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Yariv Lotan Navy Sea Ls 2nd Rule In China Mit Forum Jan 2010


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Opportunities in the Chinese market: Strategy, Tactics and Practical Tips
Sunday, January 24, 2010

Published in: Economy & Finance, Business
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Yariv Lotan Navy Sea Ls 2nd Rule In China Mit Forum Jan 2010

  1. 1. nd Navy SEALs 2 Rule in China Assumptions about Chinese and Israeli Entrepreneurs Yariv Lotan Founder, Value-Focused Investments Venture Partner, CIVC Private Equity Representative, China Creative Capital
  2. 2. nd Navy SEALs 2 Law Assumption is the mother of all fuck- ups. The 1st Law or motto is: Patience… at the end.
  3. 3. Capital Raised by VCs Israel vs. China 8,000 7,000 6,000 Capital (US$m) 5,000 4,000 3,000 2,000 1,000 0 2005 2007 (40,971) 2009H1 (17,469) 2004 2006 (17,798) 2008 (64,502) Year Israeli VCs Chinese VCs
  4. 4. Invested Capital in Companies Israel vs. China 18,000 800 16,000 700 14,000 600 Number of Companies 12,000 500 10,000 US$m 400 8,000 300 6,000 4,000 200 2,000 100 0 0 2006 2007 2008 2009 Year Israeli Invested Chinese Invested Israeli #Comp. Chinese #Comp. Capital Capital
  5. 5. Cross-Border M&As 20,000 Israel vs. China 100 18,000 90 16,000 80 14,000 70 12,000 60 US$m 10,000 50 8,000 40 6,000 30 4,000 20 2,000 10 0 0 2006 2007 2008 Year Israeli C-B M&A Chinese C-B M&A Israeli Transactions Chinese Transaction
  6. 6. Business Assumptions Parameter Israeli (Western) Chinese Focus on Process, Focus on Relationships or Attitude Agreements Guanxi Basic understanding* is Finalize as many details Negotiations enough for closing. possible. Closing is HS > HP Details will follow. actually only a beginning. Endless time and Time GH patience. HS* Concessions A sign of Weakness. Support Trust. Help Close GH > HS Reopen negotiations. Relatively Communication What does YES mean? straightforward.* Relatively static and Constantly changing. Law uniform Locally bypassed.
  7. 7. Management Assumptions Parameter Israeli (Western) Chinese Focus Strategy, Domain, Niche Profits. Now! Source of Growth Technology Consumer-demand Heart of Business R&D Operations Low operating costs >> Cost Structure* High margins highly profitable and sustainable P&Ls. Books 1 3+ Geography Global China Due-Diligence Documents. Facts. People.
  8. 8. Entrepreneurs Parameter Israeli Chinese Self-made Technology-oriented Nature Centralist (Finance & Can do mentality Marketing) Trust Trust themselves Trust their friends Position Founder >> CTO Chairman & CEO Alpha = Beta Risk averse with Risk Taking Beta = Commercial foreigners, Save face Global perspective Key to China Bring to the mutual Technology Operations table Jewish Genius Guanxi 2nd round entrepreneurs. Building companies that Experience Global companies. make money.
  9. 9. What Israeli Companies Bring Turning local companies into Global Israel’s High tech Industry answers China’s needs Experience in corporate governance and western legal and financial methods Access to global capital markets Experienced Investors and mangers who went through the cycle Entrepreneurship and Pragmatism Mutual understanding based on similar cultural morals
  10. 10. The Chinese Entrepreneur Built with 10 fingers Very difficult to delegate and let go responsibility – bottle neck Opportunistic Holding companies Need to distinguish between the old school management and new school Nothing communist about them
  11. 11. Building Partnerships Choosing the right partner – trust, guanxi and abilities* Negotiations − Room for concessions − Set the red lines − HS − Use middle-men not always direct − Plan the divorce Listen to needs Sales and Manufacturing – question and understand. Seek information and transparency*
  12. 12. Things to remember Hard to sell. Harder to collect. No 2nd chance for 1st timers (new-comers). Commitment. Seek the unwritten rules. Map government organization, semi government and state-owned. Finalizing negotiations is only the beginning. If it progressed too fast... Get the right partner.
