• Israel is a fast-growing niche market in the Middle East, a place in which Hong Kong companies can contemplate export diversification, given its liberal import regime, English-speaking business community, business practices in line with that of the US and EU, and importantly, rising Israeli incomes on the back of the country's thriving high-tech industries.

• Israel's high-tech sector is a key driver of the country's economic growth and rising employment. Real GDP rose by more than 5% annually from 2005 to 2007, with per capita income (ranking fourth in the Middle East) growing by about 20% over the period. Thanks to prudent banking sector regulations, Israel has remained largely unscathed by the current financial turmoil, although a weak external environment may slow its economic growth.

• Israel is the only Middle Eastern market where Jews form the majority of the population. The Jewish tradition of offering gifts to relatives and friends at many festivals during the year generates healthy demand for gifts, premiums, consumer electronics, fashions and accessories, jewellery and other quality goods. With about 30% of the 7.1 million population aged below 14, Israeli youths represent a market with great potential for Hong Kong toy exporters.

• Electronics top the list of Hong Kong exports to Middle Eastern countries with the exception of Israel, whose imports from Hong Kong consist more of precious stones than electronics. A long-standing relationship between the two in the diamond trade offers a sound base for Hong Kong jewellers to further explore the Israeli market.

• Hong Kong handles about 20% of total Israeli exports to the Chinese mainland. Hong Kong companies' mainland network and reputation as a trustworthy counterpart open up partnership opportunities between Hong Kong and Israel in exploring the mainland market, especially in the provision of high-tech capital goods and technology used in modernising the mainland's manufacturing and services sectors.

• Entering the Israeli market is not without challenges. Hong Kong exporters should take note of Israeli consumers' strong expectations of product quality, importers who place small orders for a variety of different products, and the need to meet delivery deadlines before sales seasons tied to Israeli festivals.

Exploring the Israeli Market

Israel has enjoyed rapid economic growth in recent years and is a fast-growing niche market in the Middle East. With the prevalence of English and business practices similar to that of the US and EU, Israel presents fewer hurdles for Hong Kong companies contemplating export diversification, with the country operating a very open import regime. Most goods can be imported into Israel without a licence, though restrictions may apply to goods from countries without diplomatic relations with Israel, as in the case with many Middle Eastern countries.

Israel's relationship with its former foes has largely normalised following its war period that stretched from 1948-1973, and the Egyptian President's visit in 1977. Egypt and Jordan have made agreements with the US and Israel that in qualified industrial zones (QIZs), companies manufacturing products with at least 8% (8% for Jordan and 10.5% for Egypt) of content from Israel, can be exported tariff-free to the US market.

With the government's efforts to create economic opportunities, unemployment has fallen considerably. Low inflation has helped increase Israelis' real income. Israel's imports of consumer goods have risen from US$5 billion in 2004 to US$8.9 billion in 2008, a surge of 78% (or a CAGR¹ of 15.5%).

The financial tsunami has had limited impact on Israel so far, thanks to Israel's prudent banking regulations. Liquidity is relatively abundant, and Israeli banks are largely free of the derivative debts that have plagued a number of their international counterparts. The problem faced by Israel, as in many other countries, is a weak external environment slowing its economic growth. Israeli exports are encountering a strong headwind, as the US and EU absorbed 33% and 30% of its exports in 2008, respectively. But Israel's leading economic indicator, the S-Index, shows that while Israel's economy was levelling off moderately up until December 2008, external volatility has yet to affect the country's economy in a major way, making it one of the alternative markets for Hong Kong companies to diversify into.

Israel: Building Wealth with Human Resources

With a small population (7.1 million people) and limited geographical area, the government encourages Israeli companies to develop high-tech industries for the international market to achieve economic growth. Israel ranks among countries with the most advanced military technology. High-tech sectors involving military-to-civil technologies are the most prominent sectors in Israel. These include information and communication technology (ICT), homeland security, aircraft, and electronics. In light of its relative scarcity in water and energy resources, Israel has striven hard to develop energy-saving and water technologies, which are very advanced.

Another important industry in Israel is its diamond industry. One of the world's largest diamond exchanges is situated in Ramat Gan, just at the border of Tel Aviv. Diamonds are also the largest traded item between Hong Kong and Israel.

Israel: a Niche Market in the Middle East

Jewish people form the majority of Israel's population, with about 76% of the total belonging to this ethnicity. Naturally, Jewish traditions and cultures have a decisive influence over consumer behaviour, and this makes Israel distinctive from other Middle Eastern countries which are predominantly Muslim. For instance, certain Jewish festivals mark the beginning of shopping seasons, which are quite different from other Middle Eastern countries. The Jewish tradition of offering presents to relatives and friends means that there is much room for gifts and premiums to expand in the Israeli market.

Rising spending power together with a gift-loving culture has given rise to sustained demand for quality housewares, gifts and premiums, consumer electronics, fashions and related accessories. This presages a market that holds promise for Hong Kong exporters, which can provide unique and functional designs in these product sectors at competitive prices. In addition, Israel has a young population, over half of whom are below the age of 29. The young population has also created a great demand for toys (about 30% aged below 14). Toy shops can be seen in almost every corner of Israel's retail market.

It is worth noting that different cities in Israel have varied characteristics. For example, people in the business centre, Tel Aviv, are more receptive to new and bold designs, whereas in Jerusalem, a religious centre, people are more conservative.

Other Business Opportunities

Besides a rosy picture in the country's consumer market, Hong Kong companies will also find opportunities in partnering with Israeli companies to explore the Chinese mainland market.

As China's manufacturing and services sectors pursue higher value-added products and services, Israel's superb R&D capabilities come into play. Chinese imports of Israeli high-tech products have recorded double-digit growth through the five years to 2008, including electronics (CAGR of 19.3%), and machinery (CAGR of 21.1%).

Hong Kong companies are perceived by Israeli companies as being more conscious of the need to uphold intellectual property rights (IPR). With extensive networks on the Chinese mainland, Hong Kong companies can contribute to an excellent partnership with technology-savvy Israeli companies wanting to enter the mainland market.

In fact, trade in high-tech goods between Hong Kong and Israel has increased by nearly 20% each year from 2004 through 2008, indicating rising opportunities in the trade of these goods.

In addition, as Israel's manufacturing activities move up the value chain, certain lower value-added activities will be outsourced elsewhere. According to the Manufacturers' Association of Israel, a key concern in outsourcing production is IPR protection. Hong Kong companies may have a competitive edge in winning these orders due to being trustworthy partners in protecting IPR.

Risks and Challenges

Despite a rosy economic outlook, Israel is not without its challenges for Hong Kong exporters. Due to its fairly small market size and consumers with high expectations of product quality, Hong Kong exporters may face the problem of having to produce small quantities of goods with many variations. Economies of scale may be limited and one may incur additional operational costs in producing small batches of goods.

Israel's importing industry is fairly specialised. There are not a large number of importers competing with each other in sourcing all types of goods. Therefore exporters may find their partners or agents in Israel are quite firm in demanding price concessions from overseas exporters.

Hong Kong exporters should also note Israel's major sales seasons, including: (1) Hanukkah (Festival of light), in December; (2) Passover in March/April; and (3) the Jewish New Year, in September. These festivals are times Israeli consumers shop for new items and gifts for friends and relatives, and Hong Kong exporters should strive to meet shipping deadlines to have their goods reach Israeli buyers for these shopping sprees.

¹ Compound annual growth rate

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