more in common than one might think. "The modern Chinese economy and the Israeli innovative economy are today, more than ever, complimentary and synergetic," adds Ilan Maor, Vice Chairman, Israel – China and Hong Kong Chamber of Commerce . According to the data released by China's Ministry of Commerce, the volume of trade between the countries stood at USD13.9 billion in 2018, a 6.1% increase from 2017.
At the heart of the relationship has been China's unquenchable hunger for innovation and interest in advanced technology. For Israel, China, its second largest export market after the U.S., is a vast source of potential funding and appeals to many Israeli companies, especially those interested in software, semiconductors, IT, biotech, and agriculture.
Since 2013, the two countries have signed bilateral and business agreements valued at over USD 25 billion; there are annual meetings of the Israel-China Joint Committee on Innovation Cooperation (JCIC), the last one attended by China's Vice President Wang Qishan in October 2018; and many senior executives from China are also visiting Israel. "This is true of leading Chinese business groups, including Alibaba, Fosun, DJI, and many others, but also for other mid-scale and large-scale companies, while more Israeli SME's executives are invited and traveling to various activities and events in China," adds Maor.
"China is hosting some of the largest, most prominent and popular events worldwide. Semicon China and CMEF are based in Shanghai, while others, such as World IOT are based in less well-known cities like Wuxi, in Jiangsu province," Maor points out. In Shandong province, the 3rd largest by GDP (USD 1.1 trillion), over 100 Israeli start-ups attended this year's GoforIsrael conference, spotlighting greentech, water technology, renewable energy, life sciences, AI and many other sectors. China also looks to Israeli technology in defense, security, and counterterrorism as a means of addressing China's security needs, while Israel's achievements in agricultural technology, medical technology, water technology are also highly relevant to China's domestic agenda.
Chinese Investment Continues to Grow
As such, Chinese investment in Israel continues to grow. Over the past five years, according to an IVC Research Center report, around USD 1.5 billion from China was invested in around 300 Israeli companies. IVC also reported that over the past two years the average number of direct Chinese investments in Israeli companies each quarter grew from 15 to 20. All in all, in 2018, Chinese investors have been involved in 12% of the financing round by Israeli startups, compared to 7.5-9% during 2015-2017. In 2018, the Chinese also participated in six of the 17 large financing rounds (USD 50 million or more), also a higher proportion than previously.
"More Chinese investment is directed at Israeli tech start-ups (with around 80- 90 investments conducted annually), driven by both investing companies, as strategic investments, as well as by corporate funds, private equity and venture capital funds – such as Alibaba, Fosun, Horizons Ventures, CEIIF, Grit, Radiant and others," adds Maor
The opportunities for Israeli companies are 'almost endless'
"A large share of the large Israeli tech companies are already active in China and we now see a growing number of SME companies and even startups making their way. The opportunities are almost endless. China is in many ways the new 'land of unlimited opportunities.' The main sectors of interest for Chinese companies - for cooperation and investment alike - are advanced manufacturing, microelectronics & IC, IOT solutions, medical device, smart and autonomous automotive, and agritech." says Maor.
Sungbo Shim, Managing Partner in the Beijing office of Squire Patton Boggs ("SPB") agrees. "Chinese companies are mainly attracted by the technologies in software, semiconductors, telecommunications, medical, agriculture, and financial sectors. These are viewed as the strongest areas and are expected to remain so for some years. Most Chinese companies invest in these sectors to get technologies to support their business in China and strengthen their patent portfolio to compete with their competitors."
Simon Weintraub, Co-head of the China practice at Yigal Arnon & Co., adds "Chinese companies for a long time have also been interested in Israeli healthcare innovation including medical devices and digital health companies. Most of our investment work representing Chinese companies investing in Israel have been in this space. Auto-tech and agri-tech are other areas that are very hot and of great interest to Chinese companies coming to Israel today.
The agriculture and technology sectors had typically accounted for most of the total Chinese investment in Israel. In recent years, ChemChina acquired Adama, an Israeli crop protection company, for USD 2.8 billion. China Bright Food Group took over Israel's Tnuva Food Industries. In the ever-evolving healthcare sector, Israeli cannabis company, iCAN: Israel-Cannabis is teaming up with a Thalys Medical Technology, a Chinese healthcare conglomerate, to focus on medical marijuana. China looks to Israel as a model in greentech, with Chinese telecom giant Huawei, typically known for smartphones, entering the Israeli solar power market to sell inverters, which help to convert solar power into energy for the electricity grid. China-based consumer electronics company Haier Group Corporation is dipping its toes in the Israeli petrochemical sector by partnering with Israeli oil refining and petrochemicals company, Bazan Group – and these are just the recent tip of the iceberg.
Close ties brings challenges and risks
While there are simmering tensions between China and the U.S., Israel's principal ally, there are opportunities for Israel, if companies do their homework. "Chinese investments in Silicon Valley have slowed down," said Shim. "Chinese investments in high-tech start-ups in the U.S. face strict restrictions and are subject to approval under CFIUS ("Committee on Foreign Investment in the United States"). As a result, Chinese investors who previously focused on U.S. based technology companies have to look for targets elsewhere. Israel, with relatively lenient policy on foreign investments in high-tech companies, significantly lower costs of investment and operation than Silicon Valley, has become an attractive target for Chinese investors looking for cutting-edge technologies."
"Any Israeli company with a U.S. subsidiary and /or U.S. activities needs to be concerned about CFIUS today when considering an investment from a Chinese investor," agrees Weintraub. "We have seen potential investments and acquisitions of Israeli companies fail as of late because following a CIFIUS analysis it was determined that there was a great risk that the U.S. regulators would veto such a transaction. This is a major concern today for our clients. There are structures that can be created to mitigate the risk, and this requires strong guidance and expertise."
Israeli companies need to consider possible ramifications of Chinese backing, especially if operating in fields with national security and data privacy implications, including cybersecurity, energy and mobility, "Companies operating in such domains may find their ability to do business with certain American partners, especially government entities diminished if they have Chinese backers, "former U.S. ambassador to Israel, Daniel Shapiro said in a recent interview with financial newspaper Calcalist.
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