Shenzhen: Hardware Capital of the World

Less than 40 years ago, Shenzhen was a fishing village of 30,000 people.

Today, Shenzhen produces 90 percent of the world’s electronics, has a nominal GDP of over 2.2 trillion RMB ($330 billion USD), and is home to over 12.5 million people.

By the end of last year, the city had over 3 million registered businesses — that’s one enterprise for every four people.

In 8 years, it has become the first city on the planet to boast a 100 percent all-electric public bus fleet.

And in less than 6 years, Shenzhen has doubled its economic output.

Long disparaged as a battlefield of ‘copycats,’ Shenzhen saw over 40 percent of its 2017 economic output come from innovative businesses spanning internet, telecom and biotech.

But while local players like Tencent and Huawei have helped put China on the map for telecom, software and AI, the city’s true claim to fame is hardware.

Supercharged by hundreds of thousands of engineers, rapid prototyping, unparalleled supply chain flexibility, and sheer scale, Shenzhen is now the go-to city for businesses building robots, drones, smart sensors, and wearable technology.

In this blog, I’ll be looking at three main drivers fueling this growth:

  1. Scale and speed
  2. Concentrated talent and the Maker Movement
  3. Open source innovation

Let’s dive in.

Fuel in Numbers and Speed

In business, timing is everything.

And when it comes to rapid prototyping, Shenzhen is an entrepreneur’s paradise.

As managing director of HAX—Shenzhen-based accelerator and one of the world’s most active early stage investors in hardware—Duncan Turner confirms as much: “[In the U.K.], it’ll take you around a month to make something which is specialist from an engineering firm. Here, you can do it in a couple of days.”

But don’t just take it from an accelerator looking to attract your enterprise.

Having invested in countless Chinese and U.S. startups through his VC firm Sinovation Ventures, Dr. Kai-Fu Lee explains that “hardware entrepreneurs [claim] a week spent working in Shenzhen is equivalent to a month in the United States.”

With seemingly infinite electronic parts and manufacturing talent at ready disposal, hardware-based companies in Shenzhen have a remarkably unfair home advantage.

Choose from thousands of versions of circuit boards, LEDs, microchips, sensors, mini cameras, microphones, and crystal oscillators, on the spot, at any of Shenzhen’s countless electronics markets.

Buyable in bulk and at extraordinarily low cost, engineering parts get turned into prototypes practically overnight, thanks to a force of world-class engineers unlike any other concentration of inventors on the planet.

And with access to hundreds of factories capable of turning product batches from prototypes in a few days, startups in Shenzhen have a much higher iteration rate than their Western counterparts. This means innovating on an idea with significantly less delay.

Take the city’s Huaqiangbei Electronics Market, for instance.

Comprised of 20 different shopping malls, this powerhouse of parts and tinkerers covers over 70 million square feet.

Each building houses thousands of small kiosks, not to mention pretty much anycomponent you could ever need to build intelligent hardware.

Find sensor suppliers, injection-mold engineers, and some of the quirkiest versions of products you’ve never seen—from unique LED keyboards to Bluetooth speaker-geared electric unicycles.

But Huaqiangbei is more than just a market for components and new versions of old products.

As Shenzhen’s education system increasingly targets creativity and practical skills, markets like Huaqiangbei have birthed apprenticeship programs between aspiring young engineers and skilled mentors.

And with an unlimited toolbox fueled by Shenzhen’s frenzy of imagination, new inventions are given free rein.

Concentrated Talent & the Maker Movement

But beyond sheer quantity, Shenzhen has invested big in talent over the past decade.

To date, the local government has handed out $145 million USD in grants, attracting thousands of domestic and foreign entrepreneurs.

And resulting numbers speak for themselves.

In the first half of 2017, fixed direct investment in Shenzhen’s parent province of Guangdong rose 6.6 percent year-on-year to over $12.3 billion USD.

And over the same period, foreign-invested enterprises approved for operations in Guangdong shot up 46.4 percent to 5,239.

But Shenzhen’s efforts don’t stop at cash. Just this year, its government committed to building 10 labs led by Nobel Prize-winning scientists in a massive push to drive progress in 5G, nanotechnology, medicine, photo-electricity, and graphene.

Already home to Nobel laureates like Shuji Nakamura and Robert H. Grubbs, Guangdong’s economic powerhouse has even launched The ‘Peacock Initiative’—a program to attract highly skilled professionals, backed by a pledge of up to 100 million RMB for any team pursuing scientific breakthroughs.

And if government efforts weren’t sufficient, Shenzhen’s already-booming private sector is more than enough to lure top talent.

Take the gaming industry, for instance.

