Business: Complementary interests

CHANGZHOU, China – The complementary forces of yin and yang play a cardinal role in Chinese philosophy, so perhaps it shouldn’t come as a surprise to hear Israel and China – despite the huge disparity in size between the two countries – described as two partners coming together to form a bigger whole.

“Israel is a state full of innovation,” noted Lu Qiuming, the Communist Party secretary-general of the Wujin Economic Zone (WEZ) in the city of Changzhou, speaking to a group of Israeli journalists at a recent press conference here. “We realize that Israeli companies lack the capacity for mass production due to the small size of the country, but are very strong at innovation. China certainly has the mass but, at the moment, we lack the spirit of innovation.”

Or, as Jiang Pengui, the deputy chairman of the Changzhou’s Science and Technology Bureau put it, “We think we need more innovation and Israel needs to export innovation, so we have a complementary interest.”

And so the WEZ is actively looking for Israeli companies to join the eight that are already active in this area, setting up a joint investment initiative between Changzhou and a number of Israeli investors – the Catalyst private equity fund, the Cukierman and Co. Investment House and the PT L Group – specifically designed to attract Israeli companies to Changzhou, a city of 4.59 million people, and its economic zone in the Wujin district of the city.

Situated in the Jiangsu province at the Yangtze River Delta, Changzhou is located midway between Shanghai (160 kilometers to the east) and Nanjing to the west. In the past it was famous for its textile industry, but is now looking to move away from old, traditional industries – hence the establishment in 1996 of the Wujin Economic Zone.

As part of its technology drive, the city set up the Changzhou Science and Education Town in Wujin, and within a decade this cluster of one university and five vocational colleges has grown to comprise 76,000 students and 89 R&D institutes, incubating some 594 hi-tech enterprises.

One Israeli company about to begin work on the campus is the Chinese branch of the John Bryce IT training company, owned by the Matrix Group, one of Israel’s leading IT companies, and the PTL Group.

With $4 million in funding from the Changzhou authorities (one third of the company’s four-year budget), the aim of this center is to train local Chinese students so that they can become IT engineers at the Matrix Global Software Development Center in Changzhou, where Matrix can outsource some of its IT work.

The students will be trained for one year by John Bryce, with guaranteed employment at Matrix Global for successful students.

The attraction for the students is that if they stay at the Matrix Global development center for four years, the cost of their training will be borne by Changzhou, which is looking to find a way to attract talented local IT workers to remain in the city rather than move to Shanghai.

“The larger vision,” noted Zvi Shalgo, managing director of the PTL Group and chairman of the Israeli Chamber of Commerce in Shanghai, “is to help with the professional training of local engineers so that more Israeli hi-tech companies can set themselves up in China with an already-prepared pool of employees who understand their needs.”

BUT ISRAELI interests in Changzhou are not just restricted to hi-tech. At CI3 – Changzhou Industrial Incubator Initiative – another PTL Group initiative, along with Elan Industries, companies such as Beit Shemesh’s Tuttnauer, which makes sterilization and infection control products for hospitals, universities, research institutes, clinics and laboratories, are setting up a production line to make their first steps in producing “made in China” goods for the Chinese market.

“We’re giving these companies a chance to set up a production line here in China, on a small scale, to see how it goes,” said Ilan Maimon, general manager of CI3 and its joint owner, along with the PTL Group.

“If after two years, [if] it’s not working, they can walk away without having invested too much. If they succeed, they can go on to build their own factory.”

One company that has recently built its own factory in Changzhou is Lycored, a subsidiary of Makhteshim Agan Industries, which makes food additives for major international conglomerates.

The idea behind CI3 is that if small- to mid-sized Israeli companies (with revenues of between $10m. and $200m.) want to penetrate the huge Chinese market, then they need to establish their own Chinese entity and make their products locally. But rather than send over a management team from Israel to build a factory from scratch, CI3 offers to help incubate the project, taking advantage of their knowledge of the Chinese business world.

“We help in terms of how to manage a company in China, not how to produce.

We have a lot of experience in running companies in China, how to protect company intellectual property and how to recruit and keep workers,” said Maimon, who has helped establish 10 factories in China, including Lycored’s. In return for a management fee and, at a later stage, a percentage of the sales, CI3 takes on full responsibility for the general management of the company, handling local recruitment and back-office functions such as finance and legal issues as well as providing extra services such as a reception area, meeting rooms and so on.

This initiative also has the backing of the WEZ, with a $150m. fund established to help attract Israeli and other foreign companies to the area. The local authority is providing exemptions on company tax and reductions in municipal tax as well as stumping up 5 percent of the cost of equipment invested by the company.

THIS IDEA of outsourcing management in China is the core business of the PTL Group, which Israeli businessman Shalgo set up over a decade ago. With 45 projects currently on the go and a staff of 120, the company seeks to help Western (not just Israeli) companies looking to establish a Chinese entity in order to penetrate the local market.

“If you’re not making stuff in China, it’s hard to compete with local companies who now have the same technology – import duties and so on are making it more expensive,” Shalgo said in his Shanghai headquarters. “Today, to succeed in China, you need to establish your brand, your pre-sales and post-sales operations, you can’t just sell here.”

To do so, the PTL Group offers assistance in logistics, finance matters, human resources and marketing, providing foreign companies with the local knowledge vital for the smooth running of any company.

“Here in China, you have to be able to expect the unexpected,” Shalgo stated.

“Government regulations and market dynamics change very rapidly and you need a management team who are able to handle this. You can’t expect a sales guy on his own to deal with this.” Business in China, he added, depends on connections and understanding what areas local administrations such as Changzhou are looking to invest in – which is where the expertise of the PTL Group comes into play, alongside its provision of back-office management functions.

If Shalgo has one piece of advice for Israeli companies seeking to set up in China, it’s this: Think long-term. “Most companies come here wanting to make their next sale; they’re not thinking about their long-term strategy,” he said. “The first two years should be about building confidence to do business in China, not making sales. Take small steps, make small sales, which will then lead up to the big sales.”

The writer visited Changzhou and Shanghai as a guest of the Wujin Economic Zone.