Find here the China paradigm 72 where we Daxue Consulting interview seasoned entrepreneurs in China. Today we are going to have this amazing talk with Rami Blachman to explore the Israeli start-ups in China and discuss foreign B2B business development in China.
Full transcript below:
Matthieu David: Hello everyone, I’m Matthieu David the founder of daxue consulting, a China market research company in China & its podcast China Paradigm. Today I’m with Rami Blachman, I hope I pronounced your name well, did I?
Rami Blachman: Yes, you did.
Matthieu David: Thanks. The founder of China – Israel Innovation Accelerator. You have been in China for a while and you have done a lot of things that – raised a lot of questions actually for me in the past. You have worked in finance in China with financial institutions; with foreign financial institutions and Chinese financial institutions & also with government, local government in Nanjing, in also Haikou & Hainan. You are now in charge of Israeli Innovation Accelerator where you support the group & entry of Israeli start-ups in China, mainly tech, mainly low started. And you made recently a presentation in Nanjing where you covered those topics about comparing US & China for market entry, comparing the importance of going to China for Israeli start-ups companies & comparing to the US.
So, thank you very much for being with us. Currently, could you tell us the size of what you do? How many companies in your Accelerator? How many cases you have dealt with? Could you share a little bit of where it is in terms of development?
Rami Blachman: Yes. First of all, thank you, Matthieu, for the opportunity. It’s a pleasure to be here at this China podcast for daxue consulting. So, I would add to my background that I think my DNA is basically to be a start-up entrepreneur. That’s where basically in terms of my mindset – that’s where I come from. I have been doing that for quiet while in the US, in Israel and in China, Europe also I would say. I will speak to that soon, but I have been on the side also, the other side, the funding side; the investment side. I’ve had a chance to work with Chinese investment groups.
I worked in Hangzhou for four years with Zhejiang Zhongda which is a large conglomerate, working with their investment in joint ventures in the US & Israel & also with others. More recently the cities in China have been having a higher profile, in cities like Nanjing, Haiko, Changzhou, Suzhou, Quanzhou, Xi’an, Qingdao & I can go on and on. Many of these cities seek to become magnets for innovation in entrepreneurs, for digital nomads so to speak & there they have big budgets & they take many steps to attract the lower foreign innovators. So, I have had a chance to work on that side in China & also on the side of the Israeli start-ups in China.
When I say Israeli start-ups in China, I think it’s important to define the term because when you say start-ups most people have in mind – a couple of young people just out of college, sometimes dropped out sitting in a co-working space with a very exciting powerpoint presentation.
When we say start-up, in the start-up world we mean anything from that to Uber. So, DiDi, Chongqing, Uber until uber went public the whole range can be defined as start-ups.
Now typically what it is the technology company – a technology company in China that raises money & then goes to a very rapid growth rate. That was very important to define this thing, let’s call it technology companies in China because that doesn’t keep us necessarily at a very early stage. It could be a growth stage, in Series A, Series B – companies at least tens or hundreds of millions of dollars or just pre-seed. So, working with mostly Israeli startups in China, also European, American but Israel is a very interesting case in point because, for 25 years, these companies based out of Israel have been expanding & growing in the US market – Silicon Valley. Israel is like a microcosm of Silicon Valley in many ways. All of a sudden in the past two years China is in the front & center. It’s not just another market, it stands alongside the United States as a playing field for growth since becoming a unicorn, for creating huge value over a short time span.
Now the China – Israel Innovation Accelerator is a framework that I founded about a year ago. I think we are pioneers; pioneers have good aspects & it’s very challenging also because you are breaking into the market & that’s never an easy thing. What I can tell you is that many Israeli start-ups in China are very cautious, about entering into Chinese market & we could talk about that for a long time – what are the reasons, But for Europeans or Israeli, I think the Chinese market, on the one hand, is the huge opportunity at the time but there are also many challenges. The China – Israel Innovation Accelerator basically collaborates – the model is to collaborate with different landing pads. So, places like XNode, Shanghai or Inner Space Shanghai that I’m sure you know – Ni Hao, Hangzhou. Nanjing – We went to Nanjing tech week last month & we brought about ten Israeli companies there for matchmaking.
Haiko the city of Hangzhou has a China – Israel park so to speak. All of them are looking into having these companies land & launch there. So, this is the Chinese – Israel Innovation Accelerator. It is the framework that has different kinds of programs, it’s not like a batch – Plug & Play or Y Combinator. You go & take companies for three months – not quite there yet. It’s more like a case-by-case basis for these start-ups to non-successful.