  13. 13. nd Navy SEALs 2 Law Assumption is the mother of all fuck- ups. The 1st Law or motto is: “The only easy day was yesterday”
  14. 14. feel free to contact... Yariv Lotan Value-Focused Investments Ltd. P +972 (9) 958 9448 M +972 (544) 52 74 53
  15. 15. Issues The Israeli Entrepreneur in the eyes of Chinese - Save face - must work - no second chance - fear of mistakes with foreigners - how not to fail in China - seek chinese partner - the essense of guanxi: trust of close network - resouce committment - beuruacracy, liquidity, tough terms to work - vc industry: low-tech, consumer, in-chinese we invest, short-term roi and large irr
  16. 16. The China Paradigm Factor Creative Solutions/early Adopting Consumers: A mix of consumer savvy entrepreneurs and sophisticated consumers. Creating their own markets (online gaming, Wireless instant messaging, range of consumer items, etc) Risk-taking, Innovative Culture: Like Israel the Chinese culture is comfortable with risk, and has developed innovative ways to solve problems and create wealth. Smart, Dedicated mangers, visionary and adoptive: Have absorbed many western management concepts into China’s own unique approach to a liberalized economy – “Growth of GDP with social harmony”
  17. 17. Why China – China, an economic superpower In 2007, China became the third largest economy in the world after the US and Japan, surpassing Germany. It is also the fastest growing market with 7.9% growth estimated for 2009. China is better positioned than any other G8 nations to endure the financial crisis (budget surplus, forex reserve, interest rate, swift $580B acceleration package…) In 2006, China surpassed Japan as the world's No. 2 auto market, and in 2008 produced 10M cars (vs. 14M in USA). In 2007, China also became the world's top producer of merchant ships. China overtook the US in manufacturing output. As an industrial giant, China needs to be taken seriously as an international economic force and a strategic and military power. Chinese banks have lent out nearly $1 trillion by Aug 2009, over full year 2008! Over $2.13 trillion (Q2 09) foreign reserves.
  18. 18. Macro Overview 2007 2008 2009 2010 GDP growth, % 11.9 9.6 7.9 7.1 CPI, % 4.8 6.5 3.5 3.0 Current account, % of GDP 11.3 9.1 7.1 5.0 (USD bn) (372) USD-CNY 7.3 6.78 6.73 5.7 FX reserves, USD bn 1,500 2,000 2,350 2,500 (increase) (500) (500) (350) (150) One-year loan base rate, % 7.47 6.39 5.85 5.85 Source: SCB Global Research
  19. 19. The China Paradigm Factor High Rate of Economic Growth: Evolving from an investment- driven economy to a consumer driven economy, with a long lasting growth forecast, projection of millions moving into the economic urban circle Capital Markets in Transition: Capital markets are still underdeveloped, which enhances the importance of private equity as a source of growth. Abundant, Low-Cost Talent: High level education producing highly qualified engineers, medical researchers, and other professionals, in abundance and at substantially lower cost, lowering operational costs tremendously. Advantageous Business Models: Low operating cost advantages (employees, manufacturing, R&D, G&A, Logistics) allow for highly profitable and sustainable P&Ls.
  20. 20. China - Economic superpower China to surpass Japan as 2nd largest world economy after the US in 2010. It is also the fastest growing market with ~8.0% GDP growth in 2009. China is better positioned than any other G8 nation to endure the financial crisis (budget surplus, forex reserve, interest rate, swift $580B acceleration package…) Domestic Chinese car sales overtook those in the US for the first time in Dec 2008, and this trend will continued, in 2009 China will produce over 12M cars with appox 10M cars sold in China. In 2007, China also became the world's top producer of merchant ships. Chinese Banks have lent out nearly $1 trillion by Aug 2009, over full year 2008! Q2 09 Over $2.13 trillion foreign reserves.