In search of gold in China

With the Beijing Olympics under way, everyone is looking for gold in China. They’re just looking in the wrong place. 

While Israel’s athletes have failed to garner any gold in China thus far, its most savvy businessmen have already found some beyond the sports arenas. Close to 1,000 Israeli companies are doing business across the country, tapping into the world’s fourth-largest economy and marking the beginning of an eastward shift in Israel’s economic and diplomatic interests.

Some companies, like suits manufacturer Bagir, which opened a tailoring factory in the northeastern city of Dalian four years ago, were drawn to the Asian giant by China’s massive – and ridiculously cheap – labor market. Chinese labor costs Bagir just one-tenth of Israeli labor, according to Moshe Gadot, Kiryat Gat-based Bagir’s director of global development and marketing.

The 1,000 workers that Bagir employs at Dalian have helped it become a major player in the UK market, where one in every six suits sold today is manufactured by Bagir. Besides, Gadot adds, Bagir’s presence in China gives it access to that country’s own burgeoning middle class.

Indeed, China is no longer just a source of cheap labor. It has undergone such a dramatic economic rise in the past decade – one indicator is that it now receives more foreign investment than the rest of Asia combined – that an enormous middle class has sprung up, changing China from a country of producers to a country of consumers.

The Israeli Diamond Institute, representing Israel’s diamond industry, has identified China as its market of the future. Eli Avidar, a veteran of the Foreign Ministry who served as consul-general in Hong Kong and Macau from 2001-05, stepped into the managing director position at IDI in January 2007 and immediately began turning the organization’s focus to the Far East. He believed that American economic dominance would not last forever, and that it was time for Israeli diamantaires to establish a stronger presence in China.

“In the past, you could divide China into strips, where wealth was focused on the coast and the population became poorer as you moved inland. Nowadays,” Avidar says, “the wealth in China is spread out, and there is exponential growth in luxury consumption. Diamond-buying culture is growing.”

Diamonds account for a major chunk of Israeli exports to China, which include significant sales of high-technology products. That isn’t unusual, considering that those two industries lead Israel’s exports in general. What is unusual is the dizzying rate at which trade between Israel and China has grown.

From a mere $50 million in 1992, when the two countries established formal ties, bilateral trade has exploded to $5.3 billion in 2007 – a 100-fold increase. Trade is up in the first half of 2008 as well, on pace for a 15% improvement over last year’s figures.

“China is very optimistic that this long-term trend will continue,” says Zhou Hui, economic and commercial counselor at the Chinese Embassy in Tel Aviv. “We believe that the future of relations with Israel is very bright.”

This is so even though the past of Israel-China relations is fairly checkered. They were strained for years, as Israel moved away from its socialist beginnings and China became entrenched in its communism, and as China favored the Arab world in general and the Palestinians in particular. Even today, with diplomats from each country heaping praise on the other, the Israeli government has expressed its displeasure with China’s less-than-aggressive stance on Iran’s assumed nuclear weapons program.

“We have to understand that China’s approach is different, that they try to take the middle road,” comments Dr. Aron Shai, who holds the Shoul N. Eisenberg chair for East Asian affairs at Tel Aviv University. “The Chinese prefer talking, or appeasement in the positive sense. We also ought to keep in mind that China buys 13% of Iran’s total oil production.”

Overall, though, China has kept a relatively low profile on Middle Eastern affairs, Shai notes, and in any case it tends to treat business and politics separately.

“The Israel-China relationship is very, very smooth,” Hui says. “There are no fundamental differences.”

Israeli inroads to China – both economic and diplomatic – began with quiet arms deals in the 1970s and ’80s. China’s respect for Israeli weapons has continued to this day, which is surprising for two reasons. One is that China is an even larger arms exporter than Israel is. The other is that Israel was forced by the United States to back out of two arms deals in this decade, the $1 billion Phalcon deal and another, smaller deal regarding Harpy unmanned aerial vehicles.

“That definitely harmed our ties, and our prestige in China suffered,” Shai says. “Until that point the Chinese had treated Israel as a power, but suddenly they realized the true dimensions of Israel’s strength.”