Matthieu David: So, what are you offering exactly? Is it training? Is it expedition – like we say, learning expedition where will you bring these companies to China to meet with people to understand the Chinese market? Could you give a case for the people who listen to us to understand what you do & offer?
Rami Blachman: Yes. So, it could be a company in a certain – let’s take the Chinese automotive industry for example – well it’s mobility which China is very important and dominant players having hundreds of deep technology companies in Israel. Now the first step typically – in usual situations typically the first step could be three- or four-days orientation in one of the cities or in Nanjing, Hangzhou; or one of the places where one or two companies can come & they can find out what this place is all about. What are the matchmaking possibilities because the one thing that we need to understand about Israeli start-ups in China is that many of them have raised money locally from Israeli and US VC funds?
So, they have raised one to two million – 10, 20, 50, 100 & over. They are very focused – laser focused & they need to know one thing that’s most important for them when they look at China’s market – not necessarily for fundraising that’s a secondary issue concern. The most important thing is we land in China ‘How we going to get into projects?’ the proof of concept – the pilot project. We think customers – in China, the government is always a very important player in the background. So, we address these points, how do you take this step by step to help this company commercialize the right way without losing focus; losing time & going back and forth on and on.
Matthieu David: How do you do to assess it? I feel that a lot of companies are attracted by China because of the size. As you said they realize that the environment is very different – that it needs a lot of appreciation; it needs a lot of changes including technology – technology is not the same, it could be different API, it could be different software, etc. How do you assess it’s too early or it’s a good time for them in China?
Rami Blachman: It’s the case – by – case basis. I would say the sector’s verticals have characteristics. So smart mobility, for example, is the longer-term game because the major OEMs as they call it – the big brands like Volkswagens & BMW’s and Ford’s and so on – the car makers in Chinese automotive industry right now are in process of designing the next generation car that will be rolled out let’s say in 2021. So, the technologies right now are rushing to integrate into that – into the design specification. That’s the longer-term & there is some characteristic that is typical to that. If you look at E-Commerce or digital marketing, it’s very different. So, go-to-market is great there, you get into & that can happen very fast – that’s one way to categorize it.
Another way is to look at the companies; the
If you look at the companies that have already 100 or 200 employees and they have raised 50 – 20 million & they have an office in the US. You think that typically they would be more mature & ready for the Chinese market which is true, but the downside is that they can’t get distracted. So many times, they will say – sure – like the companies like R B robotics, which is a radar system driven by a smart algorithm that sensors the eye of a car of the future, the driverless car. They entered -they have a Beijing office and we’re very close to them, we talk to them very often & they have made the decision to set up an office in China. But the other companies will say listen to this is something we do in 2020. So, it’s a case-by-case basis.
Matthieu David: You are mentioning technology companies from the west especially Israeli technology companies in China. So far, we know a lot of foreign companies like in luxury; in cars and so on who have had some success in China. But for technology company the ones we know mostly had figures like Uber. I mean Uber won success up to 20% of the market share and then was bought by DiDi. when you look at Google & so on, they are just forbidden. So, do you have some cases where purely Tech companies have been successful in China? I remember a case which is Qoros automotive which is from Israel as well I believe, a joint venture between China Israel – Qoros.
Rami Blachman: Yeah. Qoros.
Matthieu David: It’s difficult for me to name a very successful Tech company. Do you have examples from the west, from policies? Do you have some example cases?
Rami Blachman: That’s a very good point. There are not many success stories. Uber is an interesting case in point, we know what happened there. Uber went in & then went out in a way and has a shareholding in DiDi. We see Airbnb they are trying to localize; I don’t know to what success that’s questionable. But at least they are making a significant effort. Maybe the tourism industry ‘Booking.com’ is a very interesting company that has huge space in C-Crypt & in DiDi. They have made a huge commitment in a multi-billion-dollar commitment to China & in the Shanghai subway system you see their advertisements everywhere. But these are some examples, if you see Israeli start-ups in China, they are usually not that big & there are few signs of success stories.
