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ALIBABA! SABABA! The Chinese giant comes to , challenging Amazon

TWO HUGE Sumo wrestlers have landed ter in Haifa and now employs more than On a trip to China, I visited a so-called in Israel. The battle between them will be 200 people. Taobao village (taobao means “treasure epic. As these two giants collide, their im- This is the way global multinationals tend network”). Taobao, an Alibaba venture, is pact will be felt worldwide. to set up R&D centers in Israel. For exam- China’s largest shopping network. Actually, they are not wrestlers. They are ple, Apple, whose shares now have a stag- In many Chinese villages, locals are giant global companies. gering and unprecedented market value of trained to start online businesses and then One is American – Amazon, the world $900b., bought the start-up, Anobit, in De- sell a variety of products online. This has leader in online sales. Amazon, which was cember 2011, for $500m. and turned it into created a huge number of jobs, and is one of founded by a genius named Jeff Bezos Apple’s R&D center in Herzliya. China’s ways of spreading hi-tech benefits in 1994 as Cadabra, employs more than In October, Amazon announced it will to ordinary people on the periphery. 500,000 people, has $135 billion in annual hire 100 scientists, engineers and Is it good for the people of Israel that so revenues and its shares are worth more than project managers, specifically to develop many foreign companies are harvesting $500b. Alexa, its “intelligent” personal-assistant innovative ideas here? Or is there a major The second is Chinese – Alibaba, an up- service. The goal will be to develop voice downside – do they snatch our ideas and start challenger. Alibaba was founded in technology so people can order and make run off with them to benefit everyone but 1999 by another genius, Jack Ma, in Hang- selections online with voice commands. Israelis? zhou, China; has $23b. in annual revenue, Amazon’s impact is not solely on the de- One effect of the foreign invasion is to and directly employs 50,000. mand for hi-tech workers, but also on com- strengthen the shekel. This year, the dol- Alibaba Group’s shares are worth $469b. mercial real estate. The company has rented lar-shekel exchange rate has fallen to about and have risen more than 70% in the past 37,000 sq. ft. of office space in and 3.5 shekels per dollar as foreign dollars year. It has more than 450 million active on- Haifa, including 11 floors of the Azrieli Sa- pour into Israel and are converted to shekels line customers in China alone. rona Tower in Tel Aviv and several floors to buy start-ups. The resulting strong shek- The two giants have chosen to set up re- of the Gav Yam building in Haifa. As many el makes our exports more costly and, thus, search and development centers in Israel to as 2,000 Amazon employees will reportedly harder to sell. The Bank of Israel has had to pluck the fruits of Israeli creativity as key work in the company’s Israeli offices. intervene to buy dollars. levers in their bid for market leadership in Alibaba’s investment arm first came to Is- It cannot be denied that those 300-plus global online sales and cloud computing. rael in 2014, buying start-ups and investing R&D centers generate income and wealth They are among more than 300 global mul- in the leading venture firm Jerusalem Ven- for the relative handful lucky and smart tinational companies that have set up simi- ture Partners. Alibaba has announced that it enough to work there. But there is a down- lar R&D centers in Israel. will invest $15b. to launch R&D centers in side. The ideas they generate are harvested The clash between them pits the energy, several countries, including Israel. by foreign companies and are taken abroad money and ambition of a rising power, Chi- An Israeli organization that perhaps loves to be produced and sold. Other countries na, facing off against the creativity and clout Alibaba the most is Israel Post – Alibaba is benefit more. of a declining power, the United States. its best customer, and local postal branches This means Israel is literally selling its Amazon is a market leader in cloud com- are swamped with packages Israelis have brains. It would be far better if Israeli start- puting services. In January 2015, it bought bought online through Alibaba. I doubt Is- ups themselves could harvest those ideas an Israeli start-up, Annapurna Labs, for a rael Post was prepared for this tsunami of and scale them up globally. And there is reported $370 million. online buying fueled by convenience and no sign that anyone in government is in the Annapurna had developed a chip that cheap prices. least concerned about this problem. strengthened Amazon Web Services. The Israel can learn from Alibaba about how Another effect of the foreign R&D cen- company then became Amazon’s R&D cen- to create value for locals. ters is to make it much, much harder for Is-

