Impressions from the visit of Israel’s Prime Minister in China | Adv. Omri Hephner

Impressions from the visit of Israel’s Prime Minister in China | Adv. Omri Hephner, China Partner, Shibolet & Co.

Monday evening, May 5th, I met with Prime Minister Mr. Benjamin Netanyahu, during a meeting held in Shanghai for heads/representatives? of Israeli companies in China. A few days afterwards, Mr. Netanyahu would have his first meeting with China’s newly elected President, Mr. Xi Jinping, a meeting that could bring hope for the far-reaching changes that are necessary to enhance the commercial relationship between our two countries.
What are the mutual benefits and the potential? Simply put, on China’s side and in accordance with its current 5-year plan, Israel has an abundance of advanced technology in all relevant fields sought after by China. On Israel’s side, China has a huge consumer market and assets needed by Israeli companies to expand their business and to develop new technologies. This potential synergy is well recognized by both governments, however, both governments have yet to make the appropriate agreements and regulatory changes needed to effectively enable the realization of this potentially immense commercial cooperation, and much can be done to improve the current situation.
Therefore, I was positively surprised when Mr. Netanyahu did not open with a festive speech, that would have bored me very much, but rather directed a focused question to us, the heads of Israeli companies working in China: “What can I do to help increase the penetration of Israeli companies into the Chinese market and to increase the technological cooperation and investments between the two countries?”
My practice experience in China started in 2007, at that time I was the General Counsel (Senior attorney) of the Tshuva Group, one of Israel’s largest investment companies that have come to China to develop real estate projects. Later I provided services to many Israeli companies, some big ones by Israeli standards but most are SMEs (Small – Medium Enterprises, which comprise the majority of the Israeli companies). The bottom line is, and I estimate that to be the opinion of most of the participants in that respectable forum, that the entry barriers for Israeli SMEs wanting to enter China markets and the exit barriers for Chinese companies wanting to invest in Israeli technology companies are too high / cumbersome?. Without a very focused government intervention the market will dictate that the potential above mentioned will only be realized on a very small scale and both nations will lose from not gaining the potential benefits s they both want so much.
With respect to entry of Israeli products into China, the initial investment needed by an Israeli SME on the one hand and the complexity and decentralization of information flow prohibits entering the China market, or when they do try entering look for creative ways to save on the expenses, usually resulting in big commercial mistakes. The tools that both governments previously created to make cooperation easier are very much outdated and not relevant for 99% of these SMEs.
With respect to Chinese investments in Israeli technology companies, the main problem is not the lack of money or motivation by the Chinese side, but rather a lack of experience in doing cross-border investments, especially in technology companies and therefore their problem results in making bad investment or not being able to effectively manage the company initially and capitalize on the investment later. Of course, this is not the case with the more experienced Chinese companies, such as Fosun which just bought an Israeli medical device company Alma Lazer for USD 240 millionrecently, or Lenovo which invests in Israeli starts up, or ChemChina which bought the Israeli Makhteshim-Agan for USD 2.4 billion about a year and a half ago. These giant companies do not need government support; they have enough resources (including government connections) to make business agreements by themselves. But the majority of the Chinese companies need better regulated? assistance if they are to enter the vibrant Israeli technology market.
The support needed by both governments is negligible and judging from the results above it is obvious that money is not an issue: The Chinese side needs the sense of security, which depends on up-to-date information and knowledge for investing in good/solid? companies, consequently they will be able to effectively manage their investment and capitalize on it in the Chinese and global markets. The Israeli technology companies need the security that their IP will be protected in China. Israeli banks and financial institutions need a mechanism, provided by Chinese state-owned banks, insurance companies and investment funds, for the protection of their investments or loans given to joint projects. Simply put, the Israeli financial institutions need local Chinese banks and financial institutions as partners to evaluate the Chinese side and help in the collection of the revenues, investments or loans, if needed, at a later stage.
These are only two basic ideas, but more can be developed, we just need to keep an open mind and remarkably Holland is a good example: I recently started working with a Chinese partner in bringing Israeli cosmetics brands and products into China and was surprised to discover that in terms of the sales of international brands in China, Holland has 6% of the market share, rated number 4 with Japan, after the US, UK and Korea. I never heard of a Dutch cosmetics brand before and this is a tiny country, therefore it begs the question – how come? I asked one of my Israeli friends in Shanghai, who works with many Dutch companies and he explained that the reason for such amazing market share is that the Dutch government supports Dutch companies by lifting the restriction barriers into China, because they understand the economic importance of deriving income from manufacturing and sales in China itself. In other words, the Dutch government supports the manufacturing and distribution of Dutch brands inside China by lowering the entry barriers into the Chinese market for Dutch SMEs, and on the other end, in Holland, it gives these companies tax benefits encouraging them to keep their headquarters in Holland, thus, Holland can benefit from the income derived from the local Chinese subsidiary and collect the tax from the headquarters for such profits. In a global world this is the right approach, the wrong one would be insisting on the continuance of the manufacturing of commodities in the west and later being surprised that factories are closing and jobs migrate to another part of the world.
May 7, 2013, Shanghai, China  Adv. Omri Hephner, China Partner, Shibolet & Co
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