One company, for example, is Mellanox. Mellanox is not a start-up – it has revenues of 1.5 billion dollars & they were acquired by Nvidia from Silicon Valley three months ago for seven billion. They do switches & routers for data centers, so it is like an infrastructure company. We took them to Nanjing tech week and this is the company I think has at this point something like fifteen to twenty percent sales in China. They have a very nice office in Shanghai. Mellanox, Israel based that traded on Nasdaq for a long time & then was acquired by Nvidia. So, this is one of the low profiles but pretty successful companies that are building a nice market share. That’s one example of bigger companies.
Now if you look at
I will give you one more example that I think is really like these people because I think they did a superb job – a company called Temi.
Temi is a maker of cool personal assistant robots, this robot that goes around the home. It’s not going to bump into the things because it has a system that enables it to see what’s going on in the environment. This company raised about 50 million dollars, two years ago from John Hu – he was the Ex- CTO of Alibaba. And through the consortium of investors in Singapore, they invested 50 million dollars into Temi based in Israel & now they have really good China headquarters in Shenzhen. In September they are beginning to deliver i.e., take delivery on orders into China. They are working with retail chains so these robots can guide people to wherever – it’s a really nice presentation. This is a company that’s making inroads as a Chinese company but it also has western Israeli – American parts that are separated but the technology is shared through these two platforms. These are some examples of success stories. It’s not going to be easy but I think & hope we are going to see more and more of this.
Matthieu David: Interesting. The example you take out both companies which are on the radar like Booking.com, Airbnb where everyone knows about it & some companies are more industrial, which are more hidden because they work more in B2B. Maybe some parts of it are actually hidden because a lot of them are using B2B. You talked in your presentation that you made in Nanjing about the secret sauce from Israeli start-up, The Silicon Valley DNA and the Chutzpah. Could you tell us more about what you mean by Chutzpah? I have no idea what it is? You spell it – Chutzpah? Maybe I didn’t pronounce correctly.
Rami Blachman: Yes, it’s a word actually in Yiddish, and Yiddish is the language of the Jewish – old language of the Jewish people in Europe. Yes, that is a very good point that you made that Israel is very much B2B, it’s true. Because there’s no local market, that’s why many of the Israeli start-ups in China are B2B – maybe 80% or 85%, that’s true. What is the secret sauce? That is something that people ponder and talk about, but I think the fact that Israelis start-up founders, because there’s no local market, there’s no local capital, they had to start with the united states market and that’s – with the culture – there are many things that are very – the countries are very close together, but still it’s a very difficult leap because silicon valley, we all know what it is.
It’s a huge, massive powerful platform and it’s hard to break into it and these small upstarts from Israel had to develop certain skill sets or mindsets over the years to do that, and they weren’t able to do that and typically the model that has worked really, really well is keeping the R&D in Israel. Keeping the programmers and the software engineers and so on, most of them in Israel. Whoever studying the sales, the product, the management, marketing in the US, for the most, and in Europe. Mostly in the Bay area, for example in New York City, you see many companies are media, fintech, content, you see a lot of that in New York and in Boston are a lot of medical designs developed here.
So, over the years this has developed into a very successful model, we’ve seen exits. So, I would say that the secret sauce as we say – first of all, we have that Silicon Valley DNA, which means many things, it means we’re professional and we are very focused. Really, really important, you raise capital and you have to achieve these goals very quickly. There are certain things that you have to carry yourself in a certain way, in a professional way. Accurate and so on and so on. So, this is something that has worked well.
Now, we need to apply this to China. China is different in many, many ways. Well, I can just give an example, in the western US culture, things are very open, right – so you meet someone, you don’t necessarily need to be friends, you know what their resume is, they know your resume – maybe some introduction and then you’re ready to talk business. You’ve been sending emails with the job sheet – that doesn’t happen in China. No way. And that is something that time and time again, both sides face – one side – the Israeli side says okay, we had a good meeting, let me send you bullets via email. But then the Chinese side is a different place altogether. Mainly the people who are not decision-makers, they still need to know who these people are because they’re a small company from the other side of the world.
They need to build up trust in the relationship which is very important in China. So, they don’t reply to the email sometimes and that’s why these things fall apart. So actually, your question – the secret sauce, the thing that has worked so well for Israeli companies needs to be adjusted to be successful in China. It needs to be localized and I think that is the most important thing that people like you and me understand.
Matthieu David: One thing you said, keeping the R&D in Israel. Can it work really in China where again the technology environment is very different? If you have a Facebook font or Facebook API or Google font in your app, you will not be able to use it in China or not be able to be very fast in China, you have to put the server in China and is the DNS going to work the same actually, compared to the West, in China. Do you think R&D can still stay in the country where the company has started for China?
