Source: https://www.fungglobalretailtech.com/research/deep-dive-shenzhen-international-hub-hardware-innovation/
Executive Summary
This is the first report in our series on the startup ecosystems in
China, a continuation of our coverage on other global ecosystems and
startup hubs:
India,
Berlin,
London,
Paris,
Stockholm and
Amsterdam.
In this series, we focus on Shenzhen, Beijing and Shanghai to provide
insights into how these cities have bred successful technology
businesses such as Tencent, BYD, Xiaomi, Huawei and Lenovo.
This report will explain the value proposition that Shenzhen offers
to technology startups. How far it has come from its origins as a
fishing village 35 years ago to what it is today. Ironically, being the
capital of
shanzhai―a word that describes producing counterfeit
consumer goods―has actually become the city’s strength, by encouraging
creativity and the development of flexible supply chains.
We look at three different aspects―demographics, quality of life and
economy―to analyze the pros and cons of starting a business in Shenzhen:
- Demographics: Shenzhen is one of the youngest cities with the largest number of migrants in China.
- Quality of Life: Shenzhen is one of the least
air-polluted cities among the Chinese megalopolises, but expensive
housing prices are an issue for budding entrepreneurs.
- Economy: Shenzhen has a world-class manufacturing ecosystem that helps convert ideas into products quickly and efficiently.
The fact that major industry-leading tech companies, such as DJI,
Tencent and Huawei, are headquartered in Shenzhen is an asset for the
startup ecosystem. Their success sets an example and brings more
investment and business opportunities into the city, while they also
supply a pool of engineering talent for the ecosystem.
Introduction
From its origins as a fishing village to a hub of original equipment
manufacturers (OEM), to a world-class hardware maker, to an incubator of
software, Shenzhen is working to rebrand itself as an innovation hub in
China.
World-Class in Hardware Manufacturing and Tech Innovation
Shenzhen was designated as a special economic zone in the 1980s and
initially the city’s manufacturing industries focused on labor-intensive
production of products such as textiles and toys before progressing to
the higher-value manufacturing of consumer electronics goods.
As Shenzhen solidified as the city in China for hardware production, it acquired the reputation of
shanzhai―a word that describes counterfeit consumer goods.
Shanzhai
became a standard for products because it offered the easiest way to
capitalize on factories’ idle utilization. Since the early 1990s, the
manufacturing sector has expanded rapidly, and a whole value chain in
manufacturing electronic goods started to emerge along the way.
Due to blooming demand for electronic products and the growing
purchasing power of Chinese customers, Shenzhen gradually integrated
manufacturing, technology and innovation into its ecosystem, which
consists of a network of supply chains, experienced engineers and
advanced logistics and infrastructure.
In a study, McKinsey & Company argues that the time it takes to
make a product prototype in Shenzhen is 2–3 days, while an integrated
manufacturer might need 10–12 days. This is due to the collaborative
nature of Shenzhen’s producers and the close proximity of materials,
parts and services suppliers, all located within the city. This is also
reflected in the costs associated with product development―making a
prototype in Shenzhen is estimated to cost $30,000–$50,000 versus
$100,000–$200,000 for in-house development, according to McKinsey’s
study.
From a Maker to an Innovator
Shenzhen is now one of the top cities in terms of the number of
patent applications in China, according to the international Patent
Cooperation Treaty. Companies in Shenzhen were awarded more patents than
all companies in Beijing and Shanghai combined in 2016, according to
data from the State Intellectual Property Office for the People’s
Republic of China (PRC).
Shenzhen has also become a major hub for foreign high-tech companies
in China, while also attracting notable domestic ones. According to a
report by PWC, Shenzhen ranked first in terms of technology readiness,
which involves: internet penetration, broadband speed, digital economy,
software development and multimedia design, in line with its capability
for innovation.
Shenzhen has invested more than 4% of its GDP annually in research
and development (R&D) since 2013, putting it on a par with South
Korea and Israel, which hold the world’s top-two positions in terms of
investment in R&D, according to the OECD. In 2017, the Shenzhen
government targeted to spend ¥80 billion in subsidizing technological
innovations. In addition to that, the level of spending is expected to
be maintained at more than 4% of GDP for the next three years.
The Road to Becoming an International Hub of Hardware Innovation
During the sixth municipal congress of the Communist Party of China
in 2015, Municipal Committee Secretary of Shenzhen Ma Xingrui laid out
the city’s blueprint for the next five years, and highlighted the key
focus for Shenzhen before 2020: remaining competitive in high-tech
industries, upgrading modern infrastructure for modern service
industries, scaling up education and medical services to sustain and
further enhance its attractiveness to capital and talent.
