Can Shenzhen Become the Next Silicon Valley?

A glowing profile in MIT’s Technology Review posits that Shenzhen, China might displace Silicon Valley as the global hub for innovation, entrepreneurship, and manufacturing. I get the last two. High-tech production has brought fabulous wealth to Shenzhen (the “Silicon Valley of hardware”), with a population that’s grown from 30,000 in the early 1970s to over 10 million today. That, in turn, attracts a new breed of entrepreneur, with an eye towards globalization.

But IP theft ≠ innovation. Nor is the estimated $225-$600 billion in lost revenue (annually) to Chinese counterfeits.

“Shenzhen flooded the world with cheap gadgets,” claims the very first sentence of the Tech Review piece. And why are those gadgets so cheap? Negligible labor costs and a lax attitude towards intellectual property has a lot to do with it.

We all know the story – a product lifecycle of 12-18 months takes 4-6 weeks within the “shanzhai” ecosystem (a rapid process of product development and distribution). Shenzhen manufacturers beat Western companies to market with their own products.

Take a stroll through the CES “International Gateway” – a quiet little corner comprised entirely of Asian manufacturers – and you’ll see countless products that look eerily familiar.

But that’s old news. The question is, can Shenzhen use their reverse-engineered foot in the door to innovate? Shenzhen’s greatest homegrown success story, Huawei, is the world's largest telecom equipment maker, but they’ve otherwise struggled to gain an international foothold.

Huawei famously provides white-label products – devices that are rebranded by other companies – and while they’ve achieved moderate success (with a net income of $7.3 billion in 2017), Huawei is constantly saddled with cybersecurity concerns.

Sen. Mark Warner, Vice Chair of the Senate Intelligence Committee, famously called Huawei a “threat to our national security” over concerns that its devices could be used for spying or espionage. And while Huawei denies any direct connection to the Chinese government or People’s Liberation Army, they pulled out of the U.S. market in April 2018. Separately, Best Buy announced that it wouldn’t stock Huawei products, while AT&T and Verizon both declined any future business dealings with the Shenzhen juggernaut.  

But let’s assume all the charges are slander (they’re not, but let’s assume, anyway). Tech Review links Shenzhen’s success with China’s economic reforms and war on poverty. The Communist Government likes to boast that it’s lifted “more than 700 million people out of poverty” since initiating market reforms in 1978.

Here’s the problem – China relies on the World Bank’s definition of poverty (living on less than $1.90 a day). $1.91 a day is no fortune by any standard, and arbitrary stats lack any semblance of context – China’s lifting 700+ people out of poverty is no more an economic miracle than Fidel Castro receiving 100% of the vote is a sign of free and fair elections.

Also, Shenzhen’s success has raised the local standard of living to the point where earlier waves of migrants can’t afford to live there. This, in turn, has intensified China’s regional inequality – poverty (by any definition) is dramatically higher in rural areas than newer, high-tech urban centers (like Shenzhen).

We can wax poetic about Shenzhen’s (highly localized) success, but they don’t innovate so much as they rush “borrowed” IP to market at breakneck production cycles. An entire industry built on theft can certainly prosper, but I wouldn’t call it a “global hub” for anything, let alone innovation.

PSD

www.powersystemsdesign.com