Three years ago, Mitronics from Kibbutz Yisrael, a world leader in the production of robots for cleaning swimming pools, enjoyed a positive business momentum – demand grew, revenues and profits increased and the stock soared.
However, the reports for the second quarter for 2024 published last week indicated an opposite trend, which has been going on for some time: revenues fell by a double-digit rate and profitability eroded. Following them, the Mitronics stock fell by 85% from the record it recorded in November 2021, and the company lost NIS 7.8 billion in value at that time.
Along with the increase in interest rates, the accumulation of stocks at its suppliers and the bad weather, another reason for the negative turn in the trend is the competition imposed on Mitronics by Chinese companies. In the company’s reports, it is explained that they see “the entry of a large number of Chinese players (into online sales channels, ‘SHA’), who present value propositions in a wide range of prices, while investing significantly in digital marketing.”
Mitronics is just an example of an Israeli company that developed a “winning product”, grew and gained a significant share in the global market, and then competition from China (along with other factors) hurt its business and its share price.
Other examples of this phenomenon can be used – with different strengths of competition and influence – by the Solarage company that develops and manufactures systems for maximizing energy facilitiesSolar (whose stock fell by 93% from the record in 2021 and wiped out investors over 17 billion dollars Mashviyya), the producer of the Caesar stone quartz surfaces (a 93% decrease from the record in 2015 and a write-off of 2.4 billion dollars), the giant of irrigation products Natafim from Kibbutz Hatzer (which is a private company), and quite a few other companies.
Photographs: Shlomi Yosef, NASDAQ, Einat Lebron, YH”C
Of course, not only Israeli companies are affected by the increase in competition from China, which sometimes begins with local cooperation between the parties, until the Chinese player studies the market and technology and establishes his own company, which eats into the market shares of the original company. Other times Chinese entrepreneurs simply identify an attractive technology or product and develop a similar one themselves.
Which sectors are mainly exposed to competition
Yuval Vinerev, an expert on China and the host of the “Understanding China” podcast, says that competition from Chinese companies is something that happens in almost every industry: “One of the famous cases is water management technology, one of the first areas in which Israel was successful in exporting to China, with Netafim and other companies.” , he mentions.
“At Netafim, the success was very great with regard to drip technologies and smart management. In China, when there is a lot of demand for something, they study it, then copy it amateurishly, and over time improve. Even when the Chinese know how to make something that provides 80% of the quality but at 30% of the price, they They are taking over large market shares in China, and the ones who are left to sell it (the original technology, ‘Sh’) are the ones who care about high-quality technology. In water technology, Israeli companies are considered high-quality, but the gap is narrowing.”
Caris Whitty, founder and CEO of the Signal Group for Israel-China relations, estimates that the competition from Chinese players will only increase in the future, since its economy is currently in a bad state: “Unemployment is high among young people, and every year millions more young people enter the labor market. The adjustments the government is making to improve the economy are working slowly. In China there are people with a very entrepreneurial nature, many of them are educated, and they are looking for any way to make money. The phenomenon will expand because the economy is weak and the economic situation is challenging.”
Whitty gives an example of Chinese competition in the “backyard” of China, Southeast Asia: “In Thailand there are factories that make local art objects from ceramics; today the Chinese make them, it flows into Thailand and causes the closing of local factories. China has cheap labor and a large scale of production, so they can Lower prices too In industries that do not have government subsidies, such as the electric vehicle.”
Whitty also points out the power of Chinese state-owned businesses, some of which in fact don’t even need to be profitable. “Any industry that belongs to areas that the government believes are important to it on a security level, such as transportation, food, energy – is an industry that is well subsidized,” Whitty says, noting for example that today the Chinese control 80% of the cranes in ports around the world. “Of course, chips, nano technology, robotics and cyber are also prioritized in the budget support from the central government.”
Weinerv adds that “the Chinese government identifies strategic markets that it is important to enter, and then gives a lot of subsidies to companies, especially in the early stages. In fact, companies are given benefits so that they can compete effectively abroad, and thus they can often offer prices that are below the cost of production. At a certain point, when the market is mature enough – for example the electric vehicle market – there is no longer a need for subsidies.
“There are some very large companies that know how to produce on a very large scale, and enjoy advantages of scale and cheap labor compared to that in the West. These are efficient and good companies, and because there is competition between the Chinese companies and themselves, they produce more than the local demand requires and take out for export at very cheap prices, which is difficult for Western companies to deal with.”
Vinerv presents Solaredge as an example, which operates as mentioned in the field of technology for the solar energy industry, in the production of converters, optimizers and more. “Solaredge has not become less good, but what it knew how to do in a unique way, today there are other companies – not only Chinese, by the way – that can deliver in a sufficiently close way. And if it is cheap enough, it is attractive to a significant part of the market,” says Weinerv, which probably also explains the The processes that damaged Metronix or in the past the Caesar Stone.
Trade war: “Chinese cars sell well in every market they have access to” | Another angle
14 years ago, China overtook Japan and became the second largest economy in the world, after the US. In recent years, the two largest economies have been in a struggle with each other; a trade war that broke out in 2018 has since been reflected in the imposition of tariffs and restrictions on trade between the two countries.
In the US, they felt that there was unfairness in trade, and claimed intellectual property infringement, as well as barriers that prevent fair competition at the international level. The Trump administration imposed tariffs on many products, which also affected manufacturers from Europe and other countries that exported to the US. An analysis by The Tax Foundation indicated that in 2019 the tariffs affected the import of Chinese products to the US to the extent of 200 billion dollars. China did not remain liable and imposed tariffs on imports from the US. The trend continues even today and new tariffs were imposed this year as well.
