All this has happened very recently. “In 2014, I think China will be number one,” says Avi Hasson, Chief Scientist of Israel’s Economy Ministry. “Three years ago they were at zero.”
This tightening of the Chinese-Israeli business bond is largely due to the complementary nature of the two economies. Israel has a very developed economy, mainly driven by high tech. The country has the highest ratio of university degrees per capita, the highest number of scientists and engineers per capita, and the largest number of startups per capita in world, hence, the nickname “Silicon Wadi.”
As a summer intern at a top-notch venture fund based in Jerusalem, I worked with Israeli entrepreneurs and talked to locals on a day-to-day basis. I was always amazed and humbled by their constant motivation and efforts to create something new. It seems that adventurousness and resilience are embedded in every Israeli’s personality, which helps this young state survive despite serious, long-running geopolitical conflicts, and even thrive with almost no natural resources and less than half of the population in the New York metropolitan area.
The tiny population does, however, pose a challenge to Israeli startups. Israelis, despite leveraging the global Jewish community, are not able to scale up and sustain startup ideas in the long run. Startups in Silicon Wadi do not get nearly as much venture capital on average as their counterparts in Silicon Valley. They often come up against what is described as the “valley of death”, the gap between the first stage and the final stage of funding.
Jon Medved, serial entrepreneur who has also invested in more than 100 Israeli startups, said, “Today, if you’re not global from day one, you’re losing it. That is one of the advantages we have in Israel; we don’t really have a domestic market. Our companies either go global or they go nowhere.”
Traditionally tethered to western markets, in recent years Israeli companies have strived to tap into emerging markets in the Far East. Naftali Bennett, Israeli Economy Minister, stated that Israel was shifting its economic resources to “China, China, China”, given that the country has a solid manufacturing base, a strong urge to invest abroad, and the determination to boost innovation and technology.
As China’s “population dividend” is predicted to end by 2015, one major way for it to battle increasing labor costs is through technological innovation. Its flourishing consumer power and production strength, however, have not been able to transform it into a booming technology hub as of yet. To work towards that, China is seeking collaboration with Israel through direct investments and acquisition transactions. Beyond the obvious match of demand and supply, there is great esteem in China for the Israeli economic miracle, and Chinese and Jewish cultural and historical connectedness also contributes to potential close cooperation.
In the past two decades, two-way trade between the two countries has increased 200-fold, making China Israel’s third largest trade partner after the EU and the US. Amir Gal-Or, a Beijing-based managing partner of Israel-China investment firm Infinity, believes there will be a 20-30% annual rise in the number of Chinese acquisitions of Israeli firms in coming years, while investments in Israeli firms could double annually.
As ambitious a newcomer as China is, however, the US will still remain the major partner of Israel in startups and venture capital. More than 85% of the capital invested in Israeli high tech is originally from the US, and a fair amount of capital invested in Israel comes from the venture arms of large American corporations like Cisco and Intel. The homerun for Israeli startups is mainly to go public on NASDAQ, currently listing more than 90 Israeli companies valued at $40 billion. American financial institutions carry out a lot of the relevant M&A deals. There are also multiple tech training exchange programs and venture challenges held between the Silicon Valley and Israel every year. It seems that the US will still remain Israel’s main force in terms of foreign investment in the near future, while China will increasingly stimulate the Israeli market, potentially shaking up the Israeli startup and venture capital scene in the long run.
One question yet to be asked is, with Chinese domestic startups and venture capital market still in their budding stages, how can cooperation with Israel impact the industry in China? Many Israeli venture capitalists have lived, studied, and worked in the US, but almost no one speaks Mandarin or has a thorough understanding of China. The barriers go beyond language and communications difficulties, though, as intellectual property rights, cyberspace censorship, different customer bases, and differentiated approaches in business all come into play.
Adventurous leaders with multicultural understanding are crucial to bridging these gaps and helping realize the full potential of Chinese investment in Israel high tech, but if they are enough remains to be seen.
Clarey Zhu is a junior at Yale University. Contact her at email@example.com.
This article appears in the November 2014 issue of China Hands.