Plenty of money, and risk, for Israeli start-ups in China

For Israeli firms willing to take a chance in China, fame – and especially fortune – await. “China has dozens of start-up parks that are empty, just waiting for companies to populate them,” said Zvi Shalgo of the PTL Group, an Israeli firm that helps companies deal with the Chinese bureaucracy. “The governments have grant money, and they offer free services, like QA (quality assurance).” Israeli start-ups that look to economically-anemic American and European markets would do well to try their luck in China, Shalgo said.

Shalgo was speaking at an event in Tel Aviv, where the guest of honor was Johnny Lee, Director of Application Store Operation Center of China Telecom, the third largest telecommunications company operating in the by-far biggest telecom market in the world. Lee was in Israel recruiting potential Israeli partners, start-ups that could supply CT with technologies it needs to expand its markets.

It’s not necessarily mobile apps that Lee is seeking in Israel, despite his job title; such apps are better developed locally in China, where app writers know the markets and the needs. “We have a great need for advanced technologies in many areas, including environmental technologies, tech for business, government, and industry.” Israel, he said, excels in many of these areas, so it was more than worth it to make the trip here.

China may need Israeli technology, but Israeli entrepreneurs need to be able to sleep in peace — knowing that their technology is secure. Despite the welcome mat China is throwing out to Israeli start-ups, few indeed have chosen China over the US or Europe for their offices abroad. Part of the reason, of course, is that China is still a mystery — you need all sorts of licenses and permits to operate, and few officials speak English. But fear over IP theft, for many entrepreneurs, is by far the greatest concern.

Lee has a solution for both problems. China Telecom, he said, “is offering a platform to bridge the gaps between foreign companies and local vendors. Basically, we take care of all the permits and bureaucracy, and start-ups just go to work.” And, said Lee, CT is prepared to “guarantee” that a start-up’s intellectual property remains secure.

Lee didn’t describe the mechanism whereby CT could enforce such a guarantee, but Shalgo, whose PTL Group has been working with Israeli companies seeking to do business in China for 13 years, believes that a start-up’s IP can be kept safe, with or without China Telecom’s guarantee — if a company is willing to do things the “Chinese way. One of the big mistakes Israelis and other Westerners make when they come to China is to assume that the rules they are familiar with apply. They may, but more likely may not.”

For one thing, he said, Israeli companies seeking to sell in Chinese market are forced to work with representatives and distributors around the country. “China is too big for a single distributor to work with a product,” Shalgo said. “But you have to keep a close watch on what they do, because they, of course, are out to make money for themselves, and if you have a hot product, the distributors are going to try and maximize their profit in whatever way they can. If you let someone else do your work for you, don’t be surprised if he puts his name on your work.” Letting the distributor know you’re there and watching is a good way to prevent distributors from absconding with your business, Shalgo said, adding that “if they know they are going to be called out on bad behavior directly, they won’t do it,” because they will “lose face.”

Ditto for concerns over IP protection. “If you are producing in China, you have to be on the ground. You cannot manage the business remotely,” said Shalgo. The old joke about Chinese factory managers running a first shift for their foreign employer and a second shift for their own side business is all too true, as is the very serious issue of reverse engineering and “rebranding” of products and technologies under Chinese names. There are laws about intellectual property protection in China, “but they are different than those Israelis and Westerners may be used to.” PTL, said Shalgo, has had a long history of helping Israeli companies to successfully navigate the choppy waters of Chinese business.

But for those who do succeed, the rewards can be substantial, for companies producing and selling in China, and for start-ups seeking to do development there. “We get calls from incubators in China all the time asking us to help them find start-ups to work with them,” Shalgo said. “There are plenty of incentives available. It’s just a matter of taking advantage of them,” and between his company’s work and China Telecom’s assistance, there is a good chance Israeli companies can succeed.

“Succeeding in China is a matter of knowing how to do it, or finding someone who can guide you,” said Shalgo. “The Chinese have been doing business this way with each other for 5,000 years. You can’t expect them to change to accommodate Israelis.”