GBA Brief

Everything within an hour’s drive: HSBC’s Neo Wang on Shenzhen’s manufacturing miracle

Change is a constant for Shenzhen’s economy, so much so that ‘Shenzhen speed’ is a favoured way of describing how the landscape is shifting. Neo Wang, HSBC’s Co-Chief Executive in Guangdong province, talked to the Brief in March about how the city is always transforming itself. 

How has Shenzhen changed economically over the years?

Shenzhen was the first special economic zone under Deng Xiaoping’s pioneering reforms. At the beginning it leveraged inward investments, particularly from Hong Kong and Taiwan, to build a relatively strong base of manufacturing, particularly for the technology, media and telecom (TMT) sector. Ten years ago, many would have thought of Shenzhen manufacturers as copycats. But there was a turning point when people started to realise the importance of intellectual property and to invest more in their own research and development. With the support of government policies, Shenzhen managed to transform itself and started to build products that are world-class. Now probably all of us know that it has become China’s hub for hardware manufacturing and innovation.

But aren’t some manufacturing businesses shifting out of Shenzhen?

We do see some businesses moving out of Shenzhen and relocating to nearby cities like Huizhou or Dongguan. But it’s not necessarily a bad thing: it’s just a readjustment of the wider supply chain. Shenzhen is still hosting most of the key functions, like the brand and product management, the corporate headquarters and the R&D, which are the higher-margin, higher-profit parts of the business. 

It’s usually the manufacturing that’s moving out. And although some of the older factories may be leaving the city, they aren’t moving miles away, which means that production is nearby and the supply chain stays intact. The relocations also create space for newer industries. So from that angle, I don’t think the Shenzhen government has a major issue with them.

So Shenzhen is still a magnet for technology companies?

Yes, and I think that has its roots in its strong base for manufacturing electronic devices over past decades. In fact, the innovation hubs in China are all quite different. Beijing attracts software firms by providing access to a multitude of venture capital and private equity investors. Hangzhou, plus Shanghai, is pretty much driven by the anchor player Alibaba [and hence a primary focus on the e-commerce sector]. Shenzhen stands out by focusing on hardware and advanced manufacturing. And apart from hosting leading tech players like Tencent and DJI, the city is a great incubator of many smaller or medium-sized tech companies around the supply chain.

A tech client once told me that Shenzhen is the only place where he can source all the key components that he needs within a one-hour radius. Nowhere else in the world can offer that. That allows for mass production at a very affordable price, which in turn attracts other start-ups and tech talents to the city. That’s Shenzhen’s core advantage.

Secondly, the city’s investment in research and development, at 4% of its gross domestic product, is double the national average and at a level that is similar to South Korea’s. In the Nanshan district, home to many tech companies, the ratio is even higher with investment reaching 6%.

What about the challenges facing the city?

One of them is property prices. Remember that, in terms of land area, Shenzhen is only a sixth the size of Shanghai and it’s a third the size of nearby Guangzhou, despite having a similar population. That is feeding through into the costs of property and we are starting to see many more smaller flats being developed, around 500-square-feet versus the 1,000-square-feet average of the past. The trend signals an increased cost of living for people and likewise increased costs for companies doing business here.

Shenzhen is also facing new competition from other cities. Every city wants a technology sector now, so much so that even tier-two cities are offering juicy preferential policies to attract talent. So to stay in the game, the Shenzhen government has been boosting investment in its education sector and local health system. Putting more money into these areas makes it a more attractive place to live, as far as many of its residents are concerned. And that helps Shenzhen to keep its edge.