Based on this comprehensive new urban planning blueprint, Shenzhen is
slated to become a high-tech innovation base, an international
logistics hub, a financial and cultural center and a provider of
advanced services. Local government sets the development focus for each
district. Here are the highlights of the key zones in Shenzhen:
- Qianhai: A Hong Kong-Shenzhen service center, focusing on high tech, education, art and logistics services.
- Futian: A political, financial and trading center.
- Luohu: A financial and trading services center.
- Longgang and Pingshan: A modern heavy industrial base.
- Longhua: A transportation and logistics hub.
- Guangming: A local high-tech and eco-agricultural base.
- Aerotropolis: An international logistics and supply-chain base.
- Yantian: A leisure tourism and logistics hub.
Shenzhen by the Numbers
To better understand the differences between Shenzhen and Shanghai,
Beijing and Hong Kong, we compiled a data table to study the advantages
and disadvantages of starting a new company in Shenzhen compared to
other cities.
Demographics
Although Shenzhen is not the largest city in China, the average age
of its population, as of 2016, is only 33, which makes it one of the
youngest cities. On top of that, 73% of the population is between the
ages of 15 and 44, which is the age group most prone to
entrepreneurship.
With 160,000 new registered migrants in 2016, Shenzhen is also one of
the most diverse cities in the country. Diversity contributes to the
quality of the talent pool available in the city.
Quality of Life
Due to the rise in incomes, standard of living and real estate
prices, many factories moved to nearby smaller cities in Guangdong
Province. As a result, Shenzhen has become one of the cleanest of
China’s industrial cities. Shenzhen’s PM 2.5 index is 30, which is one
of the lowest readings for a Chinese city. However, housing prices have
become increasingly expensive, and housing-related expenses now account
for 42% of the average resident’s income, similar to the level in Hong
Kong. The relatively less-polluted environment is now a positive driver
for attracting talent, however, the rising cost of living has hurt the
incentive to remain long in the city.
Economy
Compared to Shanghai, Beijing and Hong Kong, which all focus on
service industries such as finance, logistics and tourism. Shenzhen has a
world-class manufacturing ecosystem that helps contribute over 39.5% of
it GDP. Shenzhen houses a complete manufacturing value chain and has
incubated thousands of hardware startups over the past decade. Because
shanzhai
is deeply rooted in Shenzhen, rather than protecting their intellectual
property through timely legal action, most entrepreneurs focus on
product improvement and innovation.
The Startup Ecosystem in Shenzhen
We evaluate Shenzhen’s startup ecosystem by looking at its foundation
blocks: its accelerator and incubator programs, the funding climate,
the track record of startups and the availably of technology talent.
Accelerators and Incubators
The incubator and accelerator network in Shenzhen is underdeveloped relative to other ecosystems.
Haxlr8r―A Hardware Accelerator
Pronounced “Hax-celerator,” a combination of the words “hack” and
“accelerator”, Haxlr8r is a hardware-only accelerator program, and
probably the most established program in the city. As a mostly
foreign-owned accelerator launched in 2011, the program put a tremendous
effort into promoting Shenzhen as a hardware hub to the rest of the
world. Co-Founder Cyril Ebersweiler, an investment partner with
SOSventures, an Austin, Texas headquartered venture capital firm, is a
vocal advocate of Shenzhen, and so is Ben Joffe, a general partner of
Haxlr8r.
According to Joffe, the accelerator program at Hax is an effective
training ground for foreign entrepreneurs to learn to take advantage of
Shenzhen’s manufacturing and supply-chain capabilities to build their
products. Many of these foreign entrepreneurs come to China for the
first time without speaking the language, so the accelerator program is
particularly valuable in connecting them with the right factory and
supply-chain partners.
Hax has also become a launchpad for Chinese hardware startup teams
that are developing products for the global market. Darma, the smart
seat cushion that monitors posture, heart rate and breathing, is one
example of a product developed by a Chinese team that launched with the
help of Haxlr8r.
Weiyouhui Incubation Park―An Incubator in Longgang Shenzhen
Weiyouhui Incubation Park is located in Longgang and, with more than
12,000 square meters of office space, it can incubate more than 100
companies at the same time. The incubator offers startups mentoring from
coaches who are veterans in Internet, media, recruitment,
entrepreneurship and management. In addition to mentoring, Weiyouhui
helps startups acquire angel investment or Series A funding.
One example of a project incubated at the Weiyouhui Incubation Park
is Su Yun Bang Bang, a logistics company that focuses on last-mile
delivery for schools. Its valuation is now more than ¥20 million.
