China, to go or not to go?
Some tips for Israeli startups
When Israeli companies plan their go-global strategies, they usually aim at the US and European markets. This is understandable because despite endless opportunities of an enormous market for tech products and solutions, a lack of familiarity with the local rules and customs would discourage prudent entrepreneurs.
However, what makes more sense for an entrepreneur is to evenly evaluate all foreseeable opportunities against associated risks in any given market, before making a decision. This article presents (non exhaustively) some factors to consider, in order to maximize one’s benefit in expanding to the Chinese market.
An Israeli business entity may implement its expansion to China through a few ways. One is for a subsidiary of the Israeli parent company to be incorporated in China as a Wholly Foreign Owned Enterprise (or “WFOE”). This has an implication of deep engagement in the market and therefore, many provincial grants become available, in cash or as an exemption of rent and taxes, or both. This is thanks to a top-down plan of strategic collaboration with Israeli tech companies.
As a result, an Israeli company already has a more advantageous starting point to do business in China, compared to other foreign companies of similar sectors and sizes.
Note that these grants are given without an exchange of equity in the Israeli company, unless it was expressly made as an investment from some dedicated funds. So in a way, the grantee owes no substantial duties to the grantor who, in turn, has no control over the grantee. The situation offers considerable liberty for the Israeli company to develop its market in China with funds and network provided by the local government and associations.
On the other hand, some elements such as unaligned interests (occasional or inherent), as well as different ways of doing business ought not be ignored in order to fully benefit from the advantages.
For instance, it is necessary to study past experiences of Israeli companies settling in the same area, the stability of local policies and legal ways to “lock” the current or agreed policies. When it comes to a local partner (sometimes it is a shareholder), consider whether it is necessary to keep governance at WFOE level or offshore (Israeli parent) level.
Israeli startups tend to move fast and focus on immediate interest. Probably a result of the existential crisis, this characteristic also drives Israel’s fast-growing tech industry. While it is key to some success stories, it may seem impatient or “short-sighted” from a Chinese business culture point of view. This opinion seems not to matter until it starts to harm your business. For example, when a long-term motivation to develop in China fails to be demonstrated, a grant decision may be negative.
Apart from navigating in China “on your own”, some Israeli companies paved their way in the Chinese market through their prominent Chinese investors that participated in several financing rounds since the beginning of the Israeli startups.
This article was written by Omer Ben-Zvi, partner and Jiaxin Zhao, associate at China Practice of Shibolet Law Firm.
You are welcome to read about Brooks-Keret China Desk led by Lillian Zhang, Director of Finance & Head of the China Desk