Rami Blachman: Again, this is a good question. The answer is yes, but there are more complications. The infrastructure much of it needs to be in China – because the Chinese law requires the data people to reside in China, so you have to use – as cloud providers, Alibaba or AWS in China. That makes it more complicated. That’s the cost of doing B2B business development in China. That’s life. That requires more resources but I think that the basic essential strength for Israeli start-ups in China to behave these developers and programming and keep the R&D in Israel, they have to keep that and they will have the China operations maybe a little bit different than the US. You know what I’m saying – so they will keep the model but they need to adjust it because this is a winning model. In many ways.
Matthieu David: The presentation you did in Nanjing for where you were with these Israeli companies, these tech companies – not to use the word start-ups. You mentioned five sectors where you see potential because they are Israeli tech companies and because you believe there’s a market in China, as far as I understand. The message. So, one is – UrbanTech, one is Food Agro Tech, the other one is Clean Tech and New Energy. Ecommerce and Digital Marketing the fourth one and fifth one Medical Device and digital healthcare. I think the one which is the newest to most people, the most surprising is the one called UrbanTech. Would you mind elaborating on what you call UrbanTech and what is more surprising is that you have listed 1200 start-ups in Israel doing UrbanTech plus IOT sorry, here you have IOT as well? IoT is maybe more just now. Could you elaborate more about the potentials that overseas companies, especially the Israeli start-ups in China?
Rami Blachman: UrbanTech is like an umbrella. It’s something that could sit with many things. Basically, the aim to improve the lives of people who live in cities. Because we see that urbanization is a trend that is growing, more and more people moving to big cities, particularly in China, it’s going to be already more than 50% in China. In the Western world, it’s much higher than that. So, urbanization is very important. How do you make life in the city better? And there are many aspects. One aspect is mobility, how is transportation in the city? Another aspect is the buildings, so we need to have what’s called smart buildings. Smart homes. Then there is also the IoT – IOT another term for it is Edge Devices – Edge computing –
Matthieu David: Basically, the idea with IoT is everything is going to be connected, in the future when you sit on a chair, it will be connected to know the weight, to know how healthy you are or whatever – the feet will be connected – this is the IoT world. So, you believe it will connect the city?
Rami Blachman: Yeah, it will be in people’s homes, it will be on the consumer side and it will be on the municipal side. You have you know, the lighting suspension, you’ll have every edge device basically, the extension, the cameras, need to have some computing and this is a huge challenge because it takes energy, it takes electricity, how do we power that and how do we feed that back in the cloud? So, this is another aspect of it. There’s also the aspect of security, right. There’s education. There is recycling. There are many, many things under Urban Tech – in fact, we put it up as a part of the delegation to Nanjing, we had with us, to join us – High Road center, which is an incubator based in Tel Aviv – High Road Centre and they focus – they come from industry background. So they’re backed up by government municipal road building and infrastructure building companies and it’s a platform that screens foreign investment companies that are in Urban Tech, and they have realized something like tempo folio companies – just to be in business for a year, and they came to Nanjing with a few of their portfolio companies that were very early stage. So, companies that raised 50 – 100,000$, and they focused on Urban Tech.
So that is something that is extremely relevant to China of course and we see that a lot of the initiatives as I was saying earlier, comes from cities. So, you have the central government of course – the motivation, the budgets many times and they margin orders, right – so they’ll say, this is where we’re going, and then you’re going to see the city level. Sometimes the districts. So, in the case of Nanjing, there is Nanjing city, the Jiangning district, Jianye district. In Shanghai, you have Xuhui, Jingan, Yangpu and so on. Each district takes the initiative in each city. So, we really believe that urban tech in that very broad term, the sensible term is something that’s going to be extremely relevant to B2B business development in China.
Matthieu David: That’s one thing I wanted to ask you and to elaborate more on how government can drive innovation, how government can actually be the platform to oversee the start-up and tech companies to enter the Chinese market because they will ease their entry, also because they will use their solution. So, your business partner of Jianye district – so in Nanjing, and also you are a business partner in Haikou Fullsing Town Internet Innovation park in Haikou, Hainan and you mentioned that Jingdong, Xian, Zhengzhou, they have a lot of budgets. Could you explain to us, what’s happening exactly? Because it looks like a dream, they have a budget, they want you, they want to invite you – wow! Let’s go. It sounds so easy. Can you explain the back story? What’s behind this? Is it because the officials are rated on the GDP growth or innovation ranking? Is it that they have a budget but they offer free space and actually they can provide a loan or is it free budget they open – could you explain more about what is the ecosystem with those parks and those which help innovation overseas companies going to China?