38 THE JERUSALEM REPORT NOVEMBER 27, 2017 REUTERS raeli start-ups to find and hire engineers and scientists. The foreign centers pay substan- tially more in salaries and they tighten what is an already very tight job market for those trained in artificial intelligence, machine learning and deep learning – the newest hi- tech “hot button” (see “Silicon Einsteins,” September 4). Writing in the business daily TheMarker, Nehemia Strassler observed that Israel’s universities graduate only 900 software en- gineers annually, including those expert in artificial intelligence. “This does not even scratch the demand for these graduates,” he observed. “It cre- ates a bottleneck in the development of technologies in what is called the Start-up Jack Ma, chairman of the Alibaba Group, performs during the Yunqi Music Festival in Nation.” Hangzhou, on October 11 The business daily reported in October that there are 390 unfilled positions in machine learning. “Let’s hope,” Calcalist wrote, “that the foreign [R&D centers] do shekels a month ($7,600), while those at help Israeli start-ups grow independently, not make a U-turn and leave as a result.” local companies averaged 16,205 shekels. rather than sell their brains and exit, by In terms of wages, the foreign R&D cen- Thus, local start-ups find it hard to compete. leveraging the enormous scale of the Chi- ters greatly increase a massive gap between Blame for these huge wage gaps is not nese economy, which is now becoming the what Dr. Gilad Brand, a researcher at the to be placed on foreign invaders. It is the world’s largest. Taub Center for Policy Studies, calls “the fault of those who run our country and make According to a study by the Israel Venture start-up nation and the nation of all the rest.” policy. A great deal more could be done to Center, only 4% of Israeli start-ups become In her column for TheMarker, Meirav Ar- help skill and knowledge spill over from profitable and remunerate their investors. losoroff observed that “the gap between… Amazon, Alibaba, Apple, Microsoft and And, of those, nearly three-quarters are ac- export workers’ wages [including R&D Intel to Israel’s more traditional low-tech quired by foreign companies. Can collab- workers] and those of all other workers is companies and thus boost their workers’ orating with Chinese companies and their the highest in the world” – a gap far bigger productivity. deep pockets help start-ups access the huge than in Ireland, which is second. Over time, it cannot be that Israel will Chinese market and forego the exit route? Somehow, the skills, knowledge and man- have two parallel economies, one advanced It’s worth a try. agement expertise of the 8% who work in and the other backward. One or the other So, why not say, Alibaba! Sababa! Israeli hi-tech do not migrate to those in the re- will triumph. And, unless action is taken, it slang for “cool, awesome, no worries, it’s maining 92%. And even though both Fi- may not be the advanced one. all good.” Same for Amazon. nance Minister Moshe Kahlon and Econo- So, on balance, should we welcome the Both Jack Ma and Jeff Bezos are wel- my Minister Eli Cohen have strong business newcomers, Alibaba and Amazon, to Israel? come. In the Holy Land, it is “abra ca- backgrounds and should know better, there I believe we should. dabra” (Amazon) versus “open sesame” is no sign they will do anything about it. A growing fraction of foreign investment (Alibaba). Foreign R&D operations create wage gaps (an estimated 10% to 20%) flowing into And may the best Sumo wrestler win.  even within hi-tech. According to a Finance Israel’s venture-capital companies is now Ministry study, “employees at multination- coming from China, replacing money from The writer is senior research fellow at the als [in Israel] earned 64% more than those the United States. This is a welcome trend. S. Neaman Institute, Technion and blogs at at local tech companies” averaging 26,640 Perhaps new links with Chinese hi-tech can www.timnovate.wordpress.com

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