Japanese Companies Scurry to Set Up Shop in Startup Nation

Japanese executives are in Israel looking to learn all about innovation. They might have to forget for a moment their country's concerns about Arab oil.

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Japanese executives visiting Teva Pharmaceutical Industries, May 1, 2016.
Japanese executives visiting Teva Pharmaceutical Industries, May 1, 2016. Credit: Economy Ministry

Four large Japanese companies are considering setting up R&D and manufacturing centers in Israel the question is whether this heralds a breakthrough in economic relations between the two countries.

The Economy Ministry and the Israel-Japan Friendship Society and Chamber of Commerce are convinced we’re on the verge of such a breakthrough after three years of efforts by ministries on both sides. But this has followed more than a decade of trips on the Tokyo-Tel Aviv route that produced meetings and ceremonies but few deals.

In addition to the contacts for establishing development centers, a delegation of top people is visiting Israel this week from the Keizai Doukai, the Japan Association of Corporate Executives. The goal is to examine how to develop advanced innovation on a global level and promote cooperation with Israeli researchers and investment groups.

The goal may not be any different from that of previous Japanese delegations, but it will be interesting to see whether the changes in the political atmosphere between the two countries  along with Mideast developments  produces different results this time.

The complex relations between the two nations stem from the tension between two interests. Japan wants the most advanced Israeli technology, but it’s dependent on Arab and Muslim oil, which has blocked the warming of relations.

Tokyo may be encouraging companies to invest in Israel and is holding talks with the Finance Ministry on protecting such investments, but Japan says it isn’t interested in a free trade pact. Still, the Israelis hope such an interest will pick up in the future. In addition, Japan is characterized by a very different business culture than that of the West and even elsewhere in Asia.

But Israeli exporters who have penetrated the Japanese market tell of solid returns compared to other markets, as well as customer loyalty as long as quality remains high. The Japanese are rightly considered perfectionists as customers.

Prime Minister Benjamin Netanyahu and Japanese counterpart Shinzo Abe in Japan, May 2014.Credit: AFP

Officials in the Economy Ministry say the breakthrough in relations has occurred over the past three years because of all the mutual visits. “I work with four huge Japanese companies that intend to establish development and manufacturing centers in Israel,” says Noa Asher, Israel’s trade representative for the Economy Ministry at the Tokyo embassy.

The sector that interests the Japanese the most is cyber, followed by artificial intelligence, vehicle sensors, new materials and even textiles, she says. These are the areas that might benefit from those new Japanese centers in Israel.

First trip outside Japan

The contacts to establish the centers in high-tech and the car industry are relatively advanced, while textiles are only under a preliminary examination by a Japanese outfit that operates in Egypt, Asher says. The firm aims to take advantage of the Qualifying Industrial Zone agreement that allows duty-free imports to the United States from Egypt and Jordan if they contain inputs from Israel. The company is also considering doing some of its manufacturing in Israel.

“I work with companies that come to Israel once every few months to check out technology. There is broad Japanese interest; there are investments in Israeli companies, agreements and significant breakthroughs. I think that in the next few months it will be possible to publicize everything,” Asher says.

“Japanese industry is showing interest in Israel. Our goal is to make Japanese industry aware that it’s worth doing business with Israel, which can be the solution to increasing the competitiveness of Japanese industry.”

The delegation includes around 20 large Japanese companies including Nissan, Mitsubishi Chemicals, All Nippon Airways, Japan Airlines, Yamato Scientific, KPMG AZSA, Sumitomo Mitsui Banking Corp. and IBM Japan.

Keizai Doukai is considered one of Japan’s most important economic organizations. During the visit, it wants to learn how the Israelis got so good at innovation. This is the group’s first visit outside Japan, so it’s clear how important it views Israel.

Some of the companies represented in the delegation have already worked with Israeli companies and know about Israel, while others know very little. Either way, with the rising competition from China and South Korea, along with the stagnant Japanese economy, many older Japanese companies are looking for new revenue sources to pull them out of the torpor.

If up to only a short time ago Japanese industry developed all the technology it needed, today “open innovation” is all the rage. Japanese companies realize outside sources can reduce the risk in developing new fields something they value very highly.

Among the Japanese firms represented in the delegation, Mitsubishi Chemicals is already importing from and exporting to Israel; it’s also investing in Israeli companies. Also, chemical and pharmaceutical maker Teijin does research with Israeli firms, and All Nippon Airways has signed an agreement with El Al Israel Airlines. Nissan largely sells vehicles in Israel but it’s also very interested in Israeli prowess in the cyber and vehicle-automation industries, the Economy Ministry says.

