V. MARKETING U.S. PRODUCTS AND SERVICES Distribution and Sales Channels ------------------------------- Approximately 25% of Israel's 5.4 million population is concentrated in the Tel Aviv metropolitan area, Israel's commercial and financial center. Another 15% of the population lives in Haifa, a major port and the center for most heavy industry. Almost all goods are imported through Israel's two Mediterranean ports, Haifa in the north and Ashdod in the south. They have good transportation links to the rest of the country. Most companies are headquartered in the Tel Aviv or Haifa metropolitan areas; a growing number of firms also maintain branches, showrooms, or service facilities in other communities. Consumer malls have become an overnight success story in Israeli retailing. Several large shopping malls now exist and others are planned. Trendy, specialized national chain stores and franchises have become increasingly popular, replacing traditional food and consumer goods monopolies. The key to this success has been the increasing variety of new products and services offered to the Israeli consumer. Wholesale channels are not as well developed in Israel as in the United States. Some consumer goods are marketed through wholesalers, although wholesaling does not exist at all in many product areas. Most U.S. exporters choose to market their products in Israel through agents/distributors who generally prefer to act as the exclusive representative of their foreign suppliers and maintain their own distribution networks. Chain and department stores sometimes prefer to deal directly with overseas suppliers in order to cut middleman costs. Agent/Distributors ------------------ Good local representation is the key to success in the Israeli market. Reliability, loyalty, technical suitability, and after- sales-service capability are essential qualities which U.S. companies should seek in their agent/distributor. Some exporters prefer to use commission agents who conduct limited promotional campaigns and call on potential buyers, but do not import on their own account. This approach is most commonly used by exporters of heavy industrial equipment. The most common approach used by exporters of light industrial or consumer goods is to obtain a local distributor. A distributor usually imports on his/her own account, carries stocks sufficient to satisfy immediate demand or to use for demonstration, maintains his/her own sales organization, and supplies spare parts and service. In concluding a representation agreement U.S. companies should be sure to include the following elements: -contract duration; -exclusivity (if applicable); -compensatory amount as a function of contract duration, in case of termination of exclusivity; -promotional input by agent and volume of sales; and a -dispute settlement mechanism, either by arbitration, or by assigning a tribunal (preferably U.S.). Once an adequate agreement is concluded, there is usually no need for the U.S. exporter to retain a local attorney. Legal support should be provided by the local representative. The U.S. & Foreign Commercial Service (US&FCS) and the U.S. Foreign Agricultural Service (FAS) at the U.S. Embassy in Tel Aviv provide agent/distributor search and other services designed to assist U.S. companies to establish themselves in the Israeli market. For information on these services interested firms should contact the USG contact personnel listed at the end of this report. Franchising ----------- Franchising is a relatively new concept in Israel, which has become very popular in a very short time, especially in the fast food restaurant industry. Franchising has seen a 130% growth rate in three years, from $60 million in 1991 to an estimated $140 million by the end of 1994. Due to the strong presence of such companies as Domino's Pizza and Pizza Hut and, more recently, McDonald's, Kentucky Fried Chicken and Burger King, the U.S. share of the Israeli fast food industry is now about 30%. So far, franchising has not really penetrated into other industry sectors. The market, however, is open. The key to success in Israel lies in strong management and good, ongoing, in-country training programs. Those who have tried to establish themselves without these two factors have failed in their attempt to establish franchises in Israel. Direct Marketing ---------------- Direct marketing is new in Israel; activity in this area only began in 1992. The major credit card companies (Visa, Mastercard, Eurocard, American Express, and Diners) were among the first to introduce direct marketing in Israel primarily through direct mail campaigns. There are six marketing companies which provide these services including telemarketing. Cable television has been the real impetus behind the growing popularity of direct marketing. Based on the success of this technique, demand for direct marketing services is expected to grow approximately 20% during 1995. (Also see "Advertising and Trade Promotion".) Joint Ventures/Licensing ------------------------ Manufacturing under joint venture or licensing agreements is common in Israel and encouraged by the GOI. U.S. companies wishing to invest in Israel will find detailed information in section "VII. Investment Climate". Israeli businesses usually prefer to negotiate licensing agreements for an initial 5-year period, automatically renewable for another five years. They also prefer agreements where the licensor takes equity with the licensee. The norm for royalties is 4-5% percent of turnover, although higher rates are common for luxury articles, for items that include author's fees, and for specialized machinery. A withholding tax of 25% on royalties and fees is withheld at the source. Royalties