What keeps Israeli companies out of China? A survey by Globes Research and PwC Israel reveals the opportunities, and the difficulties in exploiting them.

What keeps Israeli companies out of China?

A survey by Globes Research and PwC Israel reveals the opportunities, and the difficulties in exploiting them.

6 May 13 18:06, Avi Temkin

“There is a real fear that Israeli companies will not be astute enough to exploit the huge opportunities that have been created by China’s economic growth, especially in the light of the government’s twelfth five-year plan, because of lack of knowledge or fear of failure. The companies need to understand however that those are the markets where the big growth will happen, and if the management doesn’t understand this, then the board of directors should take action,” says Gerry Seligman, an international tax partner in the New York office of PwC US residing in the Tel Aviv office of PwC Israel, following the publication of a broad survey of business models of Israeli companies in China. The survey, by Globes Research and PwC Israel, is based on dozens of interviews with company managers, government officials, and researchers.

Israel Export Institute director Ofer Sachs explains that exports to China are concentrated in three main sectors: electronic components; minerals; and chemicals. These account for 71% of total Israeli exports to China. In other industries, it seems that Israeli companies are finding it hard to expand exports to China, and in some cases they are actually declining.In 2012, Israeli exports to China totaled $2.45 billion, 7% more than in 2011. On the face of it, this is a success story, particularly in a year in which exports to most of Israel’s main trading partners fell. But a special report compiled by Export Institute researchers finds that the growth was mainly in exports of electronic components, an industry that accounts for half of all Israel’s exports to that giant country. Excluding that sector, exports fell by 16% in 2012 in comparison with the previous year.

Sachs points out that the decline was caused by a slowdown in the rate of growth in the Chinese market, but also by barriers to entry, such as regulation, bureaucracy, and lack of transparency. To this must be added the high costs for companies of setting up and maintaining a local representative office in China.

A tough market

The barriers to entry into China, says Seligman, have made Israeli companies wary. “The opportunities are very great, but it requires ground work by the companies, and also government assistance, to make the Chinese market accessible. This is a very tough market, and most Israel companies are not very large.”

Sachs says that the Export Institute devotes much effort and large resources to help exporters that operate, or are interested in operating, in the Chinese market. The Institute has a professional team that assists Israeli companies in getting to know the Chinese market and to overcome the barriers. The Institute has identified two areas of great potential for Israeli companies. The first is medical equipment, designated in the five-year plan as a high priority, and a field in which the Chinese government will invest large sums in order to upgrade the health system. The second is consumer products, a field that is benefitting from the growth in the purchasing power of the well-to-do class in China.

There is considerable wariness of the Chinese market, amplified by several cases in which Israeli companies have been harmed by a failure to keep agreements with them or by unlawful use of their technology, but Seligman suggests that companies should take a good look at the opportunities that this market offers: “When you examine these things closely, it turns out that in many cases the failures arose from haste in entering the Chinese market, with deciding on a business model, without proper preparation, and without the right experience in finding appropriate partners.”

According to Seligman, in recent years companies have become more aware of the risks and dangers, and go into China in a more organized fashion. Some have an advantage because of previous experience with Chinese companies, including collaboration with them. Proper preparation includes, among other things, the right choice of partners, suppliers, and service providers. Sometimes they hire consultants, Chinese or foreign, with expertise in advising companies seeking to go into China. All these things raise the chances of success.”

Solo or tango?

Companies have to decide whether to operate alone or whether to form a partnership with a Chinese company, or perhaps to join forces with a large company active in China. There is no uniform solution, says Seligman, and each company has to work out which model suits it best, in accordance with its goals, it area of activity, and its characteristics.

The key to success, however, lies not just in the model chosen, but also in planning the entry into the market. “It’s not easy to work alone, but there are companies that have done so and succeeded, because they took the time to plan meticulously. If you choose the model of finding a partner, you have to gear up to find a partner, even if the process takes a long time, and examine whether the prospective partner has the right connections in the various regions and districts, on both the business and the regulatory levels.”

Those who choose to operate alone need to find the best location for their activity and the best infrastructure. Highly important too are selection of suppliers, planning the distribution network, drawing up the contracts and agreements required with various parties, finding skilled manpower, planning recruitment, defining the roles that need to be filled, and deciding on pay policy.

Seligman stresses the huge importance of the five-year plan. “In the plan, China decided that it wanted to be a center of innovation, development, and design of technologies. There is a move away from copying technology and producing imitations, to a situation in which Chinese entities seek to become technology-intensive and compete in the global market.

“There will therefore be growth in mergers and acquisitions by Chinese companies overseas on a scale that can hardly be grasped today,” Seligman explains. “The acquisition of companies engaged in innovation, each in its own field, is a strategic goal as far as they are concerned. There is a huge desire to nurture Chinese companies that will be able to compete in the global market, and all this when a lot of money is going around in China in search of a purpose.”

Israeli companies need to understand the significance of the change, and to think of ways in which they can leverage their advantages. There is an opportunity to cooperate with these Chinese entities, and not just be based on mass distribution of this or that product. “There needs to be commitment to the Chinese market and to the things that matter to the Chinese, whether it’s technological innovation, advances in agriculture, water ventures, or environmental protection. When a foreign company deals in things that improve the quality of life, its status in China improves.”

There are many technologies in areas where Israel is strong, such as water technologies or renewable energy. This applies to companies from Israel that probably can’t make a profit from selling products offered by many competitors, but can make progress on the basis of unique technology.

It’s very important that Israeli companies should be able to demonstrate their technologies. But China is such a difficult market that it is highly recommended that it should not be the first to which Israeli companies turn. They should go there after accumulating experience in other places, because China is problematic enough even for those who come prepared.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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