3W―An Incubator with a Coffee Shop
3W was first crowdfunded as a coffee shop in 2010. The company not
only provides office space for startups, but also offers services
including angel investment, corporate public relations, conference
organization and, last but not least, its coffee shop.
Joymason is a personalized services provider incubated at 3W. It is
an instant-messaging product that uses artificial intelligence (AI). It
raised Series A funding in June 2015.
Entrepreneurial Magic Cube―An All-in-One Incubator
Entrepreneurial Magic Cube is the world’s first all-in-one “Office
space + Cloud roadshow + Partnership” service base. Launched by Zhang
Bing, CEO of 3800 Group in China, the company selects startups based on
their fast growth potential, and provides value-added services such as
corporate strategic management consulting, technology development, brand
design and management, and investment and financing guidance.
Makerspaces and Maker Events
Shenzhen is a hub for makers, and makerspaces are well developed
compared to incubators in the city. Shenzhen Maker Faire and Chaihuo
Maker Space are both well-established platforms that bring the maker
community to Shenzhen.
Chaihuo Maker Space―A Playground for Hardware Innovators
Chaihuo Maker Space is China’s equivalent to TechShop in Silicon
Valley. For an affordable monthly membership fee of US$20,
entrepreneurs, engineers and hardware enthusiasts can use the workspace
and equipment (such as 3D printers and machine tools) to build
prototypes and test their ideas. What is even more valuable is the
community and network that Chaihuo offers: there are frequent networking
events where seasoned entrepreneurs from China and other countries
share their experience and advice.
Shenzhen Maker Faire―An Annual Event for Makers
Part of the international maker movement, the first Shenzhen Maker
Faire, was held in April 2014. “Maker Faires” consist of conferences,
expos and carnivals held all over the world to engage the hardware
developer community. It was a big show-and-tell, and could be considered
a milestone in rebranding the “Made in China” stigma. The whole
ecosystem—from large corporates to small players to venture funds, from
Chinese to foreigners, from professionals to hobbyists—gathered as part
of this vibrant industry meetup. The upcoming Shenzhen Maker Faire held
on October 15–16, 2017 will certainly be an event to watch.
Successful Stories and Notable Startups
According to the report “2016 Chinese ‘Unicorn’ Development,” there
are 131 (87% year-over-year growth) Chinese companies that fit the
definition of Chinese Unicorn:
- Registered in China
- Founded within the past 10 years (established in 2006 and later)
- Obtained private investments and has not yet listed
- Valued at more than $1 billion
Combined, these 131 unicorn companies are valued at over $487
billion, and of this, 13 are based in Shenzhen with a valuation of
around $39 billion in total.
Software Startups Account for the Majority of Unicorns
With the help of Shenzhen’s hardware ecosystem, DJI has become one of
the largest manufacturers of unmanned drones in the world, however, it
is one of only three hardware-driven unicorns. In contrast, the other
nine unicorns in Shenzhen are clearly software-focused, operating in
industries such as e-commerce online finance.
Notable Startups
The following list of startups shows the different approaches they
have taken in leveraging Shenzhen’s ecosystem. Some have succeeded and
left Shenzhen to target global markets, while others have chosen to
remain rooted in the manufacturing hub. Some have developed a consumer
product to showcase their technology in order to earn the credibility to
expand into the enterprise space.
ZhenHub―An E-Commerce Logistics Management Platform
Founded in 2016, ZhenHub is a cloud-based inventory and
order-management system for e-commerce retailers to automate logistics.
Retailers can manage all their inventory and orders from a single online
dashboard. The platform can automatically fulfill orders and automate
the fulfillment process, while providing a complete real-time overview
of inventory, sales orders and shipments globally. ZhenHub assists with
international package and freight quotations, warehouse and fulfillment,
platform integration, reporting and analytics.
Meta Factory―A Hardware Prototype Factory
Meta Factory was founded in 2016, based in Shenzhen and New York. The
company offers four services: CAD drafting, prototyping, manufacturing
and components sourcing. It can help to design and build complex
electronic prototypes, manufacture high-quality and high-volume
electronic hardware products and source rare and unique electronic
components.
Tech4Trade―A Global Sourcing Company
Tech4trade is a web-based application designed to give buyers,
manufacturers, inspection companies, freight forwarders and other
related companies a secure online market place to meet, cooperate and
share information on international trade projects. Tech4trade’s solution
can support different stages of product development, such as design,
sourcing, supplier audits, order management, quality assurance and
shipments management.
Klook Travel―A Travel Activities Booking Platform
Founded in 2016, Klook Travel offers a one-stop solution to discover
activities, attractions and things to do in different cities. To offer
activities at lower prices than traditional travel firms or tour
operators, Klook works directly with attraction managers and owners.
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