Will Israeli auto-tech stay Israeli, or go to China?

Amnon Shashua Photo: PR

GM's Herzliya development center is one model for the industry, but Chinese money and ambition may dictate another.

The annual conference of EcoMotion, which represents Israel's growing smart vehicle community, took place last week in Jaffa. The conference featured parasols, beer in plastic cups, and overseas guests being sheltered from the Tel Aviv sun. This year's event was more like a beach party than a serious international commercial conference, but its importance should not be denigrated.

Beyond the fact that a considerable proportion of the familiar local players in the sector had their first public exposure at EcoMotion, and are now raising money at company values in eight and nine figures in dollars, VIPs from the international auto and investment industry with multi-billion dollar purchasing and investment power were also present at the conference. The spirit of the Intel-Mobileye(NYSE: MBLY) deal was obviously omnipresent at the conference.

The atmosphere was energetic. There was lot of mutual admiration between rivals - something quite unique for the Israeli high-tech industry - and we also saw several technologies and companies that were previously almost completely unknown popping up from beneath the radar screens with a real potential of becoming the next big thing. On a somewhat less festive note, it was impossible to avoid noticing the accelerating fragmentation of the sector. The hunger for innovation and the availability of investments are inducing employees to resign from the existing companies, with more startups being founded and trying to jump on the bandwagon of the hot trend with unready products, and sometimes with mere ideas.

The really important trends at the national level, however, continue to progress quietly and quickly behind the scenes. They are currently marking two potential directions for long-term development in the Israeli auto-tech industry.

Israel in the spotlight

The first trend can be called "staying in Israel." Two companies currently represent it. They were not officially present at the conference, but their influence on the development of the sector is critical. The first of the two companies is, of course, Mobileye, which yesterday announced its intention of establishing a large (45,000-square meter) technological "campus" in Jerusalem that will focus on smart vehicle technologies.

This is obviously a reason for national pride, and if elements of the announcement, such as education, patriotism, and personnel training, are sifted, it may be possible to find between the lines a clear statement of intention by Intel about its future entry into many aspects of the smart vehicle, which extends far beyond Mobileye's core activity. It is certainly worthwhile following the future investments, mergers, and acquisitions of Intel-Mobileye in Israel.

Also representing the local trend, and no less important than Mobileye for the development of the industry, is the General Motors development center for advanced technologies in Herzliya. Unfortunately, not a single auto manufacturer has followed this investment model, but we believe it will become the next global movement around the Israeli industry.

General Motors' Israeli development center recently entered a quiet phase, with very few announcements of breakthroughs. This contrasts with the current strong tendency, both in the auto industry and outside it, to run and tell the investors (or the shareholders). This deafening silence is part of the well-known business policy of General Motors CEO Mary Barra of secrecy and compartmentalization until the "product" is ready for market. Behind the scenes, however, the Israeli center is in the eye of the storm of the US corporation's future global strategy. General Motors is currently investing capital in its own development of technologies for a connected autonomous vehicle based on the Chevrolet Bolt – an all-electric vehicle that is serving as a prototype for development in Herzliya. General Motors is also investing huge sums in acquiring companies with core technologies, such as Cruise Automation, which is doing road testing of an autonomous vehicle in San Francisco, and travel network company LYFT. General Motors is conducting advanced testing of municipal vehicle sharing services with Onstar vehicle connectivity infrastructure, which probably has the most extensive international deployment in the auto industry today.

These are all indications that the group's smart car activity is considerably ahead of a large proportion of General Motors' competitors. As of now, what is involved is still a complex jigsaw puzzle with many parts, and integrating them will take a great deal of further development. In contrast to rich IT companies and niche companies (such as Uber), however, which have critical parts of this puzzle, an auto manufacturer like General Motors has the resources and knowledge to turn the jigsaw puzzle into a complete system. When General Motors decides that the time has come to unveil its global plan for the smart car sector, and the real share of the Israeli center in this breakthrough is revealed, the local industry will undoubtedly receive another international boost. Who knows - maybe we will see many startups growing from this local infrastructure.