Rami Blachman: Yes. So, the thing is needed to position themselves for the future. We see the dreams of being Silicon Valley, but not everyone can do that, but they still try to be a hub of knowledge. They don’t get – you look at Beijing, Beijing is huge. You look at Shanghai, Shanghai is also, everybody knows about Shanghai, Shenzhen and the great Bay area, that’s the kind of Mecca for hardware anywhere in the world. So, these other cities, they don’t want to be left behind. Now, we also see a phenomenon in China that they think is really neat. You see the parks – the tech parks. There are so many of them. I think there are probably hundreds of them all over the country and these are driven by a real-estate mentality because that’s how China now is the engine of work – that’s how many people need money and they have all these parks and they were saying – hey you know, we’re going to allocate the parts, let the foreign companies come, it’s going to be good for everyone. They’re going to get subsidized office space and so on.
The thing is, the issue here in the heart of the matter is that for technology companies in China, it’s not a real estate question. So, they don’t think about parks, it’s not like a huge multinational company with plants and factories, most of them don’t have that. It’s a bunch of people sitting in front of computers and maybe they have workshops, but it’s not a huge space. They don’t need thousands of square meters, and that’s where there’s another gap here between these all entrepreneurs and start-ups and innovators and what the Chinese cities want to offer- they’re saying ‘come, we’ll give you free office space’. Number one – these founders, they’re not looking for free office space. That’s not – they’re way beyond that. They’re looking for a market. And number two – it’s not the question of just filling up the parks. So, this is one source of a gap, this is one example.
Now the cities –they’re looking to lure and attract the foreign technology companies in China because they want to transform the hubs of knowledge and not fall back, but the thing is, they’re not really sure how
If we’re not just looking to travel. We’re looking for a market, we’re looking to match with potential customers, if that’s what we care about, what is the purpose of going to this place where – for one month, for two months, for three months. That’s the question that the cities need to address. People like me – what I would say, the solution to that is curated solutions. So, these governments, they don’t do the business themselves. Right. The government officials, but they have the power – first of all, they have the money and they have the influence – so they can say okay – here is a company from Israel and this company do let’s say robotic warehousing solutions, driven by AI and machine learning and so on. This company is a very good fit for Nanjing because Nanjing does these kinds of things and wants to be a leader in these kinds of things. So, we, as the government – we are going to say – okay.
Here is a local company in Nanjing that has warehousing for Jd.com or Alibaba or some other players, you guys have – we’re going to allocate some space for you. Some warehouse spaces. We’re going to fund this also; we’re going to put 10 million RMB. You guys run pilot projects here. So, I think this kind of curated projects, commercialization projects, that is something that will work very well.
Matthieu David: I see. When you’re saying business partner of a municipality, what is it exactly? Do you bring business to them, what’s the gist you have?
Rami Blachman: The thing is that my company has always been screened by the local authorities, by these government officials and we are a qualified, certified business partner. So, it’s like – let’s say you are a supplier to Wal-Mart. You work inside the billing system. This means that you are a certified supplier and business partner. So that means, we are open to doing business and if they want something from Israel – if they want a delegation to visit or they want – if there’s an event in the city or in the district and they want some Israeli start-ups in China, we are the natural partners to do that.
Matthieu David: Does it mean that you have specific access to them or specific – you can actually have access to specific programs and so on?
Rami Blachman: That’s the idea, yes.
Matthieu David: Can you give some ideas about what kind of specific programs you’ve got access to?
Rami Blachman: As I said, number one is – many of these cities, they want to send delegations, there are many, many delegations coming to Israel, and they come for three days. So, they want to meet start-ups and incubators and they want to get a good picture of what’s going on here. So, we will do this kind of service for them. That’s one example.
Or, Nanjing, Jiangning district – end of June, they wanted 10 or so Israeli technology companies in China to come. We were communicating this – communicating the program and just handling everything to bring these companies to the event and then be there throughout the event with them, with the matchmaking, which was the most important thing for them in the exhibition. Keynote speaking, panel speaking and so on. These are just two examples.
