Shenzhen: The Silicon Valley of China

Without much fanfare, the southern Chinese city of Shenzhen has become the most important design and prototyping center of the world’s latest electronic goods.

Once a collection of fishing villages divided from Hong Kong by a narrow river, the city was China’s first special economic zone set up in 1980. The city started in the 1980s as a low cost export manufacturing center churning out cheap clothes, toys, and electronic gadgets. But before the turn of this decade many low cost manufacturers like Apple supplier Foxconn moved to cheaper inland Chinese cities as increasing local wages eroded its competitive advantages of cheap land and labor.

The city turned to higher value-added, homegrown technology in response to the rising cost challenges and the result has been impressive. Innovative companies are drawn to Shenzhen’s well-established manufacturing supply chains and transport links. The open door policy of the local government in attracting new innovative companies also helped a lot. Established tech giants such as telecom gear makers Huawei and ZTE and internet giant Tencent all call Shenzhen home. So are rising stars like DJI Technology Co., the world’s largest civilian drone maker and BGI, the world’s biggest gene sequencing and research company.

The city is now the acknowledged global design and prototying center of electronics goods. A cost analysis by Mckinsey shows that Shenzhen design firms can turn out a typical electronic product prototype in 2-3 weeks, compared with the usual in-house development time at multinational companies of 10-15 weeks. Likewise, it just costs a Shenzhen design firm USD 30-50 thousand to get the prototype done, as against the in-house development cost at multinational companies of USD 100-150 thousand. With electronics becoming the heart of most new high-tech products, many international industrial design firms have set up shop in Shenzhen to take advantage of the enormous cost and speed advantage of the Chinese firms.

The success of Shenzhen in becoming the global design and prototying center lies in its successful manufacturing ecosystem. Companies in Shenzhen can save time and costs in developing prototypes, tap into a large supplier base to scale up manufacturing, and deliver finished products to global markets speedily (Figure 1). The experience of Shenzhen highlights the importance of an industrial cluster in fostering innovation and speeding up the commercialization of innovation.

Figure 1. Shenzhen has a Strong Ecosystem Advantage in Manufacturing

Source: McKinsey Global Institute. (July 2015). The China Effect on Global Innovation. Retrieved from http://www.mckinseychina.com/wp-content/uploads/2015/07/mckinsey-china-effect-on-global-innovation-2015.pdf?bd0bde

Shenzhen is now dubbed China’s Silicon Valley. Based on the City Competitiveness Bluebook of the Chinese Academy of Social Sciences, the city surpassed Hong Kong to become China’s most competitive city in 2014 and kept the title in 2015. One can argue that the Shenzhen experience provides the blueprint for the innovation-led supply side reform of the Chinese government in its recent economic policy pronouncement.