Economies of Scale

WHEN Deng Xiaoping began steering China through a historic period of post-Mao economic reforms, he looked to the simple fishing town of Shenzhen as his proving ground. There, in May 1980, Deng established the first Special Economic Zone (SEZ), inaugurating an unprecedented phase of development made possible by the country’s turn towards “reform and opening”.

Today, Shenzhen’s export volume continues to be ranked first among China’s cities for the eighteenth consecutive year and accounts for 13 per cent of total Chinese exports. In 2010, FDI reached USD4.297bn, nearly three quarters of which originated from Hong Kong. Shenzhen achieved 10.7 per cent growth in that same year, with GDP of USD146bn– a value thousands of times greater than the city’s total output in 1979.

Situated in the lucrative Pearl River Delta (PRD) region, Shenzhen serves as the mainland’s southern hub for transport and trade and as a direct link to the thriving economy of Hong Kong. Home to hundreds of high-growth, high-tech companies in addition to a world-class manufacturing sector, the city’s economy continues to perform with the vigour that made it the cradle of China’s economic rebirth.

The city now accommodates 180 companies in the Fortune Global 500, including Shenzhen-based Ping An Insurance, Huawei Investment & Holding and China Merchants Bank. However, as high-tech products and services continue to rise in prominence in the modern global economy, Shenzhen’s future tech giants are poised to seize the spotlight.

Electronic Ecosystem

Huawei, the world’s leading telecommunications equipment manufacturer, seems to embody the dynamic nature of Shenzhen’s commercial framework. The company’s 1,737 patent applications to the World Intellectual Property Organization in 2009 placed it first among all applicants, and the company’s global sales that same year surpassed USD30bn.

Founded in 1987 by Ren Zhengfei, who was named China’s most powerful businessman by Forbes China this year, Huawei has grown alongside the Shenzhen SEZ to become the dominant force in electronics manufacturing and services. While energetically driving technological innovation, it remains grounded in expansive manufacturing operations.

Roland Sladek, vice president of international media relations at Huawei, believes that the city of Shenzhen itself has been a major contributor to the company’s success. “One of the key elements of succeeding in the telecommunication industry is to be able to interact in an ecosystem of like-minded companies, suppliers, research institutes, and universities,” he says.

This “ecosystem” is, in fact, a vast assembly of China’s most prominent technology and electronics companies. Tencent, the world’s third largest Internet company behind Google and Amazon, has its headquarters in Nanshan District, the city’s centre for high-tech industry.

“Foxconn is there, BYD is there, and so is Tencent. There are many innovative companies, and the interaction between these companies feeds innovation,” says Sladek. “So that’s really central to understanding the success of Shenzhen.”

Shenzhen’s industrial zones include the Shenzhen Hi-Tech Industrial Park, with a per sq. m. output among the highest of China’s industrial parks, and the Shenzhen Software Park, distinguished as the centre of software production in the National Torch Program, a plan for developing new high-tech industries in China, in 2001.

The Virtual University Park, a multifaceted initiative that involves over 50 foreign and Chinese universities, has produced over 31,000 postgraduate students. Aside from providing Shenzhen with a healthy supply of highly skilled professionals, the park is an important site of R&D. So far, the park has been home to over 600 start-up companies with 288 patents between them. Sladek describes the impact of this rich environment on Huawei: “It’s a huge advantage, because it’s really the ecosystem which drives innovation in the telecommunication field. No company, as such, can drive innovation alone.”

Ultimately, the external economies of scale arising from this vibrant concentration of tech and electronics companies, universities, research centres and supply chains have had a tremendous effect on Shenzhen’s output. In 2009, the park’s total industrial value was Rmb301.42bn (USD47.6bn), showing 18.17 per cent annual growth– higher than the city’s economy as a whole and constituting over a third of Shenzhen’s total GDP.

