How and Why Has Shenzhen Become a Global Innovation Centre
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Trinity College Trinity College Digital Repository Faculty Scholarship 1-2017 China’s Emerging Silicon Valley: How and Why Has Shenzhen Become a Global Innovation Centre Xiangming Chen Trinity College, [email protected] Taylor Lynch Ogan Trinity College, Hartford Connecticut Follow this and additional works at: https://digitalrepository.trincoll.edu/facpub Part of the Asian Studies Commons, and the Business Commons In-Depth Innovation another eight million short-term resi- dents in Shenzhen today, bringing the China’s Emerging Silicon Valley: total to around 18 million.2 This qualifies Shenzhen as China’s largest immigrant How and Why Has Shenzhen city. The inflow of human resources Become a Global Innovation Centre through the large influx of immigrants has contributed to Shenzhen’s innovative By Xiangming Chen and Taylor Lynch Ogan capacity (see later). The rapid growth of Shenzhen’s economy has both paralleled and facil- itated its structural shift favouring Shenzhen is China’s very own to examine the key factors that make innovation. After averaging about Silicon Valley. Find out how it has Shenzhen an innovative ecosystem in 35% annually for its GDP growth become innovative by tracing its which companies have thrived. through 1995, Shenzhen kept its rapid growth and strategic transi- annual growth at around 14% through tion; what are the four of its most Rapid Growth and Quality Transition 2014. As a result of this slowed but innovative companies, and what Few companies can perform well if their sustained high growth, Shenzhen’s are the key factors that make it home city does not create and sustain GDP per capita in 2014 reached an innovative ecosystem in which healthy demographic and economic around $25,000, the highest of all companies have thrived. growth. This has not been a problem Chinese cities. At this pace, Shenzhen’s for Shenzhen, which has been one of GDP per capita is expected to hit any informed people would the fastest growing cities in China and $36,000 in 2020, equaling the 2012 have heard about Shenzhen, the world for the last 35 years. In fact, figure for Hong Kong.3 Driving the Mwhich has grown, at a break- no other city anywhere in the world has more recent and future growth is the neck pace, from a small village and gained more population than Shenzhen accelerated development of services China’s first special economic zone since 1980 (see Figure 1 below). Unlike and the relative contraction of manu- to a prosperous megacity and an any other large city in China, Shenzhen facturing (see Figure 2 on next page). emerging centre of innovation over has maintained a small proportion of The still substantial share of GDP in three decades. Yet how many people, its population (only about 30%) as offi- manufacturing is no longer produced even in the global corporate commu- cially registered with hukou. Besides the by the labour-intensive and low-tech nity, have heard about BYD, which approximately 70% or eight million long- assembling industries that domi- happens to have risen from Shenzhen term residents included in Shenzhen’s nated the earlier phase of Shenzhen’s to the world’s manufacturing leader total population, there are as many as economic development. Instead in rechargeable batteries and electric vehicles in 20 years? Probably not many. Besides the tale of Shenzhen FIGURE 1. Shenzhen’s Population Growth, 1979-2014 as a “miracle city”, there is a story to 1200 be told about how and why Shenzhen has also become a global hub for inno- 1000 vative companies like BYD. While 800 our previous article in this maga- Year-end permanent 600 population zine focused on the rise of BYD Registered with Shenzhen,1 this article has two 400 population Non-registered purposes. The first is to look at how (10,000) Population 200 population Shenzhen has become innovative by tracing its rapid growth and strategic 0 transition as a favourable backdrop 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 and then profiling four of its most Year innovative companies. The second is Source: Graphed from various Shenzhen Statistical Yearbooks www.europeanfinancialreview.com 55 In-Depth BYD also pioneered a solar also accounted for 46.9% of all Patent after BYD purchased Xi'an Tsinchuan tracking system, where the Cooperation Treaty (PCT) applications Auto Co., Ltd., a defunct Chinese auto- from China in 2015. By then Shenzhen mobile manufacturer, in 2003, BYD panels can follow the path of led all large Chinese cities in the released the world’s first plug-in hybrid the sun across the sky, thus number of patents applied and grant electric car, the F3DM. This attracted stabilising power generation for 