Israelis flock to China's Silicon Valley

Hangzhou, 180 kilometers from Shanghai, has become a magnet for Israeli companies seeking a foothold in China.

180 kilometers from Shanghai, with a 350-km/h high-speed train, endless expressways, a mass of cheap labor, determination, and most of all, money, the leaders of the industrial city of Hangzhou are trying to tempt Israeli industrialists who dream of the Chinese market. Infrastructures and workspace are already in place to take in the know-how and innovation coming from abroad to fill the immense body with spirit and purpose, which will drive the production lines. For the Chinese, this is the ticket essential for moving from assembling American iPhones to becoming the place where the next technological big thing that will charm and fascinate the world will be invented.

When the criteria of success in public positions are numbers and amounts of money, it is no wonder that Hangzhou's officials are prepared to go far to encourage foreign investment and attract Israeli technology. Even when a great recession is hovering around the corner, no one there is in a hurry to tighten belts en route to realizing the main objective - to turn Hangzhou, a city of 4.6 million residents, into China's Silicon Valley.

Meanwhile, billions are being poured into the construction of manufacturing infrastructures, huge campuses for training engineers, state-of-the-art trains, and residential skyscrapers which reshape the city's skyline every few weeks. Many of these buildings are still empty, but huge cranes are still located everywhere and construction is continuing, possibly because of the need to provide jobs for the masses, or because of the need to provide a solution in advance for the tens of millions of villagers migrating to the cities every year.

In 2011, for the first time in history, China's urban population exceeded its rural population. Shanghai is expensive, and Hangzhou intends to offer a good, sane alternative.

"The Hangzhou government encourages the arrival of foreign companies, and offers far-reaching incentives to the companies that come to the city," Hangzhou Deputy Mayor Feng Jiang told a group of Israeli correspondents, who came to ask questions and received longwinded declarations about the area's advantages and its desire for innovation. "In recent years, thousands of foreign investments were made here amounting to $19 billion. Foreign trade amounts to $28 billion a year. We welcome and foster Israeli high-tech companies and innovation that will come to the city. They will not only find encouragement and incentives here, but also a unique operating model that is adapted for small and mid-sized Israeli companies."

The Chinese do not waste time, and when the government announces a need, the provinces toe the line. When someone decides that there is a shortage of engineers and technicians to achieve the national vision of becoming a technological great power, the provinces work overtime drawing up proposals. Hangzhou's officials identified opportunities, picked up the gauntlet, and established a unique pilot for the government, a campus for technological education to train hordes of engineers who will meet the demand. These engineers, promise the city officials, will shoulder the burden of R&D for the district's manufacturers and they will be the professional class for the foreign companies that will set up shop in the city.

80,000 students from all over China study at the Hangzhou campus, which is as large as a mid-sized Israeli city. Ten top Chinese universities have opened branches at the campus. The government subsidizes tuition, provides grants and scholarships, and talented students will not be kept out of the classrooms because of a lack of money. The Hangzhou Municipality believes that most of the campus's graduates will opt to live in the city to drive its growth.

An incubator for Israelis

Zvi Shalgo, an Israeli businessman who resides in Shanghai, has headed PTL Group Ltd., a provider of management services for Western companies in China, for 12 years. The company also has offices in Beijing and Hangzhou. He presents himself as the entry ticket for Western companies into the huge market.

Shalgo has set up the Hangzhou Industrial Incubation Initiative to provide a soft landing for Israeli manufacturers that are targeting the Chinese market. When he visits the workshops at the technology campus, he mainly sees China's response to the need of the confused Israeli manufacturer. "There is no longer any technological education in Israel, and here there is an entire industry for training engineers. This is one of the factors that will bring Israeli industry here: engineers who earn a lot less than an Israeli engineer," he says.

A young Chinese engineer earns $600 a month, and a production line employee earns $200-300. When there are masses of such people, and there is a market averaging 7.5% annual growth, is it any wonder that the Manufacturers Association of Israel and Israel Export and International Cooperation Institute are panicking?

"I am not the reason why Israeli companies are fleeing to China," says Shalgo. "They are already thinking about China. I am a factor for their success here. Israel is trying to increase its exports to Asia, but that won't happen without Israeli companies operating here. Anyone who wants to sell to the Chinese has to manufacture in China. This is not meant to disparage the companies' other activities in Israel."

Israeli companies operating at PTL's incubator, which is registered as a Chinese company, include Matrix IT Ltd. (TASE:MTRX) and its training arm John Bryce Ltd., Kibbutz Afikim's dairy herd management company Afimilk Ltd., Makhteshim Agan Industries Ltd. subsidiary LycoRed Ltd.; and sterilization and infection control products manufacturer Tuttnauer Ltd.

PTL provides management services for these companies, including relations with the Chinese authorities, accounting services, and tax reports, leaving the companies free to deal with production. PTL charges a commission of a few percent of the companies' Chinese sales. "We manage these companies with open books and complete transparency, teaching them about how to do business in China and about the local business culture," says Shalgo. "Companies that come here with the idea of operating independently encounter difficulties and complications, and then turn to us to save them."

For the Hangzhou Municipality, Shalgo's business model meets the needs of small and mid-sized Israeli companies. It offers them an attractive package of income tax and company tax exemptions for two years and a 5% reimbursement for the cost of investment in production line machinery.

No intellectual property

"The Chinese themselves know that what they have done until now is not sustainable," says Israeli deputy consul in China Oren Rosenberg. "The situation in which China manufacturers everything with cheap manpower cannot last, which is why they are increasing investment in R&D."

Rosenberg adds, however, that this immense potential is still conditional, because of one painful point for Western entrepreneurs. "The moment they solve the problem of intellectual property, many Israeli companies will come to invest. For that, China must have a legal decision and enforcement mechanism. But until the leadership stabilizes, no decisions will be made on this matter."

Ilan Maimon, the owner of a chain of cafes in Shanghai, and PTL's partner in the Hangzhou industrial incubator, says that in the matter of intellectual property, no one gets an insurance policy. He is trying to teach the Chinese to drink coffee, and many of his customers are young people who have already been exposed to the West and fell in love with it.

"I own the only plant that produces coffeemakers in China, and I see the attempts to copy me every year from every direction. I am still the only one in this market, and I have 70% of the market in Shanghai," he says. "The technology that I use is difficult and problematic to copy. All efforts to reverse engineer it have failed, because I have a strong core team that understands the importance of secrecy."

Shalgo says that the Chinese government is waking up to the issue of intellectual property, and that an increasing number of companies are fined for patent infringement. "There was a company that copied Yamaha motorcycles and was fined $2.5 million. Although this is a ridiculous sum, it's necessary to understand Chinese thinking: they prefer to preserve the labor market rather than reduce activity because of higher penalties. Investment in dies for the production of copied products and jobs is considered by the government as something worth protecting. But that will end. There's a process underway, which will take years to complete, and the rules of the game are changing," he says.

But even in a country where everything can be copied, it is impossible to get along without an iPhone - and not the phones sold at ridiculous prices in the Shanghai market. The Chinese are learning that if you don’t have a tablet, you will fall behind, and Israeli carriers have already spotted the potential. "Within 2-3 years, there will be 200-300 million more Internet subscribers," predicts Shalgo. "Companies in these fields cannot ignore these numbers, and they will have to begin investing here seriously."

Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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