Neither side wishes to dwell on those incidents, as both countries attempt to move on with increased cooperation in other fields. Shai notes, however, that the recent increase in trade has mostly favored China, as the gap between how much Israel imports from China and how much it exports to that country has expanded over the past few years.

“If you check the trade figures carefully,” Shai says, “you’ll notice that this growth has tipped the balance from two-thirds in their favor to three-fourths in their favor.”

Hui not only acknowledges this point but, rather than downplaying it, says that China wants more balanced trade with Israel. And while China is very happy that Israelis are investing in China, and China hopes to attract even more investment from Israelis, it is also encouraging Chinese businesses to invest in the Jewish state, too.

“Israel’s GDP is high, the people here have lots of purchasing power. That is attractive for Chinese manufacturers, who can sell their goods here,” he says. “We are also very impressed with Israel’s engineers and with its research and development capabilities. And, we want Chinese companies to participate in infrastructure projects here.”

China, Hui says, is eager for its foreign partners to see doing business with China as a win-win situation. Apparently, China feels – at least, outside the Olympic Games – there is enough gold to go around.

To that, Avishai Silvershatz agrees. As manager of the $600 million Infinity fund that invests in China and Israeli-Chinese business partnerships, Silvershatz has seen China become the largest market in the world for a number of segments. In a country where cell phone subscriptions increase by 10 million each month, for example, there are boundless opportunities for smart foreign companies.

“We see significant potential in China in internet gaming, medical devices and services, information technology, cleantech and many other domains,” Silvershatz says. “What’s more is that government regulation is becoming more mature, leading to greater protection of intellectual property, for example. There has been consistent progress in all areas over time, and we are confident that will continue in a controlled manner.”

Shai warns that, while Israeli companies sell agricultural products, advanced medical equipment and other hi-tech products to China, their advantages in those areas may very well fade as China continues to develop and become more competitive in those fields. What he, Silvershatz, and Avidar agree on is that Israelis need to make their presence felt in China even more than they have until now, to exploit the country’s breakneck growth and to establish lasting relationships with companies there.

“Just two years ago,” Silvershatz says, “people asked why they should bother looking east. Today, you can not afford not to. Now, basically, every company has to define some kind of China strategy.”

Every country has to do the same, as well. America’s economic and military influence around the world is shrinking, while China’s is growing. Any country that ignores that reality and neglects its ties with China does so at its own peril.

“Strategically speaking, the United States is still much more important for Israel. But several years from now, as America’s economic strength declines and China’s grows, ties with China will be far more valuable,” Shai says.

Avidar notes that China has shifted its focus outward.

“In the past, when China’s foreign minister would go abroad, he would talk about Taiwan all the time. Now the foreign minister talks about energy, and about investments in places like Africa,” he says. “China has enormous amounts of funds for investment. It is more concerned about oiling the Chinese machine and keeping it going.”

Israel would do well to realize the role it can play in China, and in helping itself in the process.

“We have to recognize that we are insignificant in terms of numbers and size, but that we are a powerhouse in terms of creativity, innovation and technology,” Avidar says.

“The days of Israelis going to China to teach the Chinese how to milk cows are over. If they want, the Chinese can buy millions of cows and give them to us as a gift. So when I hear people in the government speaking about China as if it were a place where we need to educate people, it is disturbing,” he continues.

“That Israelis think that 1.3 billion people need to be taught is arrogance, and it needs to change – quickly. Because, let me tell you, we have nothing to teach them. Actually, we have much to learn.

“We have to learn from them how, in a very short time, they transformed their economy and instituted a revolution in the way their bureaucracy took its hands off the economy to let it surge forward. We have to learn how the government builds a strategy and then implements it, without changing its ministers and its policies every two years. If they can do it with 1.3 billion people, dozens of languages and a huge stretch of land, then we, who have 7 million people in a much smaller land, have to be able to do it, too.”

Not to worry, Hui says, the Chinese know that “Jewish people are very good at business.”

Considering how poorly Israeli athletes have performed in China, we’d better be.

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