This year marked a turning point in the Israeli-Chinese economic relationship in general and in Israeli-Chinese hi-tech cooperation in particular. China is looking beyond natural resources and in Israel, Chinese companies are finding the technological advantage and innovative spirit they are seeking in order to compete in their domestic market and ultimately become dominant global players.
Strategic and financial Chinese investors are increasingly investing in Israeli tech companies. They’re investing directly in Israeli companies and are also investing in domestic venture capital funds. In fact, Israeli VCs are increasingly viewing China as their main source of capital. This new growing affair between Israel and China is extremely important to the Israeli technology industry, which is always seeking new markets and lacks capital, and is equally important to China, which is looking to develop its technological infrastructure, to better compete with Western players and foster internal innovation. For Israeli tech companies – startups and bigger companies alike – this is a rare opportunity, and it won’t last forever.
One of the evident signs of increased bilateral relationship between China and Israel is the lack of seats on flights to China. Israel and China just signed an aviation agreement that increases the number of weekly flights from Tel Aviv to Beijing from three to fourteen. Turkish Airlines is operating an efficient connection to China through Istanbul. On one of these flights I met Eden, the CEO of an Israeli next gen hardware company that is focusing on the gaming consuls industry. Eden was on the way to a board meeting, in Beijing. His company raised significant funds and has strategic partners in China. “My suppliers are there, the market is there, and my investors are there” Eden tells me; he previously founded and managed one of the most innovative search companies in the world, in Palo Alto. “The pace in China is faster and the opportunities are bigger than anywhere else. In fact,” Eden says as we finish our Turkish wine and prepare to land, “what is so intriguing about China is that the cultural and commercial disadvantages of an Israeli tech company are considered advantages here”. I know exactly what he means. Having worked in China and with Chinese companies for a decade now, Israel is (still) perceived as an innovative, cutting edge, quick and inexpensive tech hub by many in China. The Israeli focus on reduced costs and high performance, which is injected into the DNA of Israeli tech engineers during their military service, is exactly what China needs.
But why should China be so interesting to Israeli tech? Some statistics first: according to the OECD, the global middle class will grow from an estimated 1.8 billion people in 2009 to 4.9 billion in 2030. Nearly all of that growth will occur outside Europe and North America, from Brazil, China, and India to countries in the Middle East, North Africa, and Southeast Asia. Eighty-five percent of the growth will come in the Asia-Pacific region alone, and most of it will be in China. This Chinese growing middle class will consume (and is already consuming) more and more electronic devices (mobile devices, smart TVs, set top boxes, gaming consuls, etc), internet and telecom services, next generation hardware, advanced medical services and medical devices, pharmaceutical drugs, and more. China is no longer a production site, it is a market, and it is becoming the largest market in many areas, including those that are heavily tech oriented. For instance, China has already become the world’s largest App consumer and is becoming the world’s largest online publishing market and online retail market. These are areas in which Israel has technological advantages to share and the first companies that will penetrate these markets will most likely win.
So what does it take to be successful in China? It’ll take more than this blog post to answer, but here are a few rules of thumb: (I) understanding the Chinese market that is relevant to your company is probably the most important factor. The Chinese domestic market is what typically matters the most to your Chinese strategic partners and investors. You need to understand the balance of powers, the competition, the strategic plans of your potential partners, the personal friendships and dislikes and how you fit in all of this; this is the most important challenge and where many fail; (II) protecting your intellectual property is extremely important, no doubt, but if protecting your intellectual property becomes your business, perhaps China is not yet the right place for you. The horror stories about IP embezzlement are widely known, and many of them are true, yet good developments are happening, and you might want to shift your analysis of the balance of risk and return. In that regard, it is important to know that IP rights are increasingly protected and enforced in China as part of China’s move to encourage innovation (there’s no innovation without the protection of intellectual property rights). You need to structure an IP strategy, consult with good IP lawyers and most importantly consider relying on your sophisticated product and your ability to continue and develop newer and better versions continuously. Remember that many of the Chinese giants are not in the business of copying you but rather in the business of continuously leading the market through their ability to distribute more sophisticated products and services; and (III) China is the new wild west and the opportunities are enormous. The general feel is that of Silicon Valley’s golden days. You should use the momentum and use the Israeli tendency for directness and disregard for authority and class to your advantage, yet understand that China has its own rules and that more than anything else, personal relationships matter the most.