Indo-Israeli collaboration in high-tech: Can it work?

Creating an awareness of the mutual opportunities and a framework for bilateral cooperation can lead to rewarding collaborations between India and Israel, according to India market consultant Ari Bloch.
n May 2002, a delegation from Indias National Association of Software and Service Companies (NASSCOM) visited Israel. On the morning of the first joint session, one Israeli industry leader told the delegation, friends, if you have come here looking for (outsourcing) jobs, you have come to the wrong place. Though presented in true blunt Israeli style, the fact expressed was correct outsourcing from India to Israel is not, by and large, a viable prospect. As such, Israel has never shown up on India Inc.s radar screen as an interesting market destination, and only a very small number of Israeli companies outsource work to India. More recently, a senior Vice President at one of Indias largest IT companies remarked, we would love to collaborate with Israeli companies, but what can we actually do with them? If I go to Israel, what will I actually find there? This sentiment is echoed by many in Indias IT community. There is a tremendous amount of good will towards Israel, but also a significant amount of ambiguity about its industry and, as a result, the types of collaboration that are really possible. These same thoughts are reciprocated by members of a recent delegation of Israeli VCs that visited India in April, stating that while the visit was very interesting and an eye-opener, it is not clear if there is anything to do at the moment. Full diplomatic relations between Israel and India were established in 1992. Over the past decade, both countries have consolidated their position as leading global forces in IT and technology, with exports of approximately $10 billion each in 2003. India has overtaken Hong Kong as Israels largest trading partner in Asia with $1.5 billion in bilateral trade in 2003. However, technology-related trade is relatively low and estimated to be 10 percent to 15 percent at most (excluding defense), virtually all of which is exported from Israel to India. The balance includes diamonds (over 50 percent), textiles, manufactured goods, chemicals and agricultural products. Indeed, trade is one indicator by which activity between countries can be measured and judged. However, leveraging comparative advantages and synergies between countries to create even more economic value takes the level of bilateral activity a step further. Israel has created frameworks of collaboration with several countries including Korea, France, Sweden, Singapore and Canada. For example, BIRD, the US-Israeli Foundation for Binational Research and Development has, to date, invested in more than 600 projects resulting in over $7 billion in sales. In order to discover what synergies Israel and India can leverage for mutual benefit, it is important to understand the basic structure of both industries, as the driving forces behind them are fundamentally different. Indias growth is primarily fueled by an increasing demand for offshore outsourcing services, which itself is driven by companies that want to achieve cost reductions as they race to stay competitive in a globalized world. The vast majority of Indias 2,800 IT companies are engaged in providing services. Over 85 percent have annual revenues of less than $2 million, making the industry highly fragmented. There are less than 20 companies in India with revenues in excess of $100 million. Over 90 percent of Indias export revenues come from software and IT services, custom application development and maintenance, application outsourcing and, increasingly, Business Process Outsourcing (BPO). Approximately 40 percent of this comes from on-site billing (i.e. providing manpower for clients outside India). While it does exist, product development in India is negligible. Examining the Indian IT and technology industry, it is important to differentiate between the structure of the industry and the intrinsic capabilities of its manpower. Using the measure of patent filings clearly illustrates this point. While development centers of international companies in India filed for over 750 patents by mid 2003, Indian IT service companies filed for less than 90. Of course, in both cases, patents were filed by Indian scientists and engineers. So, clearly Indian manpower has the inherent capability to create indigenous intellectual property rights (IPR). The fact that India is still more service oriented than product oriented has more to do with the way its industry has developed and the seemingly bottomless market for outsourcing services, rather than with Indian industrys inherent capabilities for developing IPR. Indian industry is primarily shaped and influenced by market pull, in contrast to Israeli hightech industry that is predominantly fueled by innovation resulting in market push. (Of course Israeli industry is influenced by market demands as well.) The majority of Israels exports is derived from products and technologies that have been indigenously developed and either sold as products or licensed as technologies or IPR. As a country, Israel spends approximately four percent of its GDP on R&D activity, a huge amount by any

Ari Bloch Israel-India Ventures

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standard. Israel has the worlds largest concentration of high-tech companies and of start-ups (over 3,500) and receives the largest amount of VC funding in the world outside the US. Apart from the US and Canada, Israel has the most Nasdaqlisted companies. Innovation is engrained in Israels culture and corporate infrastructure, and there are numerous support mechanisms in place to facilitate new ventures. To date, Indo-Israel technology relations have been largely confined to trade. However, there is no reason why Israel should not be able to benefit significantly from bilateral technological cooperation with India similar to the way it does with other countries (and vice versa). Israel and India have much they can share. India possesses firstrate technological capabilities, an advanced scientific community, extremely mature quality norms, delivery methodologies and economies of scale. Israel has extremely developed research and innovation capabilities, an established VC community and a proven ability to commercialize innovation. Israel and India can collaborate in a number of ways. For example, cross-selling and joint marketing is a neglected area of opportunity. India has an enormous and growing customer base in markets that are traditional markets for Israel as well (85 percent of Indian IT exports are to the US and Western Europe). Incorporating Israeli products and technology into service offerings of Indian companies creates a win-win situation for all. It expands the market for Israeli products and creates additional value propositions for Indian firms. India also sells in markets that Israeli companies are either absent or have difficulty accessing, such as south Asia, Africa and various Arab countries (where, politics aside, most businessmen are willing to do business, and India can readily act as a bridge). Technological collaboration for creation of joint IPR is another potential area. There are several academic and technological research institutes in India in the public sector as well as the private. Joining forces will not only leverage the combined skills and knowledge of

Israel and India, but also take advantage of Indias lower cost structures, making possible more R&D within a given budget. In order to achieve this, two main issues need to be addressed. The first has to do with awareness and education. To put it quite simply, the Indian and Israeli technology communities are, by and large, very ignorant about one another. There is, of course, a general mutual recognition. Israelis know that India is a major outsourcing destination, and Indians think that Israelis are very smart and brainy. But scratch the surface with most people, and you will find very little knowledge about what actually goes on in the industry or how relative strengths can be leveraged for mutual benefit. The second issue has to do with having an appropriate framework for bilateral collaboration and a functioning operational mechanism to make it work. In 2001, Israel and India signed a memorandum of understanding aimed at promoting R&D between the two countries. To date, not a single project has been executed under this agreement. One of the apparent problems is the lack of funding on the Indian side. While in Israel the Office of the Chief Scientist (OCS) has allocated a dedicated budget for this cause and has an administrative body to oversee the process (MATIMOP), there is no such arrangement in India. So although a general agreement is in place, it lacks the practical infrastructure to make it work. The case for Indo-Israeli collaboration in technology is compelling and logical. With some additional attention from both government and the private sector, existing ties can be further strengthened and taken to the next level of cooperation. s

Ari Bloch is Managing Director of Israel-India Ventures Ltd., a company providing strategic marketentry services for Israeli companies and active in investing in technology-related ventures in India. He lives in Mumbai.

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