As explained by Jeff Lyndon, co-founder and president of Tencent-backed mobile game publishing platform iDreamsky, “Shenzhen has one of the most centralized technology hubs in China. 85 percent of us [gaming companies] are located in [its] Nanshan district [and] 70 percent are in the same complex.”

Having briefly surpassed a $500 billion USD valuation, and with $12.5 billion USD in 2017 total game revenues alone, Tencent is a magnet for tech professionals worldwide.

And what better to meet this influx than the city’s famous makerspaces?

Fueled by tens of millions of dollars in government funds, Shenzhen’s makerspaces have multiplied from 1 in 2010 to hundreds today.

Centered around experimentation, makerspaces have become a home to tinkerers—engineers, programmers and even children taking things apart, figuring out how they work, and building out new gadgets to flood an iterative market.

Some even claim Shenzhen’s tech boom has driven an oversupply of incubator space, ranging from little more than co-working spaces to consultancy-geared sub-rentals with in-house 3D printers.

But key to sustaining this rising fleet of makers and tinkerers is cheap access and open source design.

The Upside of Open Source

One of the most common complaints about doing business in China is weak intellectual property (IP) rights and frequent infringement. Prosecuting cases is a consistent challenge and foreign trust in local IP laws could be higher.

But while poor protections have discouraged many, they have also led to some of the most rapid and competitive innovation on the planet.

I often talk about the importance of rapid iteration, of constantly experimenting with an idea, killing a project when it won’t work, and frequently disrupting your own business.

In Shenzhen, rapid iteration is essentially crowdsourced.

As weaker IP rights give way to open source designs across the board, thousands of engineers and tinkerers collaborate across products, building progressively better iterations, and letting the market claim a winner.

Forming the crux of Shenzhen’s “Maker Movement,” local inventors live by open source hardware and software, constantly sharing data online about how to build newly released inventions and iterated gadgets.

Loosely known as shanzhai (a term originally used to reference counterfeits or knockoffs), this open source phenomenon permeates everything from circuit board designs to miniaturized sensors.

And with an abundance of freely shared data comes an abundance of product versions, spanning the gamut of AR glasses, fitness trackers, gaming equipment… you name it.

As a result, Shenzhen’s shanzhai ecosystem has birthed a generation of what Kai-Fu Lee calls “gladiator entrepreneurs,” each zooming to get products to market, meet demand overnight and iterate adjacent products before others innovate over them.

But while you might write this off as yet another brutally free market of ‘copycats,’ Shenzhen’s technology integrators have had to build novel designs not only to beat out domestic competitors, but international ones as well.

As explained by Professor Neil Gershenfeld—founder of Fab Lab and director of MIT’s Center for Bits and Atoms—"Instead of copying, other designers must make improvement and the upcoming products will also be stored in the database of open design for public use."

And as China finalizes its transition to an innovation-based economy, Shenzhen’s hardware masters have started dominating completely new markets.

Take Shenzhen’s DJI. Already owning more than half of North America’s drone market over a year ago, DJI’s drones continue to eclipse competitors, dominating the industry in price and performance.

And at maker hubs like Huaqiangbei, engineers with cheap, abundant and lightning-fast access to the resulting hardware are the first to improve upon it.

Final Thoughts

A truly unstoppable force, Shenzhen stands at the epicenter of hardware innovation.

Designated China’s first Special Economic Zone (SEZ) in 1980, Shenzhen has gone from a powerhouse of cheap manufacturing to a world-renowned innovation hub of rapidly iterating entrepreneurs and booming makerspaces.

Fueling a cycle of constant innovation, Shenzhen’s open-source ecosystem and abundantly cheap tools grant anyone the know-how to iterate on today’s top tech products and build out new prototypes.

And when thousands of inventors with world-class hardware skills build new iterations day and night, you get one of the only testing grounds on the planet where almost every permutation of a product gets trialed by the market.

Join Me in China

(1) Webinar with Dr. Kai-Fu Lee: Dr. Kai-Fu Lee — one of the world’s most respected experts on AI — will discuss his latest book AI Superpowers: China, Silicon Valley, and the New World Order. Artificial Intelligence is reshaping the world as we know it. With US-Sino competition heating up, who will own the future of technology? Register herefor the free webinar on September 4th, 2018 from 11am - 12:30pm PST. 

(2) Abundance Global — China: This year, I’m expanding A360 into three key emerging global markets: Central/South America (Rio de Janeiro, Brazil); MENA (Dubai, UAE); and Asia (Shanghai, China). Following my annual China Platinum Trip, A360 Shanghai will dive into China’s remarkable strides in AI and other newly emerging industries.

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