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China needs technology and Israel can provide it

Any Israeli company that wants to go global will have to penetrate China, Tehila Levi-Lati, partner and head of the China and East Asia practice at ZAG/Sullivan International Law Firm recently told The Jerusalem Post.

Levi-Lati recently sat down with the Post to discuss the growing Israel-China tech relationship, Chinese investment in Israeli start-ups, and the challenges facing Israeli companies doing business with China.

ZAG/Sullivan is a unique international law firm with offices in Tel Aviv, Boston, New York, Washington and London, as well as a practice in China. The firm is a powerhouse when it comes to advising hi-tech and life sciences start-ups doing business in Israel, the US and China.

“We started our activity in China 17 years ago, when the business relationship between Israel and China wasn’t so clear, but even then we saw the major potential in the economic partnership between the two countries – one that today is quite clear,” Levi-Lati said. “There are more and more Israeli companies doing business in China, and vice versa as well, with Chinese investing in Israeli companies.”

As such, the firm is ideally situated to help Israeli start-ups and businesses break into the hard-to-penetrate Chinese market as well as secure Chinese investment for Israeli companies.

According to Levi-Lati, a decade ago the relationship was mostly one-directional, with Israeli companies trying to enter the Chinese market, so that money was only going into China via foreign direct investment.

“Today, the world is different and, with the launch of China’s Go Global reform, we’ve seen money coming out of China, with Chinese companies investing in Israel and bringing back Israeli tech to China,” she said.

Still, she added, there are a lot of limitations and restrictions for Israeli companies working within China.

“In 2016, the Chinese tightened regulation, making it more difficult to do outbound investment; but China needs new technology, and so they began forming joint ventures – the new trend between Israel and China.”

According to Levi-Lati, joint ventures are a means for China to attract Israeli companies – the Chinese bring the money, and the Israeli companies bring the technology.

“It’s the favorite structure for Chinese companies because the Chinese are able to bring tech back into China, and the money still stays in China. For the Israeli companies, it is more challenging, especially if they cannot secure also direct investment in their company, but they have an opening into the Chinese market,” she said.

THE CHINESE market is notoriously difficult to penetrate, Levi-Lati explained. There are lots of barriers, and if companies want to enter the market independently, they need “deep pockets” and patience. “In the last few years, we have assisted a few Israeli biomedical companies to open their activity independently in China, and with the right guidance and with a long-term plan, it is successful.”

“Finding the right partner is very difficult, and one of the main problems in China is transparency, as is maintaining control in the business and dealing with cultural differences,” she said. “Partners are also customers, distributors or companies you cooperate with. This is where our law firm can assist, because we understand the culture and we can do due diligence, which is the most important thing in China.”

This past year alone, ZAG/Sullivan helped nearly a dozen Israeli companies penetrate the challenging Chinese market.
“We see big potential in China-Israel business relationships, and sometimes Israeli companies are hesitant to enter the Chinese market and to cooperate with Chinese investors; but China is a huge market, and even now, a company that wants to be global won’t be global unless they are in China,” she said.

Many of these Israeli companies with global ambitions currently operate in the US. When asked if this presented a problem, given the ongoing trade war between the US and China, Levi-Lati explained that while the US-China relationship is complicated, Israeli companies have so far not been negatively affected.

“Because of the trade war, you see less Chinese investment in the US, but we are seeing more and more interest in China toward Israeli companies,” she said. “China sees Israel as a country of innovation.”

She added that recent years have also seen more and more direct flights from China to Israel.

“You might not think this is a big deal, but you see a lot more Chinese delegations coming to Israel. Many come to Israel to window-shop, but you also see more and more Chinese investments in Israel as a result,” she said.

As such, she explained that while Israeli companies traditionally received funding from the US, today the trend is to go to China for funds.

“If you look at our clients alone, six years ago none had a Chinese investor, and today around 50% have Chinese investments,” she said. “The only problem is that Chinese investors prefer to invest in more mature companies and not in seed investments.”
Still, she said that while Israel has seen Chinese investments in a number of areas, including in infrastructure, there is currently great interest in big data, artificial intelligence and the biomedical industries.

“China is always thinking long term. Sometimes you don’t understand their short-term aim, but it always makes sense in the long term,” she said.

“We see major potential for the Israel-China relationship, and it’s important that companies know how to take advantage of this growing partnership, using the right advisers to help them break into the country and to seek investments.”

This article was written in cooperation with ZAG/Sullivan International Law Firm.

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