Japanese investments in Israel have surged over the past 20 years, with total investments reaching some $6.35 billion from 2001 to the end of 2018 in 180 deals, a report by a consultancy that focuses on Japanese-Israeli business relations shows.
In 2018, Japanese firms’ investments and acquisitions relating to Israeli startups and tech firms totaled some $791 million in 28 deals, and so far in 2019 there have been 13 announced investments for a total of $38 million. In 2001 there were 19 deals, and in 2010 there was just one, the report showed.
“In the past four years there has been a significant change in the business ties between Israel and Japan,” said Elchanan Harel, the founder and president of Harel-Hertz Investment House Ltd., a Herzliya Pituah-based investment house and consultancy that compiled the data. “If the pace continues, and it certainly looks like it will, then 2019 will surpass 2018 in terms of both value of deals and number of deals.”
There could be as many as 50 other deals that have not been publicly announced, said Harel. Japanese businesses tend not to make their affairs public as much as their US, European or Chinese counterparts do for cultural reasons as well as to stay ahead of the competition, Harel explained.
Japan is the world’s third-largest economy and is home to some of the largest manufacturing and automotive companies. As the world moves toward digitalization and software, however, these firms are now scouting overseas for tech solutions to help them maintain their edge over global competitors.
Israel has become a popular hunting ground for these companies, Harel said.
For many years Japan avoided doing business with Israel out of Arab boycott concerns, but the relations have warmed since 2014, and the two countries’ prime ministers have traded visits.
“The mutual visits of the prime ministers were a milestone in the relationship between the two countries,” Harel said. “That was when economic organizations in Japan got a push from the Japanese economy ministry to start developing ties with Israeli tech firms.”
The majority of Japanese investors in Israel are corporate VCs, with the most active investor being the Mitsui Group, whose VC arm has invested in IT technologies such as Autotalks and Kaltura; cybersecurity firms, e.g., Scadafence; and agri-technology firms Kaiima and Phytech. Other active investors are Softbank, Hitachi, NTT DoCoMo, Toshiba and Sony.
In July 2017, Mitsubishi Tanabe Pharma said it acquired Israeli pharmaceutical firm Neuroderm for $1.17 billion. In 2016, Sony boughtAltair, a maker of chips, for more than $200 million, while Japan’s Softbank has made investments of some $200 million in Israeli companies.
Thirty-six percent of the Japanese investments have been in the field of information technologies (IT) and 30% in semiconductors, with the rest in cyber, automotive, pharma, medical and agritech.
“When they invest, these companies are looking for added value technologies to add to their core technologies. They are not looking for a quick exit,” said Harel. “This makes them reliable and faithful long term partners.”
Indeed, the data shows that of the companies the Japanese invested in between 2001 and 2018, just 8% have ceased to operate, while 66% are still active, 4% have had an initial public offering and 22% have been acquired.
Even so, Japan is still a small investor in Israel. US investors are the dominant players in the local market, capturing a massive 35% of capital raised by Israeli companies, according to a November 2018 report by IVC Research Center, which tracks the industry. Chinese, British, Japanese and German investors accounted for around 3% of investments each.
Chinese firms have made major inroads in Israel, including the takeover of local food giant Tnuva in 2014 and deals to manage the key Haifa and Ashdod ports. Chinese e-commerce giant Alibaba earlier this month acquired Israeli startup Infinity Augmented Reality Israel Ltd., a Ramat-Gan based maker of artificial reality technologies, marking its second acquisition in Israel.
“The Japanese noticed the interest China was giving Israel and that worried them,” spurring their activity locally, Harel said. “And the awakening has been fantastic,” he said.
There are about 70 Japanese companies active in Israel and exploring the local tech market, through local representatives, offices or R&D centers, according to the data.
Israel and Japan said in January they will cooperate in developing digital health technologies and promote partnerships in the automotive and cybersecurity fields. The two nations signed a total of six agreements, including a memorandum of understanding on cooperation in digital health.
In a development that may serve to boost Japanese investment in Israel, recent trade tensions between China and the US may make it more difficult for Israeli firms to do business with China. The US is in the process of negotiating a trade deal with China, and the world’s two largest economies have been locked in a trade struggle since they both imposed tariffs on respectively imported goods. This struggle is raising concerns that the US will not look favorably on a tightening of trade and business relations between Israel, a long-time US ally, and China. China and Israel have stepped up trade and business ties in recent in years and launched free trade talks.
US Deputy Secretary of Energy Dan Brouillette warned in January that unless Israel implements stringent screening procedures for Chinese investments, intelligence sharing between the two allies could be threatened, according to a Bloomberg report.
“These tensions are likely to cause Israeli tech firms to stay away from Chinese investors, and prefer Japanese investors instead,” Harel said. “Japan, like Israel, is a strategic ally of the US and Japan could also be a hub for the Asian activities of Israeli firms. So, it is very likely that Japanese companies will step into the shoes of China.”