Matthieu David: You mentioned that a second sector, which would need start-ups and Israeli technology companies in China, which is food and agrotech, at the same time you have advised imagination venture capital, which based on the name I think has a link with agriculture. Again, similar questions about agrotech and food in China, in innovation – have you seen some success in China linked to agriculture and agrotech? I am going to elaborate a bit more. Agriculture is very strategic for China, it is within the five-year plans, that you should be Chinese in order to actually – making sure that there’s enough food for the country to be independent. So it’s a strategic matter, and some companies actually in the past, I know one – had to sell its shares – it was a French company, joint venture with Chinese company, had to sell its shares at fair price, at market price to the Chinese counterpart because it became part of the plan as strategic and no foreigner could be able to create elements within the food chain. So, would you elaborate a bit more about what kind of segment do you think in agri-food, agrotech, are examples of companies that are or have been successful in China?
Rami Blachman: There is a company – companies, for example, smart irrigation systems, which have been successful in the past. Now, what you’re talking about seems to be an issue of intellectual property in some ways I think so there’s a joint venture, what happens to the intellectual property, being food and agrotech – it could be others and to what extent do Chinese authorities and in general, the market, respect IP of foreigners. I will just say a few things about this but I think – and we know that it’s not my opinion, it’s what we see everywhere, that there’s been huge progress in China in terms of protecting IP.
First of all, there’s an IP court system in China and the track record of protecting the rights of foreign companies is very high. So, still, there’s a long way to go – right, and this is the part of the US-China trade war but we see right now that IP is a huge issue in China because the Chinese companies have their intellectual properties. So, you see Xiaomi – three other companies, Huawei and everybody, tries in their best interests to protect IP. This is good news for foreign technology companies in China. Yes, agrotech and food tech is a strategic industry and verticals of many countries, particularly in China – for historic reasons and many other reasons. They are attracting, really interested – I can say that one of the most famous international Silicon Valley-based innovation platforms, it has a presence in China, contacted me last month I think – a few couples of weeks ago and met with me in Shanghai, saying that many multinationals and Chinese companies want to source agro and food tech companies. Israel is one of the leading countries in this.
So, this is something that’s of key importance, there are some success stories. I think we have to look at what’s happening in the past few years in China. The past few years, China is transforming into a tech superpower and before that – prior to that. Last few years and prior to that, you had many kinds of – five or six years ago I was working in two companies in the water treatment space in China. For treating – we had biological ways of treating water for municipal and agriculture. They raised the money and had some successes but it was in many ways premature. I think that right now, with everything that’s happening in China, the opening up and China 2025 and 2030 plans – it’s a whole different ball game and food and agrotech, which is a very broad term, deals with farming, it deals with post farming, it deals with the logistics. There’s a lot of zones, AI is driven, data-driven solutions, it’s a very, very broad term.
That I think is going to be very big. I think the Chinese are going to – because if they want the foreigners to come, they can’t take away their IP, revolt their rights and do all the things that maybe have been done in the past, and they understand that and so they’re going to be much more open, much more transparent, much more aware of their IP. I think this is also going in the right direction.
Matthieu David: And to go in your direction, what you said before, there’s not only Beijing, Shanghai, and Shenzhen but there is also Chengdu, Sichuan and the big agriculture province where actually it certainly makes sense to go when you are in Agri. Talking about your plastic stance, I think there is something I am very curious about and I think many people will be curious about it, it’s about your experience with the financial industry. Between China and the West, financial.
Rami Blachman: Financial.
Matthieu David: Financial yeah. You had done something which seems very difficult or even impossible for many financial companies overseas is to be able to sell financial products to Chinese when you are an overseas company. There is Zheijiang Zhongda management. You have been able to set up a joint venture, set up offices for foreign companies to sell financial products. Could you elaborate more about what you did at the time and what is possible to sell when you are a financial company and a fintech actually to Chinese clients, to give a framework to people? Chinese citizens cannot send more than 50,000 USD every year outside of China, to invest or whatever. If its education, like MBA whatever to spend, they have to show the invoice first and they do justification and I believe sometimes they may be limited by 50,000 USD. You had some legislations like five or four years ago, QF2 or QF1 I don’t remember exactly – in some provinces and making it easier for Chinese citizens to invest abroad. It was very specific, very cities or provinces and it was not national at all. I want to know what you did and to what extent it can be still done?
