Setting up shop in China

The burgeoning consumer market in China is of growing interest to Israel.

By ZIV HELLMAN
Chinese agriculture 311 (photo credit: Associated Press)
Chinese agriculture 311
(photo credit: Associated Press)
IT IS EARLY EVENING IN BEIJING near the eye-catching Bird’s Nest Stadium, now bathed in glowing lights, that served as the epicenter of the 2008 Beijing Olympics. A crowd has gathered around the festive food stands erected in a courtyard abutting several of the Olympics buildings.
Only a few days earlier, the People’s Republic of China officially surpassed Japan in total economic output, on track to well surpass $5 trillion in GDP this year and move into second place in the world behind the United States. Watching the self-confidence of the well-heeled crowd in Beijing – to say nothing of the forests of skyscrapers rising in Shanghai – it is easy to relate to the dynamism of the surging Chinese economy.
But take a night train to rural Henan province, south of Beijing and the Yellow River, and you’ll begin to see the flipside of the equation. Break down China’s GDP into per capita figures, and China’s standing in the world tables drops to about the 99th position, with per capita income in 2009 at $3,678 per person according to the International Monetary Fund – placing China below countries such as Albania and Namibia. This is clearly evident in the rural areas, where the infrastructure still leaves much to be desired and local farmers debate with themselves whether they can afford to pay an extra 1 Chinese Yuan – about 15 cents – for the luxury of an air-conditioned bus ride.
Such contrasts in today’s dynamic China are part of what makes the country interesting. With traditions dating back thousands of years, the country is striving to move to the cutting edge of the 21st century, while parts of it look like they are still in the 1960s. Technological giants such as Microsoft and Intel have set up research centers in China, while Internet censorship means that sites such as Facebook are unavailable and Google has fled to Hong Kong. “Harmony” is the mantra the national leadership broadcasts, while trying to deal with over 50 minority groups, some of them loudly – and sometimes violently – demonstrating for independence.
After decades of stressing manufacturing and exports, building up an unprecedented and staggering foreign reserve now closing in on $2.5 trillion, a shift towards greater consumerism is beginning to be felt.
A potential consumer market of over 1.3 billion people is a seller’s dream and one reason companies from California to Russia are showing intense interest in China. Israeli companies are also striving not to be left behind this emerging giant market. The Ministry of Trade and Industry has declared developing trade with China to be a “central goal,” while in recent years a new raft of non-governmental organizations devoted to helping Israelis make connections in China has come into existence.
“Israelis have a generally good reputation in China in the quality of their products, and the advanced state of technology and knowledge they bring with them,” says Einat Tzur, director of the Israel Chamber of Commerce in China’s (IsCham) Beijing office. “Israelis can succeed in business in China, and the Israeli qualities of entrepreneurship and not fearing overcoming hurdles are good qualities in the long run. I have seen young Israelis do quite well here, when they are willing to put in the necessary effort and preparation.”
ISRAEL’S FORMAL DIPLOMATIC relations with China were forged late relative to the European countries and the United States, which established ties a few years after Richard Nixon’s dramatic trip to China in 1972. An Israeli Embassy was set up in Beijing only in the 1990s, after the 1993 Oslo agreement prompted several countries, China among them, to agree to an end to a diplomatic boycott of Israel. Nevertheless, bilateral trade between the two countries has steadily risen, and is expected to top $6 billion this year, making China Israel’s largest Asian trading partner.
A large share of that trade involves Israeli military equipment and technology sales to China. Chinese interest in Israeli military hardware reportedly predates the establishment of diplomatic relations, with secret meetings going back to the 1980s opening the door to Israeli arms dealers. The extent of Israeli-Chinese military trade relations is so large that it has more than once alarmed Washington.
The most high-profile instance of this occurred in the summer of 2000, when Israel acceded to intense American pressure and canceled a $1.2 billion deal under which Israel would sell China the Israel Aerospace Industries’ Phalcon Airborne Early Warning System. The cancellation of the “Phalcon deal” caused a temporary strain in Israel-China relations, but the administrations of prime ministers Ariel Sharon and Ehud Olmert worked hard to rebuild trust, sending several delegations to China that included personal visits by defense ministers and key defense officials. These efforts were largely successful, and military trade between the two countries remains high on their respective agendas. Both countries value maintaining good relations, for their geopolitical and strategic benefits, with China holding Israeli technology in high esteem and Israel recognizing the important world role China maintains – especially since China holds a permanent seat at the United Nations Security Council and can wield veto power on subjects Israel cares about greatly, including sanctions against Iranian nuclear projects.