Lots in common

The delegation will meet with Israeli companies such as Mobileye, Teva Pharmaceutical Industries and Check Point Software Technologies. It will also meet with Hebrew University’s technology transfer firm and the Weizmann Institute of Science. Other meetings will be held with the Economy Ministry Chief Scientist Avi Hasson, the Time technology incubator, and former President Shimon Peres.

Meanwhile, the Israel-Japan Chamber of Commerce will hold a reception, and the delegation will meet with Manufacturers Association President Shraga Brosh and the manufacturers’ roundtable.

Roni Bornstein, the chairman of the Israel-Japan Chamber of Commerce, also sees a breakthrough. “The Japanese are a people who do things together,” he says. “If there’s a sign from the government, everyone follows.”

The current visit is the result of Japanese Prime Minister Shinzo Abe’s visit to Israel in January 2015, when he told the Japanese to come and do business in Israel, Bornstein says. Since then there has been a wave of delegations. Panasonic’s president was here not long ago on a semi-secret visit, he says.

“We expect the Japanese will be more active in research and development with Israeli companies. Dozens of large companies have established R&D centers in Israel such as Google, Yahoo and Microsoft,” Bornstein says. “We want a large Japanese firm to come and establish an R&D center, and for there to be more Japanese investments and joint ventures with Israeli companies.”

The Chamber of Commerce hopes the flights to Japan fill up, even though the Japanese have still not let flights from Israel land in Tokyo, only in other cities.

The leading Israeli exporters to Japan are Iscar Metalworking, KLA-Tencor, Gan Shmuel Foods, Lycored, Soda Stream, HP Indigo, Elbit Systems, Lumenis, Applied Materials and Ganir. Another big exporter is the Golan Heights Winery; Japan is its third biggest export market in terms of revenue.

Yael Gai, the sales and marketing manager for the Golan Heights Winery, says Japan’s business culture is completely different from that of the United States or Europe.

“It took me and the winery time to understand what’s allowed and what isn’t. For example, there’s no chumminess, ‘trust me’ or shortcuts there. Everything is very technical, precise and orderly,” she says.

“There’s no possibility of saying we’ve run out of the product, even though we’re in agriculture. We work with them on very precise forecasts, analyzing the grape harvest and our ability to export.”

From the minute a deal is reached, the Japanese don’t deviate from it and don’t ask for discounts, as in Europe, Gai says. In fact, if the winery offers them a special price, the Japanese suspect something is wrong.

At the same time, when the workday ends and it’s time for a meal together, the precision atmosphere disappears and the hierarchy vanishes you’re supposed to let your hair down. The next day things are back to the straight and narrow as if nothing had happened the night before, Gai says.

“Israelis and Jews are seen in a positive light in Japan,” she says. Israel has the reputation of being a young country that has chalked up a number of achievements, while the Japanese note what the two peoples have in common: ostensibly smart people facing numerous and larger enemies; people with advanced technology and who believe in hard work. “They talk about two ancient peoples that are survivors,” Gai says.

A number of Israeli chains have opened in Japan recent years such as jewelry designer Michal Negrin, bath and body stores Sabon and Laline, and chocolatier Max Brenner. A number of Israeli software firms have opened centers or subsidiaries in Japan including Verint, Sapiens, Amdocs and Check Point, which is considered the leader in information security in the country. Teva and Iscar both have large subsidiaries in Japan.

The Japanese economy has been stagnating with very low growth for the past two decades. Economic growth was only 0.6% in 2015. Another major problem is the Japanese trade deficit, which has continued even though the yen has fallen over the past year.

Meanwhile, energy imports have weighed on the economy, and until the nuclear power plants that were shut down after the Fukushima disaster are back on line, energy imports will continue to play a major role in the Japanese balance of trade. This is happening despite the drop in global oil prices.

Israeli exports Japan haven’t changed much in recent years; in 2015 they fell 2.6% to $770 million. In 2012 exports hit a high of $930 million. Exports to Japan come from a wide number of industries, with machinery, chemicals and processed food products the leaders, the Economy Ministry says.

Imports from Japan are falling after a 20% drop between 2009 and 2013. In 2015, imports fell another 18%. From $2.79 billion in 2011, imports from Japan fell to only $1.29 billion last year. Most imports are cars, machinery and mechanical and electrical equipment, the ministry says.

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