By Felicia Schwartz and Dov Lieber
TEL AVIV -- Security officials are raising alarms over Chinese
investment in Israeli technology companies, prompting the Israeli
government to scrutinize the money flows and businesses to
reconsider accepting Chinese funds.
Israel is moving to create an interagency government body to
oversee sensitive commercial deals involving foreign companies,
U.S. and Israeli officials said, akin to the U.S.'s Committee on
Foreign Investment, or Cfius.
The effort has been under way in recent months but has taken on
added urgency amid recent complaints about Chinese investment from
American and Israeli security officials, including national
security adviser John Bolton and Israel's domestic spy chief, U.S.
and Israeli officials said.
U.S. and Israeli officials said they are especially concerned
about stepped-up Chinese investments in Israeli companies whose
products are dual use, meaning they have both military and
commercial applications, such as drones and artificial
intelligence. They also worry about China using Israeli companies
as a way to uncover U.S. secrets and about Beijing transferring
Israeli technological know-how to its ally, Iran, an arch foe of
Israel.
Officials said they worry that Chinese government entities could
gain access to sensitive information by gaining control over and
insight into companies that are in the dual-use space.
Mr. Bolton and other American officials have warned in recent
visits that the investments in Israeli technology could hinder
intelligence ties. American officials said they have offered to
help set up the regulatory body.
Several business executives and security officials said the
Trump administration's renewed focus on China has made such
scrutiny a higher priority in Israel.
"We are all concerned about theft of intellectual property and
Chinese telecoms companies that are being used by China for
intelligence gathering purposes," a senior Trump administration
official said.
The Israeli prime minister's office, which is overseeing the
creation of the body, declined to comment.
With few deep-pocketed investment partners outside of the U.S.
and Europe, Israel has for years welcomed Chinese money as Beijing
embarked on a long-term plan of cementing its global influence with
loans and business partnerships.
Concerns about Chinese investments flared in 2015, when
state-controlled Shanghai International Port Group won a government
contract to build and operate Haifa's port for 25 years. The
worries have accelerated with the global rise of telecommunications
giant Huawei Technologies Co. -- which the U.S. government accuses
of spying for Beijing -- and a blitz of Chinese investment in
Israel's vaunted tech industry.
Chinese investors participated in 12% of deals in the first
three quarters of 2018 with Israeli tech companies, reflecting an
increase over the past three years, according to a report by the
IVC Research Center, which tracks the Israeli tech industry. U.S.
and Israeli investors account for a much larger share, generally
about one-third of deals each annually, according to IVC.
In the first three quarters of 2018, according to IVC, Chinese
investors were involved in all 17 financing rounds for Israeli
startups of $20 million or more.
Efraim Halevy, former director of Israel's spy agency, the
Mossad, said the country has been slow to recognize the security
threat that Chinese investment represents, and said it is
especially worrisome in dual-use products.
"That is a very dangerous area," said Mr. Halevy, who supports
continued Chinese investment in Israel but wants it vetted for
national security.
American officials have pressed allies in Europe and elsewhere
not to let Huawei monopolize telecommunications infrastructure,
portraying the company as a serial violator of U.S. laws and global
business practices. Huawei doesn't have a major presence in Israel,
but Washington is worried about the firm's interest in the country.
Huawei has been developed technologies, some potentially sensitive,
through a locally registered company called Toga Networks Ltd.
Chinese officials have dismissed such warnings as "ridiculous,"
accusing the U.S. of invoking national security to harm normal
commercial activities.
"The U.S. has been abusing the idea of 'national security,'
slandering and striking down the normal commercial activities of
Chinese enterprises," a Chinese foreign ministry spokeswoman said
in January.
Huawei has denied allegations that the company spies on the
Chinese government's behalf.
Israel is already home to 12 Chinese trade offices from 11
cities across the country. They aim to foster investments that go
both ways, including funding Israeli companies that in turn set up
offices or share technology in China.
Weijan Chen, director of the city of Dongguan's Economic and
Trade Office, said his city is seeking to invest in automation,
biomedicine and telecommunications in Israel. Mr. Chen's office in
Tel Aviv is just one of two investment offices world-wide for
Dongguan, one of China's most important manufacturing cities. The
other is in San Francisco.
"We don't have any problems due to U.S. pressure," Mr. Chen
said, calling Israeli companies and government officials "very
friendly." "Israel is also very interested in the Chinese and the
Dongguan market and want to work with us."
Israeli executives said their government and U.S. investors have
stepped up pressure to steer clear of Chinese investment.
"Small Israeli companies are saying we are not sure we want to
take investments from China because we don't want to be locked out
of the U.S.," said Sam Chester, a Tel Aviv-based consultant who
helps connect Chinese investors and Israeli tech companies.
Others say China is too big to turn down, and that potential
concerns can be mitigated.
Doron Myersdorf, chief executive of Storedot, which makes
fast-charging batteries for electric cars, phones, laptops, drones
and other devices, said his Israel-based company has taken funds
from Chinese investors in several rounds of financing, including
from those with state ties.
He will also produce a preliminary version of the product there,
he said. He would prefer to take his product into mass production
in the U.S. but found it easier to establish factories in China,
where there is an established supply chain for sophisticated
batteries.
The downside: Mr. Myersdorf said he has seen an uptick of
Chinese delegations apparently seeking trade secrets or other
information about his business that has dual use applications.
"It comes under the guise of, 'We want to invest a large amount
of money, '" he said. "They try to come for a very intense and
detailed due diligence process."
--Vivian Salama in Washington contributed to this article.
Write to Felicia Schwartz at Felicia.Schwartz@wsj.com
(END) Dow Jones Newswires
February 11, 2019 05:44 ET (10:44 GMT)
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