In Shenzhen, the major city in southern China, start-up companies are being launched one after another, primarily in manufacturing. The situation is chaotic, with many manufacturers crowded together, and when a popular product is created through trial and error, others imitate it.
Could this energy lead to the industrial advancement that the Chinese government is aiming for?
A new land
Slightly more than 50 hexagonal panels, each a little larger than a person’s palm, line a wall. When you touch one panel, the others begin to move like a wave. This is a piece of art being created by a company named Blankink, which was formed by Wang Jianwei and two others, in response to an order from a real estate company.
Now in his mid-20s, Wang majored in electronics at a famous university in Beijing. After graduating, he came to Shenzhen in 2015 to start a business. He chose Shenzhen because “there are many factories, and electronic parts are delivered quickly.”
Wang and his partners purchase electronic substrates and parts from existing products, revamp them and create models for substrates to be used exclusively by their company. They use the internet to search for factories that will produce plastic covers and substrates in small quantities, and commission work to those factories.
Arashi Vision Co. manufactures a camera that can shoot 360-degree pictures. Chief Executive Officer Liu Jingkang developed a super high-definition 8K camera in a year and a half and released it in May. The company was founded in Nanjing in September 2014, but after moving to Shenzhen half a year later, Liu, now in his mid-20s, said “the time needed for development has dropped to a half or a third.”
Concerns about imitations
Since being designated a special economic zone in 1980, Shenzhen has seen its manufacturing industry develop by leveraging inexpensive labor. It has accumulated companies related to electronics through investment from Japan, the United States and Taiwan.
Major telecommunications equipment companies Huawei Technologies Co. and ZTE Corp., as well as leading Chinese companies such as Tencent Holdings Ltd., which developed the smartphone app WeChat, are headquartered in Shenzhen. The main factory of Hon Hai Precision Industry Co., the Taiwanese parent company of Sharp Corp., is located there as well.
There are also numerous midsized and small companies, so Shenzhen and its surrounding cities form a massive cluster of industry.
Thus far, companies such as DJI, the world leader in small unmanned drones, and Makeblock Co., a manufacturer of educational robots sold in over 140 countries, have grown in Shenzhen. Roughly 390,000 new companies were born in Shenzhen in 2016.
Although Shenzhen accounts for less than 1 percent of the population of China, the city accounts for roughly 7 percent of new businesses in China.
Unique to Shenzhen is the presence of manufacturers called “shanzhai” (see below) that produce imitation electronic products. Earlier, they were generally thought to just produce inexpensive products that violated intellectual property rights, but now they are said to perform contract manufacturing of genuine products in other departments within their companies.
Jan Smejkal from Startup Grind, a company that promotes interaction between entrepreneurs, said, “They have the technological strength to produce products with similar performance very inexpensively and rapidly.”
However, the fact remains that “shanzhai” are a troublesome presence. When a popular product is introduced, imitation products are made immediately, causing harm to the company that originally developed the product. There are said to be dozens of companies that create imitations of Arashi Vision’s 360 degree camera.
“Judicial action requires time and money,” lamented CEO Liu. Seventy percent of Arashi Vision’s sales come from the overseas market, with a focus on places like Japan, where there is not much risk of being knocked off.
There is a district called Huaqiangbei in the urban area to the east of Shenzhen. It is similar to Akihabara, Tokyo, where there are many electronic parts stores. Facilities and organizations supporting entrepreneurs are also concentrated here.
On one block, there is an office for HAX, a U.S.-affiliated investment company that nurtured Makeblock. In exchange for 9 percent of the start-up’s shares, HAX provides $100,000 (roughly ¥11 million) to people interested in starting a manufacturing business and offers a four-month program teaching know-how regarding manufacturing and sales. HAX was founded in 2011.
Of the over 130 companies that have “graduated” from HAX, roughly 75 percent are from Europe and America, while roughly 15 percent are from China. There have been few Japanese participants, but there are currently dozens of Japanese people active in 16 of these companies. Along with two of his classmates from graduate school in Canada, Takakazu Fujimoto, now in his late 40s, is currently developing wearable toys to nurture children’s creativity.
According to Chinese media, there were 67 facilities supporting start-ups within Shenzhen at the end of 2014, but the municipal government is advancing plans to increase this number to 200 in 2017.
A bubble period?
To escape the “middle income trap,” in which the rise of labor costs stunts growth, China must develop its industries. Major companies are increasing the percentage of their expenditures they devote to research and development costs and acquiring companies with technological strength from Japan, the United States, and Europe. The Chinese government is also supporting entrepreneurship by setting forth the “mass entrepreneurship and innovation” policy.
According to Zero2IPO Research, 131.2 billion yuan (roughly ¥2.12 trillion) was invested across China in venture capital in 2016. Of this total, about 11.3 billion Chinese yuan, or less than 10 percent, was invested in Shenzhen.
A source involved with the Japanese semiconductor industry stated, “Investments are even being made in businesses with absolutely no future,” meaning an economic bubble may be approaching.
Koichiro Kimura from the Institute of Developing Economies of the Japan External Trade Organization said, “There may be polarization between companies that advance into the world market and companies that provide low-priced goods within the Chinese market.”
Shenzhen has not been able to create a true technological revolution that can change the world, so it is impossible to predict whether it can become a presence similar to Silicon Valley in the United States.
In Chinese, shanzhai refers to mountain strongholds where bandits may live. Since the 2000s, this term has come to refer to counterfeit products, such as mobile phones, that were commonly produced in Shenzhen. In addition to imitation products, there are also products that were invented as shanzhai, including mobile phones that can hold two SIM cards, which store phone number information.