The southern city of Shenzhen is being transformed from paddy field to a Chinese Silicon Valley, with only a brief interim period as a toy and textile manufacture. Even by Chinese standards, few growth stories have been as impressive as Shenzhen’s. Its odyssey from rural backwater to wildwest boomtown has become legendary, not just for its speed, as its ability to recreate itself seemingly at will. First, it was a traditional processing centre for run-of-the-mill household products. Then, as mass-manufacturing industries began to move further into China’s interior chasing lower costs, it became a high-tech manufacturing base.
The phenomenal growth registered by Shenzhen’s technology sector is apparent from official statistics. In 1996, the output value of the city’s high-tech products amounted to Yn34.7bn, comprising 28.7 per cent of Shenzhen’s total.
By 2000, technology output had risen to some Yn106.5bn, accounting for 42.3 per cent of the city’s total, and making it the largest IT industry base in China. Over the last nine years, average annual increases in high-tech output have approached an astounding 60 per cent.
But while a high degree of reliance on technology manufacturing stood Shenzhen in good stead when the world’s technology markets were booming, it is also a dangerous specialty. The global decline in technology spending over the last year and the crash of the US Nasdaq market have resulted in a wave of high-tech factory closures and layoffs throughout the world: it would seem logical that the same problems would apply equally to Shenzhen.
But not so. In fact, the impact of the technology sectors’ spectacular demise for Shenzhen has been muted, if not non-existent. Although full-year statistics for last year have not yet been published, Chinese press reports recently quoted Shenzhen Mayor Yu Youjun as stating that the city’s GDP was expected to register 13.2 per cent growth in 2001. Although the pace is expected to slacken slightly this year – current official projections are for 11 per cent growth – the overall economic growth will remain well above global forecasts or even those for China itself. Clearly, this kind of growth would not be sustainable unless the technology component of Shenzhen’s economy was continuing to fire on all cylinders.
There are two major reasons why Shenzhen appears to have been largely immune to the global tech malaise. First, because in a recessionary environment foreign technology manufacturers have decided to close factories elsewhere in the world rather than those on the mainland, where operating costs are much lower.
Second, because China’s booming telecommunications markets act as a magnet for foreign component manufacturers to establish an in-country presence. This is all the more so given that China is commonly regarded by analysts as the world’s only remaining telecoms market with continuing healthy levels of infrastructure demand.
As a result, the Pearl River delta – and Shenzhen in particular – has become known as China’s ‘optic valley’. Leading international firms have flocked to the area to establish production facilities, turning the city into the country’s major manufacturing base for components needed for the nation’s fibreoptic telecoms networks. Canada-based JDS Uniphase, for example, the world’s largest manufacturer of optical components, opened a state-of-the-art 29,000 sq metre manufacturing plant in Shenzhen early last year.
Looking to foreign markets
Nor is the growth in this sector tied exclusively to the domestic market. Once worldwide demand for telecoms products begins to pick up again, Shenzhen’s factories will look increasingly to foreign markets to expand their production.
Moreover, the migration is not limited to component manufacturers alone. Because optical manufacturing and other high-tech industries are highly reliant on services supplied by sub-assembly and testing industries, these companies are now under increasing pressure to set up a local presence too.
This is partly so they will be close by and partly so that the entire value chain can benefit from the cost advantages of cheap Chinese labour, thereby continuing to bring down overall costs. Agilent Technologies, for example, a major optical equipment testing company based in California, opened Asia’s biggest repair and calibration centre in Shenzhen in May last year.
This influx of foreign component manufacturers to Shenzhen complements the facilities of the home-grown telecoms equipment industry that has also traditionally been based there. This includes companies such as the privately-held Huawei Technologies, which produces more than half of China’s optic components, and the A-share-listed Zhongxing Telecommunication Equipment, which last year won a US$120m contract to build a CDMA wireless network for China Unicom.
In addition to its role as a telecoms equipment manufacturer, Shenzhen is also a dominant computer production base, responsible for some 20 per cent of the country’s total PC production. In addition, authorities are seeking to boost Shenzhen as a semiconductor manufacturer, with plans to invest Yn80bn to build a 2 sq km IC industrial park in the city.
But the most ambitious of the city’s projects was unveiled last July. According to this plan, Shenzhen will set up a high-tech belt extending more than 100km from Dapeng township in the east to Qianhaiwan in the west. The belt will apparently encompass nine high-tech parks, an area for tertiary education institutions and a high-tech agricultural park. Although it is anticipated that construction will take two decades to complete at a cost of Yn100bn in the first five years alone, authorities anticipate it will serve to boost Shenzhen’s annual technology output to some Yn250bn, or 50 per cent of the total, by 2005.
The story of Shenzhen’s 20-year reinvention is therefore far from complete. Indeed, local authorities seem intent on nothing short of transforming the city from paddy field to a Chinese Silicon Valley, with a brief stop as a toy and textile manufacturer in between. To be sure, there are plenty of other venues in China that would like to beat Shenzhen to the punch. But given the speed and extent of the makeover so far, it would seem somewhat foolish to bet against it now.