Rami Blachman: So, this was about five years ago. We did a – when I was heading the overseas B2B business development in China for Zhejiang Zhongda investment, we did a joint venture with a New York-based registered investment advisor called IA – and this was a joint venture in the Shanghai situation, which enables some of these things. Starting financial products to high net worth Chinese individuals. This was kind of breaking grounds at that point and the financial legislation regulation is super dynamic, you really have to be part of it to keep track of it. For five years I’m sure it’s changed erratically. That is something we did then and I think one of the first as far as I know – of course, you have the Goldman Sachs – the big players, that have been doing things for a long time, but the second tier or third tier financial players, I believe that was one of the first groundbreaking kind of joint ventures which made important US and Chinese player to do that.
In the past few years, I have been focusing more on venture capital. So maybe I’ll just keep to that a little bit, VC. Something that we see that I think is a very, very interesting situation with many lessons to be learned from there is that – many Chinese investors, high net worth people made a lot of money in real estate and different things, where people in Wenzhou province, there are many, many factories. Many business people.
Matthieu David: Yeah, Wenzhou is known for having a lot of business people and people from Shanghai say, Wenzhou people own a lot of real estate in China. They are known to be good in business and have small to medium businesses.
Rami Blachman: Exactly. So, people from there – they want to invest in technology like this is something that – they want to take their businesses there, they have a strategic view. They want to transform their businesses. If they are manufacturing, they want to invest in industry 4.0 for example or robotics or something to help upgrade their business to the next generation. This is for strategic or they just want to be financial investors into technology and make money. So, we see many of these things happening. On the one hand– this is the Chinese side, and the foreign Israeli side, for example, Israeli start-ups in China sometimes say – listen, why don’t we go raise money from Chinese investors. This is something that we hear. So, this is a – there are some problems with this. Exactly as you say is number one – is the fact that you have RMB and USD and there is a wall in between, and they can only take out 50,000 USD per year. So, if a Chinese investor wants to invest in an Israeli start-up in China, how are they going to transfer 1 or 2 million dollars or whatever the case might be. Let’s say that they made a decision that they want to, which is not trivial. So how do you do that? Physically – you have barriers you can’t do that. That’s one problem.
So, then we see also – sometimes VC funds. Europe, we in Israel have been approached a few times and said, let’s raise capital from Chinese investors. Now I was a partner at Giza Venture Capital a few years which was I guess one of the more established VC firms in Israel and we raised China – Israel’s funding, – it was a very difficult process. So when I hear VC firms say let’s raise capital in China – I’m very – I say to them, let them first raise capital in the western ecosystem and then approach the Chinese investors, because even the big money in China is RMB and that’s not going to help you if you’re wanting US dollars in Israel. If you want the USD from the Chinese investors then you’re going to Hong Kong or to Singapore, and it’s not mainland anymore. You’re in Hong Kong. So, you might as well be in Hong Kong and Europe or London for that matter. You know what I’m saying – so the Chinese LP’s as we call it, limited partners, those that invest into VC funds, those that want to invest directly into technology companies in China, are very difficult targets for foreign technology companies because of a bunch of reasons. Psychological, experience, their inexperience in doing that.
Maybe they’re experiencing investing locally in Chinese start-ups, they have many, many of them, why would they need to risk investing in small overseas companies that they don’t know. There are answers to that, this is a whole conversation but – it is still something that is not so easy to do. One of the things that we approached is that first of all, we deal with Israeli start-ups in China that already – as I said in the beginning, they raise some money locally. The local ecosystem, Israeli, US, European, VC’s and corporations. Corporate VCs. At least more than 2 million dollars, otherwise we say – don’t look at China right now. So, they raised some money, even more than that and they’re looking to the market in China. So, we’re saying, don’t focus – if you’re just raising money, you ought not to go to the Chinese market. The chances are not high and you will waste a lot of time.
You’ll be successful, the odds are not in your favor. So, they go and focus on commercializing focus on market and then what can happen and many times happens is that they have – once they’re landing in a lot of these landing pads in China, they have the time to engage properly with Chinese investors. They have the time to build trust. Sometimes the government comes in and at that point RMB can be used to fund the Chinese operations. That is something that can work very, very nicely.
So, you have the foreign entity, landing in China, establishing a Chinese subsidiary, looking around at the market, seeing who are the customers, how do you localize, how do you hire local people? Super important. I see subsidiaries of Israeli technology companies in China with Israeli managers and with Chinese managers. It’s a different ball game.
