China's Premier Li Keqiang toasts with Israel's Prime Minister Benjamin Netanyahu during a signing ceremony at the Great Hall of the People in Beijing, May 8, 2013. (photo by REUTERS/Kim Kyung-Hoon)
China looks to Israel for investment, acquisitions
Author Keren Zuriel Harari
Posted February 26, 2014
Is pork a vital strategic asset to national security? This weighty question was debated by the members of the US Committee on Foreign Investment (CFIUS) after Shuanghui, the largest pork producer in China, had attempted to gain control over Smithfield Foods, the largest pork producer in the United States, through a large-scale acquisition transaction worth $4.7 billion. That transaction, like many others carried out by Chinese companies in the West in recent years, caused a public uproar, and this, mainly because Smithfield Foods supplies meat to the American army bases, and its corporate headquarters in Virginia is located next to a US Naval complex. What’s more, concerns were voiced over the food security, suspected to be inadequate — this, following previous cases where Shuanghui had to remove off the shelves contaminated products.
The US Committee on Foreign Investment plays a highly significant role, primarily by providing a platform for [evaluating and] criticizing the sale of local strategic assets to Chinese companies. Israel has no such committee, and hence, no criticism, and no vigilant politicians on the alert, who may ask whether the takeover of large Israeli companies by Chinese corporations is indeed to our benefit. In anticipation of the Knesset Economics Committee meeting to be convened on Feb. 25, to discuss the sale of Tnuva to China’s Bright Food, Israeli daily
Calcalist takes a look at the threats and opportunities inherent in the major acquisitions planned in Israel, and explores what has been done in this field around the world.
So far, it seems that our politicians are all too eager to sell local assets to the Chinese: Prime Minister Benjamin Netanyahu and Minister of Transportation Yisrael Katz are promoting a deal whereby China Communication Construction Company (CCCC) will be entrusted with the construction of
the Eilat railroad line — a massive project estimated at no less than 23 billion shekels [over $6.5 billion]. At the same time, Economy and Trade Minister Naftali Bennett gives a boost to business transactions with China when stating over and over again that Israeli companies should reduce their dependence on the United States and do more business with China. And Minister of Finance Yair Lapid, who intervened at the time to prevent the sale of Israel Chemicals Ltd (ICL) to Potash Company of Canada (Potacan), as he was concerned about the entailed profiteering from natural resources, has been watching from the sidelines lately, and as yet, has done nothing to forestall any of the said transactions.
If this goes on like this, then within a few years, Israel will be selling to Chinese companies strategic assets evaluated at some 36 billion shekels [nearly $10.25 billion]: It has already sold 60% of Makhteshim Agan Industries, a world leader in pest control solutions, for about 5.5 billion shekels [over $1.5 billion], in a deal signed three years ago. These days, 32% of Clal Insurance, the second largest insurance company in the country, which manages public savings worth 109 billion shekels [close to $31 billion], is offered for sale for 1.5 billion shekels [almost $426 million]. The dairy monopoly Tnuva, which employs 7,500 Israelis, is on sale for 6.6 billion shekels [roughly $1.9 billion]. And, as mentioned above, the construction of the Eilat railroad line is to be handed over to the Chinese.
The Chinese companies are on a global shopping spree
The Chinese companies are shopping for assets not only in Israel. In fact, they are on a global shopping spree. Thus, for instance, in the last five years, they acquired Canadian oil and gas companies for just over $32 billion. In some cases, the Chinese bought iconic brand names. Lenovo bought the PC division of IBM. The [Chinese] carmaker Geely Automotive, whose cars regularly fail crash tests, acquired the Swedish archetypal brand of safety Volvo. And the Wanda Group bought [the American theater chain] AMC, which was synonymous with entertainment and the movies in the United States.