But military deals are largely behind-the-scenes affairs, mainly conducted at high levels of official contacts. Civilian trade, encompassing a broad range of products, depends on the initiative of companies facing intensive international competition. Civilian trade with Israel includes agricultural technology, water systems, drought management, manufacturing systems, and solar energy exported from Israel to China, with mainly manufactured goods imported by Israel in exchange. The bilateral trade at the moment is unbalanced, with Israel buying nearly twice as much from China as it sells there.
Government offices have in the past several years made increasing sales in China a high-profile goal. In 2007, then-prime minister Ehud Olmert paid a well-publicized visit to China, giving attention both to military contacts and efforts to expand civilian contacts. During the 2008 Beijing Olympics, President Shimon Peres used an official visit in China as an opportunity to bolster trade contacts and Israel built an official, full-scale national pavilion at an international expo, for the first time ever, at the 2010 Shanghai Expo.
“Our participation in the expo was a spectacular platform for exposing Israel’s capabilities and intensifying the excellent relations we have,” Jackie Eldan, Israel’s Consul General in Shanghai, tells The Report. “It was also an opportunity for Israel to say ‘thank you’ to the city of Shanghai for giving refuge to Jews during the Second World War, during a very difficult time. We have arranged hundreds of business meetings between Israeli and Chinese representatives and, looking beyond the expo pavilion, we have a full calendar of future events.”
ISRAELIS SEEKING TO DO BUSINESS in China, however, face several hurdles, mostly due to significant cultural differences that make relating to the Chinese market a greater challenge than selling to Europeans or Americans. Organizations devoted to introducing China to Israelis have emerged in recent years to answer this need.
“I noticed the fact that there is no Asian society in Israel,” says Rebecca Zeffert, founder and executive director of the Israel- Asia Center, a non-profit organization serving as a resource for furthering understanding and cooperation between Israel, the Jewish world and Asia. “This was striking, especially given the blossoming of interest in East Asia in Israel, among both businessmen and academics. There was no organization promoting Israel- Asia relations, so I established one.”
Zeffert has a lifelong passion for East Asia. Originally from Liverpool, in the UK, she studied Chinese and Japanese at Leeds University, followed by long periods of time during which she lived in Japan and in China. In Israel, she worked in media and public relations-related jobs before founding the Israel-Asia Center in 2009. The center provides up-to-date information and analysis on Israel-Asia affairs – mostly concentrating on China, Japan and India, with additional coverage of Korea and Vietnam – through its website and newsletters, along with organizing events, briefings and conferences on Israel-Asia affairs and coordinating special programs between Israel and Asia.
The center has not yet opened a full-time office, explains Zeffert in a meeting at a Jerusalem coffee house, but even working as a virtual site it has about 30 affiliated employees, in the US, China, Japan, India and Hong Kong. The amount of interest among Israelis in China, in particular, and in East Asia, in general, she says, has been on an upward arc for some time, and shows no sign of abating.
The Chinese in turn evince a great interest in Israel and in Jews. “They see many parallels in Israel with their own experience,” says Zeffert. “The Chinese are very proud of having a civilization whose history they can trace back thousands of years, and they have respect for Jewish civilization doing the same. Even the fact that Israel was established in 1948, and the People’s Republic of China in 1949, both countries rising up after terrible suffering in the Second World War, impresses them, along with the socialist roots of Israel’s founding. They also see parallels with their own traditions in the stress Jewish tradition places on learning and family values – they sometimes call them selves ‘the Jews of East Asia.’”
This general interest in Jews, along with a post-Maoist ethos celebrating the pursuit of wealth, has spawned its own literary genre of self-help-style books in China promising to let readers in on “the secret of Jewish success.” Israeli visitors to China have become accustomed to being openly asked by their hosts to share the secrets of how “the Jews became the most clever and successful people in the world.”