Time is Money

Dotted throughout Shenzhen are a number of massive blue billboards that read “Time is Money, Efficiency is Life.” This slogan, pronounced in 1982 by Yuan Geng, founder of the Shekou Industrial Zone in Shenzhen, ushered in a renewed appreciation among the city’s residents for a market economy.

Maturing into a modern commercial centre, Shenzhen required a strong financial infrastructure to facilitate further economic growth. In 1990, the Shenzhen Stock Exchange (SZSE) was created. With a market capitalization of USD1.055tr, the SZSE is now the thirteenth largest stock exchange in the world. In 2010, the total assets of Shenzhen’s financial firms amounted to Rmb4.24tr (USD675bn), making up 13.5 per cent of the city’s GDP.

In October 2009, the exchange established ChiNext, a capital market customized for the flock of high-tech companies Shenzhen aims to turn into future industry leaders. ChiNext’s 352 listed companies are now valued at Rmb837.57m (USD133.25m).

Efficiency is Life

Shenzhen’s efficiency is embedded in a robust transport infrastructure that has provided the backbone for the city’s rapid commercial development.

In 2010, Shenzhen Port’s container throughput grew 23.1 per cent and reached 22.51 million TEUs, ranking as the world’s fourth busiest port for the eighth consecutive year. Unsurprisingly, the city is home to the headquarters of China International Marine Containers, the world’s largest container-manufacturing company since 1996.

Shenzhen Railway Station links up two major trans-China railways, the Beijing-Guangzhou railway and the Beijing-Kowloon railway, and connects over 4,700km of track throughout the country. Roads and highways weave through the PRD to form a vital network between Shenzhen, Guangzhou, Hong Kong, and all of the major cities of Guangdong province.

Delta Squad

Michael Enright, professor of business administration at Hong Kong University, describes the PRD as the “fastest growing region of the fastest growing large economy.” In 2007, the region achieved an average growth rate of 16.7 per cent, outpacing China’s 13.1 per cent growth, the country’s highest rate since 1994.

Renowned as the world’s workshop, the PRD has dominated industries across the board, and was already producing almost 5 per cent of the world’s goods as of 2001. In 2007, one fifth of the world’s mobile phones were made in Shenzhen. In the same year, FDI in the region grew to USD13.1bn, 17.5 per cent of the nation’s total.

“Economic growth in Shenzhen benefits a lot from its cooperation with Hong Kong,” explains Summer Gong, a researcher at the One Country Two Systems Research Institute, a Hong-Kong based public policy research NGO. “Hong Kong contributes to Shenzhen’s economic success by providing capital, information, professional human resources, and new ideas.”

Shenzhen’s proximity to Hong Kong is a draw in itself, says Alice Poon, general manager at ProductIP, a Netherlands-based logistics software company whose main service is a web application that streamlines access to legal and technical information as well as composes product compliance documentation. “Setting up a branch here means ProductIP can make use of the relatively low operation cost advantage in Shenzhen. Meanwhile, we can maximise our exposure and accessibility to clientele in both cities, both of which are strategically important to us.”

Onward Journey

China’s State Council has announced plans to develop Shenzhen’s Qianhai Bay into a pilot zone for widening financial and commercial currents between the mainland and Hong Kong. “The development of Qianhai is a new promising model,” says Gong. “At present, Shenzhen and Hong Kong have great potential in the cooperation of renminbi internationalisation and the establishment of an offshore renminbi market.”

Qianhai Bay will be at the forefront of China’s long-term strategy to open money flows and attract offshore yuan, of which over Rmb550bn (USD87.5bn) is currently deposited in Hong Kong.

Thirty years since the city’s initial transformation, Shenzhen continues to exemplify the success a Chinese city can achieve in the modern global economy. While remaining focussed on its mature manufacturing sector, Shenzhen embraces an industrial shift towards high-growth and high-tech products and services, spearheading China’s reinvigorated economic modernisation.

Leave a Comment