The Chinese companies have decided to empty their wallets across the globe, inspired by the 12th five-year plan of China, which is the social and economic road map of China, outlining its goals for the specified five-year period. The plan currently in effect, for the years 2011 to 2015, seeks, among other things, to step up the [implementation of the] "going out" strategy of Chinese companies, and lists various measures and benefits expected to be introduced by the government, such as easing regulatory burdens and granting tax breaks. The ‘going out’ strategy makes it possible for Chinese companies to expand their activities and achieve a return on their money, and at the same time, facilitates the import of knowhow and products to China, thus meeting one of the goals of the five-year plan — namely, raising the standard of living of the Chinese.
The ‘going out’ of Chinese companies to Israel is by no means accidental. The Chinese have deep respect for the Jews, and for their long-established tradition, which is no less ancient than the Chinese tradition, and they regard the Jews highly for their
cleverness. In recent years, the Chinese exposure to the Israeli knowhow and technology was further boosted, thanks to the translation into Chinese of the book [telling the story of Israel’s economic miracle]
START-UP NATION. Furthermore, the [Chinese] Ministry of Economy increased the number of its commercial attachés from one to five, and signed an agreement that gives Israel an advantage in the implementation of the five-year plan. All these elements have put in motion the ‘airlift’ of Chinese
investorsheading to Israel.
“The Chinese investments in Israel are something new; only three years ago, there was no such thing here,” says Director of the Foreign Trade Administration at the Ministry of Economy Ohad Cohen. “It is the product of years of work aimed at awareness raising. There are massive investments — for instance, that of ChemChina in Makhteshim Agan, and we see a lot of investors who are coming here looking for business opportunities. Some of the deals were reported by the media, and others that we know about, we are barred from exposing. Anyway, we are going to see an ever-growing flow of investors coming here.”
Last week [the week of February 16], three more delegations arrived in Israel, including dozens of businessmen and government officials who represent businesses worth billions of dollars. Prime Minister Netanyahu personally met with one of the delegations on Feb. 23. It was the delegation headed by Chen Jinxia, 46, known by her westernized name, Michelle Chen, who is the owner of Yongjin Group, one of the largest private companies in China, focusing on pharmaceuticals, financial services, and private equity investments. Chen is one of the richest people in China, and according to
Forbes, her fortune amounts to [more than]
$1.2 billion. “Last year, I was here for the President's Conference, and I was delighted by the Israeli innovation and startups,” she says in an interview with
Calcalist. “That’s why I invited my friends to come with me this time around. The market in China is
in need of technologies and innovation.”
Chen and her colleagues visited the offices of the venture capital fund Pitango Venture Capital, in which Chen is invested, and met with Chairman of the Board of Directors of Bank Hapoalim Yair Seroussi. According to Seroussi, the bank plans to expand its operations in China, taking into account, inter alia, the interest shown by Chinese companies in investments in Israel. Asked whether entrepreneurs like her are acting in light of the five-year plan, Chen says: “It is a government plan; it is not intended for the private market. Yet, once we know what the government is up to, we can prepare for it, provide support, and locate opportunities.”
A shopping spree motivated by strategic rather than economic considerations
It sounds great: Encouraged by the government, Chinese companies are going around the country with pockets full of money, looking for targets to spend it on. And this is happening just when the general feeling here [in Israel] is that we are short of money, more so than ever before, and at a time when it is rather in doubt whether anyone will be able to buy the companies that are bound to be put on the market shortly, when the Centralization Law [for promoting competition and minimizing centralization] goes into effect. However, this convergence of needs calls for an in-depth discussion of its potential implications, all the more so considering the claims made that what's going on here is a shopping spree motivated by strategic rather than economic considerations — that is to say, that these deals are the means by which China seeks to gain control globally and consolidate its geopolitical power.
The fears of a [Chinese] takeover prompted Canada’s Prime Minister Stephen Harper to pass a bill three months ago that would make it difficult for Chinese companies to go on buying local oil and gas companies. “To put it bluntly, the Canadians have not spent all these years trying to minimize their government control over a range of [market] sectors, just to see those very sectors acquired by, and passed over to the control of foreign governments,” Harper said a year ago. “When we say that Canada is open to business, it does not mean that it is up for sale to foreign governments.”