Matthieu David: So the way it would be structured – sorry to interrupt, the way that it will be structured is that – this company will have raised at least 2 million US in the West and they would set up a WFOE in China, the WFOE would be let’s say 70% their shares and 30% will be owned by the Chinese fund or the China fund and that’s the way it works. It will be financed; it will be funded by the China fund in China.
Rami Blachman: Yes. Exactly. So basically, we want to keep majority shares of the Chinese subsidiary, owned by the parent company and it would be anywhere from 49 – 40 – 30 – 25 depending on the structure. Yes. That is very correct. And very important to state that the IP remains in the parent company. IP – because this is a Chinese subsidiary, many times it will have an exclusive license to sell and distribute in China but that is also another subject in how do you reconcile the interests of the Chinese industry.
Matthieu David: It’s soon going to be for one hour. A couple of questions to end the interview, as we sent to you before. The first one is – what do you read to stay up-to-date about China’s business?
Rami Blachman: I would like to recommend – I’m sure you know these people, very, very good people. Technode. Our friend in Technode. Really, one of the best –
As you may have seen, in English and Chinese start-up in tech being in Beijing, in Shanghai, covering – two thumbs up for them, doing a terrific job.
Matthieu David: What book would you recommend about China?
Rami Blachman: I believe that the proper way of being in China and working in China is to know China’s history because its rich history, it’s so unique and it’s very important to know as much as you can – geography because it’s critical. Just like if you want to understand what happened in Europe, you need to know the geography. Right. The different countries, you need to know the history. So, one book that I liked very much is – and I can send a link to it if anyone wants, it is called – The Search for Modern China. By Jonathan Spence. He’s a British American historian of China from Yale. Many, many years at Yale University. That is the book, The Search for Modern China, it starts at the end of the Ming Dynasty. It was in the 15th century if I’m not mistaken, the 1400’s and then through Qing Dynasty, talking about the different emperors and then in the 19th century, we saw China being brutalized by the western, through the Republic and then civil war and then 1949 and so on, up to the 1990s. that’s the book that I recommend.
Matthieu David: Thanks, I will download it on kindle. What is the most surprising experience you’ve had so far in China?
Rami Blachman: Well, the surprising experience is that – whenever you think that you’ve kind of mastered a different kind of experiences, or that you know everyone there is to know in your business, or that you think you know what’s going on – you realize that you don’t. so I think there is a lot of humility here because you have respect for the size and just the sheer complexity of the country and you just say – okay – I really need to keep learning, I need to be very, very open-minded, cause when I think I know something – I don’t.
Matthieu David: If you had the extra time, what would you do in China to build another business? If you had extra time to build a new business – another one, an additional one – what would you do in China?
Rami Blachman: I think something about the environment. Something that has – water treatment, recycling – see what’s happening in Shanghai, for example, the new rules for recycling. I think Chinese people are really anxious about the environment right now and I think it’s a good cause, first of all, as a citizen of the world – it is also a good business proposition because – whereas in the West typically – Cleantech and environmental protection, there has not been a lot of success there, because the VC’s – it’s not in their charter, it’s very hard to commercialize, it’s very to make exits, it’s a big valuation, whereas in China, the governments key – from a business standpoint, it is maybe I wouldn’t say easier – but it’s simpler to build a business that is protecting the environment. So, I’m interested in doing something important for the world and for people around you.
Matthieu David: Interesting. There was a movie about climate change, an American movie and in the end, they were saying – one of the countries that could be able to change massively, quickly its way of consuming and progressing actually would be surprisingly China. Even though it is one of the countries which is putting already still a lot, but it’s the country which may change the most quickly. It’s already happening with new energy vehicles and as you said, cleantech and recycling.
Thank you very much for being with us, it was very interesting. Thanks for taking a piece of your time on Sunday – it’s Sunday today, and I hope you enjoyed the talk.
Rami Blachman: David, it was a pleasure. Thank you very much for inviting me Matthieu and I think it was fun and I hope this was informative to our listeners.
Matthieu David: I’m sure it is. Thanks, everyone for listening to us and if you have time please comment on the podcast, comment on the episode and put some good stars if you’re happy with the podcast. Thanks, everyone. Bye.
China paradigm is a China business podcast sponsored by Daxue Consulting where we interview successful entrepreneurs about their businesses in China. You can access all available episodes from the China paradigm Youtube page.
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