The top management of Israel Corporation (TASE: ILCO) had cause for celebration this week. The Chery Quantum joint venture, owned in equal shares by the company and by Chinese automobile giant Chery, was officially launched this week, with the unveiling of the new Chinese automobile brand "Qoros". It was good enough reason for the managers to travel to the event in Shanghai, together with Israel Corp. controlling shareholder Idan Ofer.
Israel Corp. CEO Nir Gilad holds out great hopes for the new automobile venture, which is supposed to appeal to the hearts and pockets of millions of Chinese. This is an opportunity for him to speak about other companies in the Israel Corp. group, the electric car venture Better Place LLC, and about the recommendations of the committee on concentration in the Israeli economy.
Zim is again in trouble, and needs a $100 million capital injection from its owners. How serious is the company's condition?
"Zim can be stabilized. Regrettably, we hit two crises, which are not in the industry, but global. I remind you that it was once said that Israel Corp reaped a bonanza by acquiring Zim. Now it turns out that there are tough times too, and there is no bonanza. No one has a crystal ball to say what will happen at every point in time.
"Zim is now feeling what all the world's shipping companies are feeling. 95% of the world's goods are transported by sea. The moment there's a slowdown, demand for shipping falls, and so do shipping prices. In contrast to the previous crisis in 2009, this time there has been no fall in fuel prices to partly offset the drop in revenue. That's why this crisis is much worse, and I'm not sure that even if there is a recovery in a year or two, all existing shipping companies will survive the current crisis."
The current crisis is different from the one two or three years ago?
"This time, the crisis is being exploited by the big players in the industry, so that when the crisis is over there will be far fewer shipping companies. That's why, in contrast to the previous crisis, the questions we're asking ourselves about Zim's future are a lot tougher.
"Unlike what happened before, this time there has been a massive introduction of huge ships that have changed the rules of the game in the shipping industry. Maersk has slashed the price per container. This game requires different thinking. Today, Zim provides continent-to-continent service, and has a 1.5-2% share of the industry. Its ability to provide this service at these prices, and to cope with the two big players which have 30-40% share of the industry, is very limited.
"Therefore, beyond the streamlining underway at Zim, which is dealing with the company's cost side and fleet structure, other measures are needed. The second measure that we're considering is to create collaborations or mergers with other players in the shipping industry of similar size to Zim, in order to create a large power that can compete in the new reality created by the giant shipping companies. By the way, despite the crisis, the big players have not stopped ordering new ships."
What do you think about controlling shareholders' unwillingness to inject capital into their struggling companies?
"It's hard for me to answer about what's happening at other companies, because I don’t know their situation. We have demonstrated in the past, and as far as we can we will continue to demonstrate in the future, that we do not abandon activities, and we have the ability to bring struggling companies safely to shore.
"The best example is Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), which we control, and which was once in trouble. It underwent a thorough recovery process under Amir Alstein, and everyone sees where the company is today. Most other owners I know would have closed the company down a long time ago. I still remember Sammy Ofer telling us that he was not prepared to close Tower because that would mean the closing of Migdal Ha'Emek, where Tower was the main jobs provider."
Israel Corp has decided to invest $2-2.5 billion in its Chinese joint car venture with a local partner. Is this the time to invest in a project of this kind overseas, when half of the global car industry is bankrupt?
Gilad: "We're a company with great successes with foreign investment. We must invest abroad to grow because of our size in the domestic market. That's what we did with the power production company which is doing very well in Latin America (Inkia Energy Inc.). We could have taken all of Israel Corp's profits, especially from Israel Chemicals Ltd. (TASE: ICL), and distribute them as dividends, but Idan Ofer decided to reinvest these billions in developing existing companies and in new ventures.
"When Idan returned to Israel in 1999, after 15 years in the Far East, he decided that the target for expansion was in the East, especially in China and India, on the understanding that this was where the world's growth engine lay. Accordingly, the car industry was identified as an industry with very high growth rates as the standard of living in Asia rose. It is not possible to operate in the infrastructures sectors in these areas, but the car industry was very interesting.
"China's car industry is growing by 30% a year, which is an insane rate. 18 million new cars will be sold in China this year, more than in the US and Europe combined. Every big car maker has decided to operate there, but all their output is only for the domestic market. We're building a new brand and building a new production line that will produce cars not at Chinese standards, but at high standards, so that they can be exported from China to other markets."
So far, you've invested some $350 million in Better Place LLC. Do you think the venture is worthwhile?
"We never thought that this would be the only model for the electric car, but until we launched the project, no company in the world talked about electric cars. Now everyone is talking about them and developing them, everyone with the technology of his choice."
But except for Renault, which chose to go with you, no car maker has decided to adopt a battery replacement solution like that of Better Place. Doesn't that raise questions?
"When you are trying to make change, and you're trying to see who is against you, they are first and foremost those with something to lose. There are many companies that only lately began investing in this venture, at a value that is only growing. So what do you think, that they don't see the reality? They understand that an investment like this involves risk, but the risks that there were at the start have greatly reduced.
"The test we ran with Tokyo cabs proved that the investment is on the right road. Israel Corp's faith in the venture has not changed. There are difficulties and there's a risk to the investment, but we still believe that there's a chance of bringing about a great change. Obviously, everything depends on consumers' wish to travel in this car, and there are risks, but we believe in the project."
As a former senior Treasury official, and now as CEO of an investment company, where do you stand in the debate on the recommendations of the committee on concentration in the economy?
"The recommendations are another stage in a process whereby the ability of investment and industrial concerns to do business and operate in Israel is declining. Every expansion or setting up of a plant encounters bureaucracy, which interferes in places where it ought not to interfere. There is a norm that it is possible to change the rules of the game retroactively, as was done in the case of the Sheshinski committee, and there is great danger in that, from the point of view of the confidence of foreign investors in investment in the Israeli economy. Any additional revenue that might accrue to the state in 2017 or 2018 is not worth the uncertainty that it creates today. Anyone who thinks that this has no effect, is mistaken.
"There is much greater stringency, in that some matters to do with reporting requirement have become criminal procedures. Take the financial statements of Israel Corp., which are supposed to provide the investor with information. It's 700 pages long! It has missed its basic aim. We can't take managerial decisions nowadays. Add to that all the furor over the business sector and those who are called tycoons, and you get a bad outcome.
"I'll give you an example. Israel decided to promote the use of green energy. Companies from all over the world expressed interest in the tender, and invested money in gearing up for it. Now, someone has decided to change the tender terms, so what are the investors supposed to think? At an investor conference in London, an Israeli developer very active in income producing real estate in Israel was asked whether he took into account that rents could be capped in Israel. He was alarmed by the question, so they told him that that is what happened in telecommunications, and look where that industry is today."
Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2011
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