The US Committee on Foreign Investment is likewise on guard, defending the American interests, which are challenged by the Chinese interests. In 2010, it vetoed the acquisition of the American 3Leaf Systems by the Chinese communications giant Huawei. A report drawn up by the United States House Permanent Select Committee on Intelligence states, with reference to Huawei and another [Chinese] telecommunications company named ZTE, that: “The communications sector plays a critical role in the security of the state, and as such it is targeted by foreign intelligence services.” The authors of the report actually called for a boycott against the products of the two companies, noting that “China has the tools, the opportunity and the motive to use telecommunications companies for malicious purposes … American systems, especially sensitive ones, must not contain equipment made by either of the two companies.”
Last summer, the Australian
Financial Review reported that the intelligence agencies of the Unites States, Australia, the United Kingdom, Canada and New Zealand were boycotting the Chinese computer maker Lenovo, fearing that the government of China would use its products to spy on the West. “At the least, Lenovo shares with the Chinese government vast intimate knowledge of foreign communication systems that it has something to do with,” ex-CIA and NSA chief Michael Hayden told the newspaper. Hayden is convinced that Lenovo is engaged in active espionage on behalf of the Chinese government. He further noted that “The Chinese intelligence agencies define legitimate spying in a broad manner, and they are not limiting their activities the way we are.”
Former [Israeli] Mossad chief Ephraim Halevy believes that Israel should examine the geopolitical considerations of China in our region before handing over to the Chinese
highly significant assets. “The regime in China is different from that in force in Israel, and if a large number of Chinese companies are currently seeking to gain a foothold in Israel, they have no doubt been told by someone [up there] in China that it is of the utmost importance to do so. I am not saying that we should or should not sell them a company like Clal Insurance. However, we have to contemplate the implications for our society, security, socio-economic strength and defense power, as well as for our foreign relations.”
Entrusting the Tel Aviv-Eilat rail line project to the Chinese would serve Iran
The Shasha Center for Strategic Studies at The Hebrew University of Jerusalem, which is headed by Halevy, has recently released a study that examines the rationale of the Tel Aviv-Eilat rail line project from various perspectives, and states that entrusting the project to a Chinese company would undermine the interests of Israel, while serving the interests of China. And this, since Israel is part of Western Asia — a region over which China seeks to secure its control by means of a string of port cities, dubbed the String of Pearls, extending from its western coastline to the Bab al-Mandeb Straits of at the entrance to the Red Sea. At the same time, China is building wide roads that would allow land transport to the sea ports, and a network of railways that would tighten its economic and strategic ties with the countries in the region. One of those is laying new rail lines stretching from China through Afghanistan , Pakistan and Iran, and from there, northward to Iraq and on to Syria, whence it goes all the way to the Mediterranean.
“A preliminary study of the map of the Chinese String of Pearls under construction points to Bab al-Mandeb as the missing link, and to Eilat, as the final port in the lineup,” Halevy writes. “If it comes to pass, then China will gain a critical outpost [in the region] in return for its financial investment in the project, leveraging it to promote its regional strategic goals, which are conflicting with those of Israel. Irene stands to be the first beneficiary by virtue of its strategic partnership with China in the region.” The strategic relationship between China and Iran is based on the Iranian oil, and China is heavily invested in Iran. At the same time, Halevy writes, at no stage in its relations with Israel has China shown consideration for the strategic interests or needs of Israel.” The foregoing does not in itself preclude the promotion of economic and trade relations with China, but it does suffice to rule out any move that may entail Chinese control over a strategic transport line in Israel,” Halevy writes in conclusion.
