Can foreign startups bridge China’s tech gap?

Speaking to a crowd at a conference in Tel Aviv recently, the head of one of the world’s largest online travel and related services providers explained why his company selected the city as a site for the group’s artificial intelligence (AI) research & development activities:

“If you want to fish, go to a lake that has many fish,” said Booking Holdings’ CEO and president, Glenn Fogel, “In Israel there are many fish.”

Booking Holdings, which operates brands such as Booking.com, Priceline, Kayak and Cheapflights and is based in Norwalk, Connecticut, is focused these days on AI. In his view, if you are not there, you will fail.

“That’s why we opened an R&D center in Tel Aviv, so we can access the best AI talent,” he said.

Booking Holdings is a latecomer. Startup Nation Central, an information and research service, reports that as many as 320 multinationals have an R&D center in Israel, including Chinese tech giants Huawei and Alibaba.

As China continues in its steady march to technological advancement, the paradox in its quest for innovation becomes apparent: Planning for innovation is one thing, but creating it is an elusive and often abstract objective.

It requires an ecosystem conducive to such activities, and people with a certain type of talent: Engineers and data scientists with hard technological skills in AI and machine learning, for example, and startup founders with soft leadership skills.

The need for the metaphorical “fish” alluded to by Fogel—people with the disruptive skills and mindset—is a unique problem facing Chinese tech companies as they climb up the value chain and evolve from being copycats to innovators. Much of the talent it takes to achieve these goals is to be found outside of China in Silicon Valley, Israel, and certain places in Europe.

Startups, manufacturing prowess

Chris Dong, director of research and advisory at market intelligence firm IDC, illustrates this: “China focuses on hardware and infrastructure buildouts while the US spends on software and services in transforming to a digital economy.”

Granted, China is home to some of the world’s most dynamic entrepreneurs, however it is often the returnees from Silicon Valley who bring home the ethos, the hard and soft skills, so acutely needed by the Chinese tech ecosystem to evolve and mature.

Harvard Business Review (HBR) describes a “negative capability” as the ability to hold a unique balance of skills and mindsets. For example, an individual with negative personality remains comfortable, sustains focus and curiosity in the face of uncertainty for prolonged periods of time, rather than keeping to a familiar comfort zone.

The HBR article goes on to talk about a “chaos pilot,” a personality type that creatively leads a project through uncertainty. It is unglamorous to be such a person, he or she is often the person working on ambiguous projects and getting beat up in the process.

To make the transition it seeks to achieve, China needs more individuals with these personality traits and these capabilities in key corporate positions and as startup founders.

Chinese players have been actively pursuing foreign technology companies that employ these talents most prominently in Silicon Valley, but with the Trump administration’s pushback, increasingly they are turning their attention to Israel for its pool of quality startups and to Europe for its manufacturing prowess.

CB Insights reports that between 2015 and 2017 the total value of funding rounds in American startups that Chinese VC’s participated in dropped by almost half from around $11.5 billion to $6.2 billion. In contrast, the trend in Europe goes in the opposite direction: According to a recent study by Bloomberg, Chinese foreign direct investment in the continent has risen from $840 million in 2008 to $42 billion in 2017, 45% more than in the US.

This trend has been apparent in the last several months as more Israeli startups in various stages of development are weighing their options in China.

Tel Aviv-based Similar Web, a digital market intelligence platform with a large global customer base, and unicorn candidate that has raised $112 million since its founding in 2007, has an operating office in Shanghai.

With e-commerce in China booming, Similar Web can no longer ignore the $1.5 trillion that Chinese consumers are forecasted to spend in online purchases in 2018.

To become a player in China, which is three times the size of US e-commerce in terms of online purchases, Similar Web will have to localize its product offering to enable Chinese companies to understand foreign markets and provide global companies with analytical research tools on the Chinese market.

NewSight Imaging from Ness Ziona, Israel, is a maker of chipsets that enable 3D image sensing and laser light detection (LiDar) in autonomous cars, barcode sensors, robots and drones that has raised since its inception in 2016 about $10 million. Part of that was from China’s Midea Group, an electrical appliance giant that has recently acquired German industrial robotics maker Kuka.

From its office in Jiashan Park in Zhejiang province—a quick ride by high-speed train from Shanghai or Hangzhou—NewSight is pitching to Chinese investors in its bid to finance a steep scale-up of its sales in China.

JD’s Israel mission

Terry Song, strategic investment director in Beijing-based JD.com, China’s second largest e-commerce company, was only the latest key visitor from China to Israel in early November, attending the “Retail Disrupt” conference in Tel Aviv.

He was following in the footstep of the trendsetter, Jack Ma, who visited twice in 2018, as well Chinese Vice President, Wang Qishan, and the mayors of Shanghai and Hangzhou.

Song was preceded by an earlier mission of JD executives last year, which has not yielded investments, as it was focused mostly on fact-finding. Song, while viewing local startups fielding AI-driven augmented and virtual reality (AR/VR), warehouse automation, cashless store technologies, asserted that he came to Israel to find concrete business opportunities. “In Israel JD hopes to find mainly new technologies,” he told Globes Business Daily.

According to Song, JD.com is looking for a polished product ready for marketing, “but not for a company that has already scaled up because that is what we want to do in China.”

With a push by the likes of JD.com, we soon may see the first Israeli startup become a unicorn in China.