The quality of these books, however, often leaves much to be desired and, at worst, they provide their readers with information that ranges from wrong to borderline anti-Semitic. This reporter has met people in China who are, wrongly, convinced that the Israeli economy is mainly based on oil exports, and others who claim to have learned successful Jewish business practices by studying the biographies of J.D. Rockefeller and J.P. Morgan – both of whom were Protestants.
The phenomenon shows no signs of abating any time soon. “Your nation,” says Li, a student at a university in central China, “and words such as ‘Jewish’ and ‘Hebrew’ are historical, mysterious, exotic and, ultimately, extremely interesting to me and to most of the Chinese people.”
Israeli businessmen who have extensive experience in China have not failed to note this phenomenon and to benefit from it. “The Chinese admire Israelis far more than is justified,” says Ram Lachover, CEO of Militram, which sells electro-optics and other electronic devices in China. “They correlate Jews and Israelis, and they suffer from ‘reverse anti-Semitism’ – they are so philo-Semitic that they give us credit for being more clever than we are.”
Elad Inbar, CEO of Massive Impact, which provides technology and methodology enabling service providers to drive direct sales, tells The Report, “We have been told by clients that they prefer working with us to our Chinese competitors, because Israelis have a reputation for quality and reliability.”
RELYING ON A POSITIVE GENERAL image can only help aspiring Israeli businessmen in China go so far. To truly break through to sales success, a large number of hurdles need to be overcome, which is one reason that the Israel Chamber of Commerce in China was established. IsCham was launched during the Olympic Games on August 10, 2008, in an event at the Israeli Embassy in Beijing, with guests of honor the Israeli Ambassador to China, Amos Nadai, and President Peres, who delivered an inspired speech on the “central target” of expanding trade with China.
IsCham China is a non-profit organization whose mission is advancing Israeli business in China and serving Israel-related companies and individuals already in China or contemplating entering the market. It is assisted by the Israeli Embassy in Beijing and the official Trade Mission to China and has opened two offices, one in Beijing and one in Shanghai.
Its budget is based on membership dues. More than 60 companies have registered as members since its inception. Members receive regular business reports covering economic and business trends in China, in macro-economics, specific sectors, regulatory news, and invitations to events, conferences and meetings throughout the year.
“In China, the government has a very central role in everything that happens, much more than in Europe and the United States, and businesses need to take that into account,” say Tzur, explaining the importance of an organization such as IsCham. “The Chinese regard IsCham as an official umbrella organization for Israeli business, and they like operating at official levels.”
Lachover confirms that official contacts in China have great importance. “I have extensive contacts with Chinese government officials,” he says. “Such contacts are not always necessary, but they open doors in a significant manner.”
Sitting in IsCham’s offices in a high-rise office building overlooking a major motorway in eastern Beijing, Tzur looks completely comfortable working in China, effortlessly explaining to a Beijing taxi driver how to find the office tower over the phone in his native language. Tzur has been the executive director of IsCham’s Beijing chapter for two years, since its inception, and was an obvious choice given her background. A Sinologist, she holds a BA in East Asian Studies from Haifa University, and has worked as a research assistant at the National Security Studies Center at Haifa University. Tzur has led tours of Israelis in China and immersed herself in the study of the Chinese language at the university in Beijing.
The work at IsCham might seem a detour in what could be a budding diplomatic career in China, but Tzur says she is very pleased with what she has accomplished there. “We have only had two years of existence,” she points out, “and I have already seen how much we have managed to assist Israelis trying to get a start in business here. We have also signed cooperation agreements with 20 other national chambers of commerce operating in Beijing and Shanghai. This is important because several other countries have many more years of experience in China than Israel. The United States, for example, has had a significant business presence in China for at least 25 years. We are a small country and China is an extremely large country. IsCham is an important source of resources.”
Tzur recommends that Israeli businesses trying to get a foot through the door in China start by concentrating in second- and third-tier cities and provinces, where they do not face fierce competition with established European companies. “Take Jilin, for example,” she says, “a province in China’s northeast, bordering North Korea and Russia. It is a market that hitherto was relatively untouched by foreign businesses, and therefore represents new opportunities for first movers. We conducted events bringing together 260 Chinese companies operating in Jilin with Israeli companies, in an effort to boost Israeli sales in the region.”