'
A deliberate action on a wide scale, done for a quick profit'
In July 2008, hospitals in the Gansu Province reported to the Chinese Health Ministry an unusual number of babies with kidney diseases and some rare cases of kidney stones. All the babies thus affected had been fed Sanlu milk powder, which was most popular in China at the time. Another two months went by before the [local] media made it known that the Sanlu formula contaminated with melamine [a chemical toxin] and the damage was exposed in full: [At least] six babies died, and about 294,000 babies [in China] became ill after drinking the milk.
The ‘milk powder scandal’ is the most severe food security incident that has ever happened, in China or the world over. Following further tests, traces of melamine were found in the products of 21 other companies. One of these is Bright Dairy, a subsidiary of [China’s] Bright Food, which currently seeks to gain control over [Israel’s] Tnuva . Regardless of the secondary role played by Bright Food in the milk powder scandal, the company name was tarnished, and a number of countries stopped importing its products.
The Chinese government response was harsh: Two of those found responsible were summarily executed, and the third was sentenced to death, while 12 others, some of them government officials, received l heavy jail sentences. Nevertheless, it did not help to improve the reputation of the Chinese food industry, which is perceived as interested first and foremost in increasing its profits by reducing costs, even if it involves dishonest practices or causes damage to health. A spokesman for the World Health Organization has aptly described the problem: “This is not an isolated event, but rather a deliberate action on a wide scale involving consumer fraud, done for a quick and easy profit.”
There are plenty of other similar cases. Thus, for instance, a year ago, China announced a new program to tighten supervision over the production of pharmaceuticals, which was characterized as “sloppy.”
That same month the authorities collected counterfeit medicines and raw materials worth $362 million. The cheap price policy adopted at the expense of risking human life is revealed in the Chinese-made cars, as well, which regularly receive poor results in crash tests — scoring two to three stars at the most, along with warnings that collision is liable to be fatal.
The pressure to achieve the goal no matter what is also reflected in the common Chinese practice of bribery. To name but one case, China Communication Construction Company, which may yet be engaged to carry out the Eilat rail line project, has been under investigation in recent years on suspicion of obtaining contracts through bribery, and has even been blacklisted by the World Bank due to fraud. Judging by the Bribe Payers Index of
Transparency International, China is (almost) the worst in the world, ranking 27th out of 28 countries, which just goes to show that bribery is quite an acceptable practice in China.
Similarly, another report of the organization found that when it comes to transparency incorporate reporting, China receives a score of two out of 10. “The results indicate that Chinese companies lag behind in every respect,” the report states. “Given their growing influence in markets the world over, such poor performance gives rise to concern.” The list of companies responsible for this low score includes, among others, several companies that seek entry into the Israeli market through acquisitions: China Communication Construction Company scored a mere 2.9 points, while ChemChina, which acquired Makhteshim Agan, scored the near-zero mark of 0.5 points.
On the other hand, the way the Chinese seem to be going about managing their investments in Israel reduces the risk of transparency or bribery issues. According to Eitan Akiva, who leads the Corporate Finances division at PwC Israel, “There is an increased demand today for locating companies with powerful technologies as candidates for investment. As far as the Chinese are concerned, it is not a passive investment. However, I cannot identify a real desire on their part to play an actual role in the ongoing management of the business. Rather than intervening in the routine management, they seek to serve as strategic partners involved on the supervisory level and privy to corporate reporting.”
Concerns over the takeover of local companies by Chinese companies are shared by many countries
“I am familiar with these concerns, but at the end of the day, it is the market forces, which are the decisive factors, that will determine the outcome,” Akiva adds.
Ohad Cohen from the Ministry of Economy raises an interesting idea. “I believe that any serious investor about to deal with the money of Israeli citizens must go through a due diligence process. He may be American, French or Chinese — they all should be reviewed on the same level. At all times, and in any investment, the aim is to use the money smartly, so as to promote corporate development. And I believe, and hope and trust that the Chinese investments in the country are going to prove no different from American and European investments. Anyway, the trend is too young to know.”
Read more:
http://www.al-monitor.com/pulse/bus...nuva-clal-national-assets.html##ixzz2uUwiBlgJ
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