Why Israel is becoming a prime destination for Chinese investment

Photo credit: slidezero / 123RF Stock Photo

This article was co-authored by Zhuohan Shao.

Israeli Prime Minister Benjamin Netanyahu met with Alibaba founder and chairman Jack Ma in Jerusalem in April this year. As one of China’s best-known business magnates, Ma’s visit was the most tangible affirmation that China-Israel collaboration in high-tech had weathered the uncertainties of 2017, when Chinese outbound investment saw a brief, yet significant, retrenchment.

As the US, Europe, and Australia have taken an increasingly wary stance toward technology acquisitions by Chinese companies, Israel has emerged as one of the most welcoming destinations for Chinese high-tech investment.

China vs the world

Long before the emerging US-China trade conflict, the US has regarded Chinese investment in the American market with concern, blocking acquisitions by Huawei in the US in 2008 and 2011. Under the Trump administration, the US has imposed even stricter scrutiny over Chinese investment. It’s rejected or discouraged high-profile acquisitions such as Alibaba’s bid for MoneyGram, Canyon Bridge’s planned acquisition of Lattice Semiconductor, and Tencent’s attempt to acquire smart mobility company Here.

Access to technology is a key point of contention. Washington’s efforts against ZTE and criticism of Beijing’s “Made in China 2025” technology agenda echo the roadblocks that the Committee on Foreign Investment in the United States (CFIUS) has placed in the way of Chinese technology acquisitions.

Chinese investors also face similar hurdles in Europe and Australia. At the EU Summit last June, Germany, France, and Italy called for greater scrutiny of foreign technology investments, with China as the implied target. In Australia, Chinese companies were blocked from purchasing electricity company Ausgrid in 2016. This was not the only transaction that has been blocked by the government.

Sino-Israeli relations

With the volatility of China’s trade relations with the US and its less-than-positive sentiment elsewhere in the West, Israel has become increasingly attractive for Chinese investors.

Unlike other technology powers, Israel has no sizable domestic market, making it wholly dependent on foreign markets for scale. This reality makes Israeli companies open to strategic investments by Chinese companies, who are not viewed as competitors but as critical partners.

In the short to medium term, we anticipate an increasingly stark contrast between the approach of Israeli companies and their counterparts in Western countries—particularly those with large domestic markets.

Technology collaboration between China and Israel has also been gaining momentum in recent years. Huawei established R&D centers in Israel. In 2016, it acquired Israeli networking solutions company Toga Networks and cybersecurity startup HexaTier.

After CFIUS foiled Chinese electronics company TCL’s acquisition of US-based Novatel Wireless Inc., TCL turned to Israel, partnering with Freshub Ltd., whose smart kitchen technology has been integrated into TCL’s Xess mini tablet.

2016 marked the pinnacle of Chinese investors’ enthusiasm for Israeli companies, with nearly US$2 billion invested in dozens of deals and projects (a stark contrast to 2010’s investment amount of US$10.5 million).

A drop in Chinese investment

However, last year witnessed a noticeable decline in Sino-Israeli investment. This was largely due to a 30 percent drop in global outbound Chinese investment, resulting from stricter regulations in the country. While the goal of these regulations was to monitor and limit “irrational” and speculative investments, they blocked many outbound investments altogether.