The Chinese conquest

The second trend is in the opposite direction - from inside to outside. It is reflected in investments not necessarily aimed at maximizing profits or local development. The aim is to obtain Israeli advanced technology, and export it to third countries. Chinese investors are currently leading this trend, either directly or through funding. While this has hitherto been marginal and implied, it is likely to soon become a real tsunami. Last week, the Reuters news agency published an article about the Chinese investments in US technology companies switching to Israel. Up until recently, US technology companies were the main target for voracious Chinese investors. Recently, however, the US federal government has begun a careful check of deals through regulation designed to prevent critical technologies from leaking to foreign ownership and the flight of businesses overseas.

As a result, Reuters reports, the Chinese last year canceled previously announced deals in the US amounting to $26.3 billion. According to the article, a considerable proportion of this money is likely to flow to the Israeli high-tech industry.

While these investments will encompass many technology sectors, from agriculture to medicine, the auto-tech sector is being specially targeted. Note that the Chinese auto industry today has a burning need for smart-car technologies. According to up-to-date estimates, within eight years, auto sales in China alone will top 35 million units a year, and 15% of them will be vehicles equipped with advanced autonomous capabilities.

The problem is that the array of international laws and patents is currently denying Chinese auto manufacturers access to the technologies of foreign auto manufacturers operating in China. The result is that the Chinese auto industry lags substantially behind in this area – a gap that the Chinese government is making great efforts to close. Some of these efforts are focusing on regulation. For example, auto companies and technology that are not under Chinese ownership or control are not authorized to conduct high-resolution geographic mapping, which is an essential element for an autonomous vehicle. This means that a foreign company wishing to take advantage of the enormous potential of the Chinese auto market will have to bring with it a technological dowry.

Another method employed by the Chinese government is inundating the smart auto market and related fields (electrical propulsion and the like) in China with money through direct investments, sending a stream of money to government-affiliated venture capital funds, and providing substantial encouragement for local companies in acquiring and importing foreign technologies. Israel, which is greatly esteemed in China, is certainly a focus of attention here.

The degree to which the Chinese shift to Israel has become a trend can be deduced from a legal article recently published by a well-known law firm in China on a large Chinese-language economic website. The headline was "How to Ensure Transfers of Technologies from Israeli Companies." The article is a legal guidebook for Chinese investors. It instructs readers how to handle various local obstacles liable to prevent the transfer of technologies from Israel – the Office of the Chief Scientist, the wording of contracts when an investment is made, the need for a team of representatives on the board of the companies in which investments are made, and so forth. Among other things, we also found a not-so-legal, but very correct, sentence: "The technologies are becoming advanced, the company values are rising, and Israelis, like the rest of the world, know that Chinese companies are rich, and are eying their wallets." Generalizations should avoided, and there is no doubt that a considerable proportion of Chinese investments in Israel are designed for standard purposes of profit maximization, but there is nevertheless food for thought.

Staying in Israel

A rapid exit and large financing rounds are not the only temptations that the Chinese are currently offering Israeli auto-tech companies. This month, for example, the Global Innovation and Entrepreneurship Fair was held in Chengdu, China's fifth largest city. This event included Chinese government figures and economists, academic and entrepreneurial groups, and foreign technology investors, and Israel also had quite a respectable presence there. Chengdu is trying to position itself as the Chinese Silicon Valley by attracting foreign technology companies, with the aim of also accelerating the training of the local base of technologies and entrepreneurship in various high-tech sectors, while at the same time facilitating the transfer to China of technologies with break-through potential for the local industry.

Official Israeli government representatives attended the conference. One of the peaks was the signing of an agreement between Chengdu and a large multidisciplinary Israel investment company that operates in the auto technologies sector. One of this company's areas of expertise is "technology exporting." The bait that the Chinese are offering Israeli technology entrepreneurs is a large one: ultra-modern infrastructure with more than 600,000 square meters in space, a pool of over two million trained workers, available academic centers, and, of course, an enormous amount of government and local financing and access to the entire Chinese market, especially the Chinese auto industry. The big question is obviously which of these models - local economic development a la Intel-Mobileye or "money talks" - will win out in the long term. The answer depends, of course, on government policy. The US government recently chose to take a step backwards, and to examine the interests of external investors with a microscope, while drawing red lines. Senior Israeli government officials, it appears, prefer a red carpet to red lines; their attitude towards Chinese investments is "grab whatever you can." This does not apply only to technology, but that is a subject for another day.

Published by Globes [online], Israel Business News - www.globes-online.com - on May 23, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Amnon Shashua Photo: PR
Amnon Shashua Photo: PR
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