In terms of sectors, water technology is one area in which Israeli companies have an edge – Israeli branding in this sector in China is significant – and IsCham is therefore placing an emphasis on it. Israeli agricultural firms also have good prospects for succeeding in China. “We are also promoting tourism to Israel among the Chinese, and we believe there is a great potential market in Chinese tourists given that the Chinese have a generally positive view of Israel,” continues Tzur.
AFTER CLOSELY ACCOMPANYING Israeli companies working in China for a couple of years, Tzur has compiled a clear list of do’s and don’ts that she believes are vital for success there. “Israelis seem to believe that they can simply land in China, jump straight in, go full force ahead, and succeed on a vast scale,” she says. “But this is wrong. One needs to do a lot of homework and come to China prepared. What works in other places does not necessarily work here, and a lot of Israelis have failed here because they came with the wrong attitude.”
Tzur’s list of recommendations and tips includes the following:
• Speak to similar companies, from Israel and from other countries, who have experience in the Chinese market. Find out what works and what does not work in your specific sector and the specific market you are targeting in China. Remember that China is not a single market. It is an immense sub-continent, with many specialized niches. Don’t come here without a lot of preparation, or expect to learn on the job. A product that is not ready for marketing here will quickly disappear.
• Keep in mind that intellectual property is not always protected in China the way it is in the West, and be prepared to deal with that problem.
• Find a contact person in China on whom you can rely. Someone who knows the local language and customs.
• If possible, bring someone from China to Israel to learn your product and help market it. Sending an engineer from Israel for a short-term stay in China is not enough. This market has rules of its own and, as a manager, you may need several trips here.
• Be generous with gifts to Chinese counterparts. What may be construed as a bribe in other countries may be the key to success in China.
• Find out who is the real power broker in your sector. There are many sectors that are controlled by government officials, and it is important to forge relations with them, from junior to senior ranks.
• Remember that time scales in China are not measured as they are in Israel. Israelis in general lack patience and want to push things forward as quickly as possible. That may not go over well in China. Take into account that what you may think will take months to develop, based on your experience in Israel, may well take years in China. You will need several years of presence in the country before you can even think about cutting corners.
Lachover and Inbar agree with the prescription of needing up front and personal contacts to succeed in China. “I have personally spent two months a year in China over the past eight years,” notes Lachover. “But I thoroughly enjoy it. I also have translators, employees who speak Chinese and Hebrew, in some cases because they are Chinese who have married Israelis, or the other way round.”
“One needs the right contacts in China, along with people ‘on the ground’ there, otherwise there is little chance of succeeding,” says Inbar. “It cannot be handled through emails and telephone calls alone. Also keep in mind that China is a continent, three times larger than the United States, with myriad subcultures and different languages. We mostly concentrate on selling to corporations in Beijing and Shanghai, not to end users, which simplifies the effort required.”
When it comes to assessing the current conditions in China, Lachover and Inbar’s views begin to diverge.
“China is simply now the No. 1 superpower in the world, certainly economically,” effuses Lachover. “Look at how young people are living nowadays in Beijing and Shanghai. Don’t let the statistics on per capita income make you miss sight of the direction in which the country is going. I have seen electronics factories in China that are more advanced than those in the United States.”
Inbar, however, says that “it will take many more years until the business environment in China is truly open and competitive. Regulation is heavy, and reliability can be poor. Promises are not always kept. The situation is complicated, and there is still a long way to go before China’s full potential, which is vast, will be tapped.”
Tzur also notes that conditions are changing fast. “China has for the last couple of decades been a site for large-scale manufacturing at low wages, but it is now becoming a consumer market, shifting from manufacturing only,” she says. “At the same time, wages have risen here, meaning that China is no longer the place to find the cheapest labor force. Consequently, companies looking for the low-wage edge are shifting production sites out of China, to new frontiers in countries such as Vietnam and India.”
Tzur is nevertheless optimistic about prospects for business success in the dynamic, new China. “If you come here well prepared, and are willing to put in the effort required, there are many potential new markets in which Israelis can do well,” she concludes.