At the same time and in combination with the trade war, the US is also trying to prevent China from becoming the dominant factor in the global chip market, and it has imposed restrictions on exports in the field, when the issue is considered part of national security in the US. On the other hand, the Chinese government limits the use of American Intel and AMD chips while developing an independent chip industry.
A car of the Chinese brand BYD / Photo: Yeh’ach’s
According to Yuval Vinerev, “in the field of chips, the West has a clear and unequivocal lead, certainly in the advanced chips, and here the sanctions help ensure that, at least in the short and medium term, there really is no Chinese competition. In the long term, it may turn out differently. The field of electric vehicles is a different story, because most of the components for production They are relatively simple and do not require the most advanced production technologies, so the Chinese can maintain an ecosystem of only Chinese companies.
“We see today that Chinese vehicles are selling very well in every market they have access to. There are attempts today to impose tariffs so that it is easier for local companies to compete, but it’s a game of cat and mouse – the Chinese find ways around it. For example, by purchasing a factory in Hungary, which is part of the European Union , or in northern Mexico near the USA”.
Weinerv adds that “the Chinese understand that in many areas it will be difficult for them to enter the US and Europe, they are not giving up on these markets but are looking more at developing economies in Southeast Asia, Latin America, Africa, the Middle East. There are countries that respond less to Western threats about the dangers to national security inherent in working with Chinese technologies, the more important it is for them to develop.
“This is significant, because global growth in the coming decades will come mainly from these countries. China knows how to produce an electric vehicle for $10,000, build the charging infrastructure and electricity in strategic projects, and will have a very good position in those countries. Although these are not prestigious markets, but the Chinese, as the cliché goes, look far ahead, and as a result it will be difficult for Western companies to compete there.”
From a customer who pays well, to a competitor
Sergey Vaschunok, a senior analyst at Oppenheimer Israel, claims that the companies that are most exposed to Chinese competition are in the hardware sector, where the gross profit rates are relatively low: “In software they are less strong, but in hardware – the Chinese are second to none. They make all hardware in the cheapest way, and this The reason is that shares in the sector, not only Israeli ones, have been showing poor returns over the years.”
According to Vaschunok, “Ultimately, what helps Israeli and American companies compete with the Chinese are the regulators. The American regulator, for example, prohibits the import of Chinese communications equipment; there are all kinds of tariffs and trade wars, and Europe is also starting to go in this direction.
“The more the company operates in the Western world, with an emphasis on the US, the less Chinese competition it has. The Chinese are currently moving up the technology value chain to sell not only consumer electronics and electric vehicles, but also things with high added value such as chips. In the medium term, many Chinese companies are looking for technology and working with Israeli companies. At first they can be a well-paying customer, then become a competitor. That’s why it’s important to protect the intellectual property and be vigilant.”
Cranes of a Chinese company in Haifa Port / Photo: Shlomi Yosef
On the other hand, Weinerv claims that the Chinese are also very strong in software, although “there is no doubt that in hardware they have great advantagesand let go In terms of software, they have no particular advantages, perhaps except for the number of engineers, but they certainly know how to produce software at a very high level. The point is that China’s focus as a planned economy is on a ‘real economy’, not a digital one. China’s five-year plan and strategic plans, at the current point in time at least, emphasize severity because that is what is important to them. At the macro level, the emphasis is on achieving a strategic advantage in green energy, electric vehicles, high-speed trains, transportation infrastructure, power plants. In these places the companies receive support from the government and this helps them build the lead. These are places where the ability to produce innovation is something that takes time, and from development to implementation the cycle is long.”
What can still be done?
Which Israeli companies encountered competition from China and were able to cope with it? And Sachunok mentions Even Caesar, which experienced Chinese competition several years ago, as mentioned, which led to a painful collapse in the stock, “but the American regulator did their job and blocked the import of products from China. Although then competition came from India.”
Another example that does not include a windfall on the part of the regulator is that of the Israeli communications equipment company Sargon, which met Chinese competition, but according to Vaschunok “understood where it lives”. This is how she managed to maximize the market when she turned toOther geographic markets that the Chinese have not taken over.
Winerv mentions Inviz, which developed lidar technology (laser sensors) for cars, and it “also works in China. The company produces more innovative and advanced products than its Chinese competitors, maintains its technological advantage, but through a very large investment in R&D and effective work with customers, and it manages to keep On a nice market share. This is in contrast to the companies that produce batteries for electric vehicles, which the Chinese have overtaken and today they produce batteries that are of the highest quality and compete not only in price.”
In fact, these are two ways of dealing with the competition from China: finding other niches or markets, or significant investments in maintaining the technological advantage. Weinerv believes that the question of how to deal with competition from China in a market without tariffs and restrictions is complex and difficult. “Israel and China are essentially very different industrial powers – Israel is the best at innovation, bringing unique things with added value, and until they copy it, they have the advantage of the special value,” he observes.
“The Chinese are the best in the world when it comes to scale – there is something that exists, which is a commodity or on the way there, and they know how to produce it in a very large quantity and in a very efficient way, with local and international distribution. They have access to local companies in the supply chain, which helps efficiency. When it comes to things that are Almost a commodity (a product in the market due to which there is no relative advantage for any manufacturer, ‘Sh’) – it is very difficult to compete with companies from China. I tell the companies I work with that the way is to maintain the technological edge (advantage), to constantly offer a road map of technological improvements and developments and win thanks to value, innovation and the ability to solve problems.”
Whitty adds that “Israeli companies need to present better branding, strengthen the customer network, and advertise effectively – no matter if their competitor is Chinese, German or Australian. Everyone has access to the market, the only thing about China is that there are so many of them, and many of them We really want to succeed.”