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Positioning the Israeli Tech Industry for China 2.0

Last month’s congress of the Communist Party of China heralds the nation's re-emergence as an economic superpower
Illustrative view of the Great Wall of China. (Liron Almog/Flash90)
Illustrative view of the Great Wall of China. (Liron Almog/Flash90)

Last month’s 19th National Congress of the Communist Party of China, more than any other recent event, heralds China’s re-emergence as an economic and political superpower.  President Xi Jinping’s assertive tone – contrasting with the reticent, understated, sometimes apologetic approach of his predecessors – caught many in the West off-guard.  But for those who spend time in the country, President Xi’s address to the Party Central Committee was anything but surprising.

Israelis should take note. This isn’t the China of the 1990s, when the country was a fast-growing emerging market known for low-cost manufacturing, and trade with Israel barely exceeded $50 million. Nor is this the China of the early 2000s, when interest in the Israeli market took shape, or even of five years ago, when investments in the local technology ecosystem began.

The New China

Today’s China is the world’s second largest economy, and among the leading sources of capital for VC, private equity, and infrastructure investment. China-Israel trade exceeds $10 billion.  Chinese companies have undertaken massive projects in Israel and have invested in dozens of local companies. They are no longer newcomers who are easily dazzled by the almost-mythical vision of Israeli technology, accepting any local innovation as ground-breaking. Rather, with more Chinese engineers in Shenzhen than in all of Israel, and 100 times the number employed at technology companies across the country, Chinese investors and manufacturers have become sophisticated technologists in their own right, and have adopted a much more cautious approach to foreign tech.  A country that produces tech powerhouses such as Alibaba, Baidu, JD, Huawei and Kuang-Chi – among many, many others – will only be impressed by the most significant Israeli innovations.

As a market for exports and a source of investment, this brings China much closer to the United States and Western Europe.  The implications for Israeli companies are clear, even if they are a challenge to follow.   For blue-and-white companies to target the 600 million-strong Chinese middle class, the world’s most important industrial base, and one of the largest sources of capital, they must make significant adjustments.

How Israeli Companies Can Adapt

First, anyone who wants to compete in China must offer products, services and a vision that reflect the unique needs and tastes of the local market.  The UK and Germany are very different places, but their cultural and commercial frames of reference are largely the same.  China represents an entirely different civilization – as large as the US and Europe combined – with its own cultural icons, nuances, and worldview.  Translating English-language marketing materials to Mandarin, as one would to Spanish or German or French, simply doesn’t work.

Second, to effectively collaborate with Chinese counterparts, a Mainland presence is critical.  Chinese business culture is far more guarded than in Western countries.  Like in other societies where traditional family and community relationships are the touchstone of trust, Chinese businesspeople expect to meet, dine, and spend time with their foreign partners.  Conference calls, detailed emails and long-winded PowerPoints generally won’t have the same impact on the Chinese business community as they might have with a Canadian or an Italian.  Combined with the great distance between Israel and China, a permanent presence in Mainland China is a must for almost anyone wishing to penetrate the market.

Third, to attract investment or any commercial relationship, Israelis will need to offer more than just intellectual property.  Five years ago, as the first big wave of Chinese venture capitalists and strategic investors rushed to explore the local ecosystem, many targeted university research labs, incubators, and core-technology licensing opportunities. Their approach often contrasted with more experienced investors from the US and Europe, who looked more carefully at the strength of a business plan, the bottom line and exit opportunities.   Those days are mostly behind us.  Chinese companies today are innovative, dynamic, and focused on their own R&D.  Chinese financiers have become skeptical of rosy promises by startup founders, both because they’re more seasoned and because there’s a lot on offer in China itself. What Israel needs to offer is cost-effective solutions that work, with a proven customer base and a clear market strategy.  That’s what has traditionally driven Israeli startups’ success – determined entrepreneurs making breakthrough innovations with immense market potential on a limited budget.

Over the past decade China has become a first-tier technological power that is increasingly shaping future trends in mobile internet, artificial intelligence, big data, computer vision, and advanced manufacturing. It’s time for us to adapt to the new reality of China 2.0 and the enormous prospects it offers to Israeli companies.  If we don’t, we’ll miss the economic opportunity of our generation.

About the Author
Dorian Barak is a private equity investor and asset manager focused on emerging markets. He is CEO of Indigo Global, which advises strategic investors and funds on investments and acquisitions.
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