can be transferred freely through an authorized bank upon producing statements from certified accountants. Royalties and fee payments are deductible by the licensee in calculating income tax. Establishing an Office ---------------------- Most U.S. exporters prefer to supply the Israeli market through a local agent/distributor. Foreign companies who do establish wholly-owned subsidiaries in Israel are usually those bidding on government procurements/tenders who wish to maintain direct contact with Government of Israel officials, most often at the Ministry of Defense and the Industrial Cooperation Authority which supervises the offset program. There are no special regulations governing the establishment of an office in Israel. Legal registration is done with the Companies Registrar, an agency of the Ministry of Justice. The Registrar has offices in major Israeli cities. U.S. company representatives assigned to manage the office/company must obtain work permits from the Employment Service Division of the Ministry of Labor, followed by the approval of the appropriate Ministry of Interior Affairs District Office. U.S. companies wishing to establish an office in Israel are advised to seek the advice of a professional legal or accountant firm. Selling Factors/Techniques -------------------------- Price, after-sales-service and customer support, and a good agent/distributor are essential to being competitive in the Israeli market. U.S. companies need to be aggressive in their pursuit of business opportunities and maintain an active in-country presence. Advertising and Trade Promotion ------------------------------- Agressive product promotion and advertising is necessary in Israel especially for consumer products where brand image is important and U.S. products face stiff competition from local and European goods. The most effective means of advertising is through cable television which is available throughout most of Israel. Companies can most effectively advertise their products through the privately-owned local channel (Channel 2) or the major international cable networks. Point-of-purchase promotions in supermarkets, drugstores, and malls are very effective in Israel, especially when free samples are available. Advertising in major Hebrew language newspapers, especially weekend editions, is also very effective. The Israel Trade Fair Authority sponsors several major trade fairs each year which are excellent promotional vehicles for introducing new products and services. In addition, the U.S. Government, through the programs of the US&FCS and FAS, organize a variety of trade events each year. (For a listing of upcoming FY 1995 events see "Appendix E".) Major Newspapers and Business Journals: English Language: Israel Business Today Jerusalem Post Jerusalem Report Hebrew Language (order of importance): Yediot Aharonot Maariv Haaretz Globes Telegraph Product Pricing --------------- Price is a key factor affecting purchasing decisions by Israeli companies and consumers. Companies often use low, market penetration pricing during the introduction of a new product, followed by a price increase once market share and reputation are established. Since most distributors prefer exclusivity, a special pricing clause may be incorporated into the contract. Whenever a similar product is locally produced, U.S. companies should be careful of possible dumping ramifications. Sales Service/Customer Support ------------------------------ The ability to provide proper after-sales-service and customer support is key to remaining competitive in the Israeli market, especially in sophisticated, high-tech areas. U.S. firms should ensure that their local representatives receive adequate and ongoing training and technical support. The "time between failure" and "time to repair" is a major factors affecting purchasing decisions by Israeli companies and government-owned entities. Selling to the Government ------------------------- Since the enactment of the 1993 Public Procurement Law and Regulations, GOI entities and government-owned companies are required by law to procure by tender. Open tenders are published in the local press. However, government-owned companies, whose tenders are of most interest to U.S. suppliers, often use selective bidding practices inviting only selected companies to submit bids. Lack of transparency in tendering procedures is an ongoing concern for U.S. companies, even though Israel is a signatory to the GATT government procurement code. Additional concerns for U.S. companies are the soon to be enacted "Buy-Israel" regulations which award a 15% advantage to local companies, and the "National Priority" regulations which give an additional 15% advantage to companies located in so-called national priority areas. Where Israel's GATT or other international obligations conflict with the "Buy-Israel" rules, the international obligations take precedence. Defense procurement is handled by the Ministry of Defense which maintains a 200-person purchasing mission in New York. The mission handles purchases of U.S. equipment including direct commercial contracts paid by FMS funds. Sales to Government of Israel entities, including government-owned companies, are subject to offset regulations, requiring a foreign company to purchase local products or use local content for 35% percent of the cost of the awarded contract. U.S. companies interested in selling to the GOI are strongly advised to appoint a well-connected local agent. Intellectual Property Rights Protection --------------------------------------- U.S. companies should take every measure possible to ensure that their intellectual property rights (IPR) are sufficiently protected in Israel. Israeli