12 years in a row. Through June interest from investors, including and matching peak loading time. 2016, Shenzhen accounted for 51.8% Warren Buffett who bought 10% of of all applied patents in China.5 BYD Co. Ltd. in 2008 for $230 million, and Wang became China’s richest man Shenzhen’s manufacturing has become A Quartet of Innovative Companies and has since been one of the wealth- increasingly high-tech, new-tech, and Since firms dominate R&D in iest individuals. clean-tech favouring such industries as Shenzhen, they logically form a wide BYD has grown to over 200,000 new information technology, biotech- and deep pool of technological inno- employees, the largest rechargeable nology, new energy, new materials, vation. But do they? What firms lead battery manufacturer with over a 25% numerical control tools, and robotics. and in what key industry sectors reflect global market share, and the largest With this shift, the value added of and represent Shenzhen’s growing iden- electric vehicle manufacturer in the these new industries as a share of tity and strength as a global innovation world. Wang also stresses the other side GDP rose from 28.8% in 2010, to centre? Here we profile four of these of the coin, where there must be cleaner 35.6% in 2014. firms, all started by entrepreneurs. alternatives for generating energy, espe- Shenzhen’s industrial upgrading has cially now that his company’s products been accompanied and fostered by the BYD demand so much electricity. continued growth of human capital. BYD was founded in Shenzhen in BYD soon entered the solar power As Figure 3 on the next page shows, as 1995 by a young, ambitious battery industry, which Wang stressed was a the number of college graduates rose, chemist, Wang Chuangfu, who aptly new energy total solution, one that was the highly educated base of the popu- named his company BYD Co. Ltd., not only about grid parity, but also grid lation became stronger. In Shenzhen his acronym for “build your dreams”. quality. BYD’s photovoltaic system was today, college educated talents relative The 29-year-old Wang began making multilayered and the first of its kind to its permanent population stand at rechargeable batteries for cell phones in in the industry, which is now being 37.1%, higher than 28.6% in Beijing, his first factory in Shenzhen. Just five emulated by companies like Tesla/Solar and 23.4% in the New Pudong district years later, BYD was the world’s largest City. BYD’s double-glass solar panel of Shanghai. Shenzhen’s expanded cell phone battery manufacturer. The is highly energy efficient, long-lasting, human capital has translated into a inevitable transition for BYD was to and requires less precious metals in greater and more effective capacity of put their battery into a car. Five years order to be cost competitive. BYD R&D at both the firm and aggregate levels. From 2009 to 2014, the firms’ share of Shenzhen’s R&D stayed over FIGURE 2. Shenzhen’s GDP by Agriculture, Manufacturing and Service, 1979-2014 90%, and Shenzhen’s R&D budget as a share of GDP stood at 4.2%, 70.00% doubling the national average of 2% 60.00% and far exceeding the 2.5%, which is 50.00% regarded as the international norm for 40.00% Agriculture/GDP innovative economies. High levels of 30.00% Manufacturing/GDP investment in R&D have paid off in 20.00% Service/GDP the number of patents Shenzhen has Percentage applied for and been granted. In 2014, 10.00% Shenzhen applied for 82,254 patents, 0.00% up from 42,279 in 2009, and was 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 granted 53,687 patents, up from 25,894 Year in 2009.4 Shenzhen-based companies Source: Graphed from various Shenzhen Statistical Yearbooks 56 The European Financial Review December - January 2017 also pioneered a solar tracking system, DJI DJI has been called the “Apple of where the panels can follow the path of Shenzhen is also home to the world’s drones”, and Frank Wang “China’s Steve the sun across the sky, thus stabilising largest consumer drone manufac- Jobs”, especially for his unique manage- power generation and matching peak turer, SZ DJI Technology Co., known ment practices, even admitting himself loading time. Most importantly, the to most as DJI. The privately held to Forbes that he can be an “abrasive solar tracking system increases the effi- robotics company’s growth is strik- perfectionist”. When Forbes asked ciency of the panels by 29%. ingly analogous with that of Shenzhen. what he thought of being compared BYD also stresses having an inverter Founder and CEO Frank Wang started to Steve Jobs, he said he appreciates it, in their photovoltaic system, which the company in 2006, and in 2011 his philosophy being, “All you need to further increases efficiency and relia- DJI was still a startup.