The coronavirus pandemic and the resignation of Japanese Prime Minister Shinzo Abe are not expected to substantially affect the number of Japanese investments in Israeli tech firms, with a new report by Meitar Law Offices and IVC Research Center forecasting that the 2020 numbers will be similar to those of the record investments seen last year.
“We won’t see a dramatic change this year compared to 2019,” said Dana Yagur, a partner at Tel Aviv-based Meitar, in a phone interview. “On an annual basis, we will get to the same levels of 2019, and the numbers won’t be significantly different.”
The interest in Israeli life sciences and digital health technologies is expected to get a boost this year, said Yagur, as the pandemic wreaks health and economic havoc globally.
The resignation of Shinzo Abe, Japan’s longest-serving prime minister, announced on Friday due to health reasons, is not expected to affect business ties between the two nations either, said Yagur.
Abe “contributed significantly to the development of the economic relationship between Israel and Japan,” said Yagur. He visited Israel and encouraged Japanese companies to explore economic cooperation with Israeli companies.
“As Japanese companies and investment funds already established a solid presence and relations in Israel during the past few years, we assume that their activities in Israel will not be affected by his resignation,” Yagur said.
Under Abe’s stewardship, economic relations between Israel and Japan experienced unprecedented growth after years of stuttering mutual trade relations that were mostly kept under wraps.
The very conservative Japanese had been reluctant to embrace Israel because of traditional fears of upsetting Arab oil suppliers, or because of cultural differences. But since 2015, following visits of Prime Minister Netanyahu to Japan in May 2014 and Japanese Prime Minister Abe’s visit to Israel in January 2015, the number of investment deals and their values have surged.
In the first half of 2020 there were 18 investment deals that involved Japanese investors for a total of $853 million, compared to 25 deals for a total of $660 million in the first half of 2019, the IVC-Meitar figures showed, indicating that the romance between Japanese investors and Israeli startups is going strong in spite of the pandemic.
Last year was a peak year during which Israeli high-tech companies raised over $1.5 billion in deals that included Japanese investors, said the report, which was compiled in collaboration with Magenta Venture Partners, a VC fund that focuses on investments in early-stage Israeli startups and is backed by Japanese institutional and strategic investors, including Mitsui & Co. Ltd.
In the first half of 2020, Israeli tech firms raised a total of $5.25 billion in 312 deals, IVC data published earlier this year showed, compared to $3.77 billion in the first half of 2019.
Japan, the world’s third-largest economy, is home to some of the largest manufacturing and automotive companies, and has over 3,500 public corporations. As the world moves toward digitalization and software, these firms are now scouting overseas for tech solutions to help them maintain their edge over global competitors.
Israel, known as Startup Nation, and for its creativity and inventiveness, has become a popular hunting ground for Japanese investors.
Following the premiers’ reciprocal visits, the two nations set up the Japan Israel Innovation Network (JIIN) in May 2017 to promote economic cooperation, and signed an “open skies” agreement for flights and other bilateral agreements, including an Israel Japan tax treaty. In addition, the two countries are discussing the possibility of setting up a Free Trade Agreement that would lower custom duties on imports and exports, the report said.
The presence of Japanese companies in Israel surged from 26 in 2014 to more than 90 in 2019, the Meitar-IVC-report said, and in 2019 Japan became the nation with the third-highest value of investments in Israeli tech, after the US and Israel, jumping ahead of the UK, China, Germany, Singapore, South Korea, Canada and France.
In absolute numbers, however, Japanese investment is still small, compared to that of US and Israeli investors. In 2019, US investors invested $4.163 billion in the Israeli tech sector and Israeli investors put in $2.961 billion, compared to the $379 million invested by Japanese players.
In the first half of 2020, Japanese investments slid to fifth place at $152 million, preceded by the US, Israel, UK and the Netherlands, the IVC data shows. Investment from US investors in the first half of the year totaled $2.21 billion and from Israeli investors $1.38 billion.
Japanese investors come from a variety of fields, including car manufacturers, financial institutions, insurance companies and VCs, and are both strategic as well as financial investors, said Yoav Sade, a partner at Meitar.
They include giant firms like Toshiba, Canon, Toyota, NEC and Sony, and general trading and investment firms like Sumitomo Corporation, SBI Holdings, and SoftBank, the report said.
The strategic investors, said Sade, in general “don’t look for control, but they seek commercial rights to the technology, so they can use the technologies in their products.”
The fields they are interested in general are in digital health and life sciences, information technology (IT) cybersecurity, artificial intelligence (AI), big data, fintech, and automotive technologies.
In the wake of the outbreak of the COVID-19 pandemic in early 2020, the Japanese economy shrank at an annual rate of 3.4% in the first three months. This was due to the fact that Japan, heavily reliant on the export of its goods, experienced a steep drop in consumer demand from global nations.
The pandemic has also affected the activities of Japanese investors in Israel, with face-to-face meetings and business trips on hold for the foreseeable future, the report said.
On the other hand, many Japanese companies and investment funds have already set up “a solid presence and relations in Israel, and therefore their activities continue intact,” the report said. “The expectation on both sides is that the relationship between Israel and Japan will continue to flourish despite the challenges presented by the COVID-19 virus.”
Recent investments in Israeli tech firms led by Japanese investors include that of NEC in Hailo, a maker of artificial intelligence chips, in March 2020, and SoftBank’s April 2019 investment in Lemonade (the Israel-founded insurer meanwhile held an initial public offering of shares in New York in July 2020) and the August 2019 investment, also by SoftBank, in cybersecurity firm Cybereason. On Monday Hailo said it was setting up a subsidiary in Japan to expand its relationship with existing customers who are developing products that require AI tech for their edge products, including for smart cars, smart cameras and smart cities.
Japan, however, is still relatively new to the M&A market in Israel. Over the last decade, only 10 Israeli companies were acquired by Japanese entities, for a total value of $2.34 billion. The acquisition of Neuroderm by Mitsubishi Tanabe in 2017 for $ 1.1 billion is to date the largest M&A transaction by a Japanese company in Israel.
“Israelis and Japanese complement each other,” said Yagur. “Israelis have innovation and creativity that the Japanese seek and value, but the Japanese have the thoroughness and the experience to bring technologies to commercialization and production. Thus, this connection, between the Israeli innovation and the Japanese experience, is many times a win-win situation. “