law provides for a broad range of ex parte enforcement measures for enforcement of rights with regard to any intellectual property. Consistent with Article 50 of GATT-TRIPS (Trade in Intellectual Property and Services), "Anton Pillar" orders are available and have been obtained in civil proceedings in Israel. Information on basic application procedures and enforcement provisions is provided below. Background information on the legal/enforcement situation for patent, copyrights, and patents is contained in the "Investment Climate" section. Patents: -Application: The principal of "first to file" applies in Israel, which means that first or prior use of a patent does not protect an owner of a U.S. patent from infringement by someone else who applies first for a patent in Israel. To apply for a patent, the owner of an invention must provide a local address. The Government of Israel recommends that an applicant engage the services of a patent attorney or a legal advocate registered to practice in Israel. The title of the patent must appear in both Hebrew and English but its specificiation may be in either English or Hebrew. Any new invention that is useful, capable of industrial or agricultural application, and possessing an inventive step may be patented. It must not have been published. A patent is granted for twenty years from the date of application, subject to the timely payment of renewal fees. Medical treatments, plant or animal varieties, and computer programs are not patentable. As Israel is a member of the Paris Convention, foreign applicants may claim priority under the Convention by applying within 12 months of the earliest foreign application and including the priority of claim. Within 12 months of the Israeli application, the foreign applicant should file a certified copy of the patent specification filed with the foreign application, including a priority claim. Israel hopes to sign the Patent Cooperation Treaty within the next year. Israel currently protects designs under the Patents and Design ordinance. For a design to be registered it must be novel and appealing to the eye. A design can be protected for a term of five years with renewals of up to 15 years. One can claim priority pursuant to the Paris Convention just as for patent protection, but must claim a 6 month priority date based on the foreign application. Israel hopes to have a new Design law by the end of 1994. -Enforcement: A patent owner in an action for infringment is entitled to relief by way of injunction and damages (compensatory and punitive). Copyrights: -Application: As Israel is a member of the Berne Convention, no formal application is required to obtain copyright protection. Computer software is protected under the general copyright laws as "Literary Works". The Government of Israel advises authors to mark works with a copyright notice including the author's name and the date. Copyright protection continues for the length of the author's life plus 50 years. -Enforcement: Civil remedies in Israel for copyright infringement include injunctions and damages, compensatory plus statutory damages ranging from 500 shekels to 31,000 shekels (approximately $200- $10,000). The criminal sanctions for infringement are imprisonment of up to three years and a fine of 315,000 shekels (over $100,000). Trademarks: -Application: Any proprietor of a trade or service mark used, or proposed to be used in Israel, may apply for registration of the mark. Collective marks and certification marks are also entitled to registration. Application may be made by the owner of the mark or by an agent of the owner. The agent must work in Israel and must present written authorization by the owner. All applicants must present a local address, so that the Government of Israel generally advises foreign trademark owners to engage a local attorney to file their applications. As of July 1, 1994, the fee for a trademark application is 469 NIS (approximately $155). The term of protection for a trademark is seven years, which may be renewed indefinitely for periods of 14 years on payment of fees. Case law in Israel gives priority of registration to the first local user of the trademark. Every application for trademark registration must specify goods or services falling within one class only, according to the International Classification of Goods and Services. Under the terms of the Paris Convention, one who has made an application to register a trade or service mark in another signatory country has a right to claim priority for registration of the same trademark in Israel for the same use. An application for registration of the trademark claiming such priority must be made within six months from the date of the first application in a Convention country. -Enforcement: Injunction relief, damages, and forfeiture or destruction of the competing wares are all avilaible remedies under Israeli civil law. Criminal sanctions include imprisonment of up to a year and a fine of 14,000 shekels (approximately $4,700). The Israel Patent and Trade Mark Office can supply information to interested parties on patents, registered designs, and trademarks. Contact: Israel Patent and Trade Mark Office, P.O. Box 354, Jerusalem 91002, Israel. Legal Assistance ---------------- U.S. companies should seek professional legal and/or accountancy advice whenever engaged in complicated contractual arrangements in Israel. Companies who wish to establish an office, invest, or apply for IPR registration in Israel should seek professional legal advice. Companies may also wish to seek legal assistance when encountering trade or payment problems. A list of local law firms is available from the Commercial Section, U.S. Embassy, Tel Aviv.