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How the PRD has developed

Once its manufacturing economy started to pick up steam, the Pearl River Delta developed at different speeds. As the provincial capital and political heart of the province, Guangzhou and its surrounding districts were home to most of Guangdong’s manufacturing activity before the 1980s boom. But the city’s factories then began to lose ground to Shenzhen, whose designation as a special economic zone gave it preferential policies unavailable to others in the PRD at the time.

Shenzhen's skyline is changing by the minute as new skyscrapers go up

Shenzhen’s skyline is changing by the minute as new skyscrapers go up

Rmb72 million

Shenzhen’s industrial output in 1978, prior to becoming a special economic zone. Last year its GDP surpassed Rmb1.75 trillion

While Shenzhen’s factories prospered from making consumer goods for export, helped by a buoyant private sector, Guangzhou’s economy was shaped by state-controlled firms in heavy industries like steel and petrochemicals. The trend has persisted today, although Guangzhou’s planners are prioritising industrial sectors like carmaking, with plants from Honda, Toyota and Nissan turning the provincial capital into one of the national centres of the automotive industry. City bosses would also like to wrest back leadership of the region from Shenzhen by cementing Guangzhou’s position at the heart of the Pearl River Delta. For instance, they have invested heavily in transport links to nearby Foshan, a focal point for appliance manufacturers and an up-and-coming hub for robotics firms (for more on Foshan, see page 26), and also strengthened Guangzhou’s logistics network by developing the deepwater port of Nansha (see page 42) and increasing capacity at the city’s airport Baiyun, the leading aviation hub in southern China.

 

To understand the PRD, you need to know Shenzhen’s story

Shenzhen is the poster child for the Pearl River Delta’s transformation. Its story is the best known – from the commonly described ‘sleepy fishing village’ of the late 1970s to today’s trailblazing economy in not much more than a generation. Shenzhen’s position as a logistics centre, fostered by the growth of its port at Yantian, has been crucial. But so has the entrepreneurial spirit of its local officials and businesspeople, who seized the opportunities unleashed by Deng Xiaoping’s reforms to develop the city into an iconic metropolis.

Shenzhen was such a novel idea in the early 1980s that there wasn’t even a commonly accepted term for its special economic zone or the urban districts that sprang up around it.

The area that it grew from – Bao’an County – was rebranded as Shenzhen, a name meaning “deep drainage”. It’s said to have been chosen because of the trenches, or zhen, that funnelled water between local rice fields. Feng shui was another factor in the naming process – it was hoped that the water in the zhen denoted the wealth that would soon flow into Shenzhen.

Before it could prosper Shenzhen needed people. They came from across China and within 30 years its population had swelled to more than 10 million. About half are migrant workers – so it’s a much younger place (the average age is low-thirties) and there’s more Mandarin spoken.

40%

Proportion of Shenzhen’s GDP that is now generated by innovative industries like biotech, new energy, internet and tech

‘When you come to Shenzhen, you become a Shenzhener’ was a common slogan on the city’s buses, as municipal bosses welcomed the outsiders.

Another theme for Shenzhen is the city’s can-do spirit, with businesses and buildings emerging at a pace that is described as ‘Shenzhen speed’. But at the beginnings of the PRD’s boom the rules and regulations for its new industries weren’t clear. Overseas investors wanted ways to reduce their risk, so they looked to locate their factories in areas where they hoped to exert more influence. Many Hongkongers could trace their family heritage to districts around Shenzhen and nearby Dongguan, for instance, so it was an obvious choice to concentrate their investment there.

These geographical and ancestral ties meant that the eastern banks of the Pearl River Delta took the lion’s share of the early investment and that it was businesses there that were soon producing more of the region’s exports.

By the early 1990s, foreign-invested factories in Shenzhen were churning out goods in labour-intensive industries such as textiles, clothing, and plastic products. More far-sighted companies then started to move up the technology ladder into higher-value exports like telecommunications equipment and electronics, with more investment arriving from Japan and Taiwan. More recently many of Shenzhen’s lower-margin businesses in plastics and textiles have been moved out of the city to make space for more sophisticated manufacturers. The baton is passing to a newer generation of Chinese firms, which have increasingly developed their own businesses and brands.

Huawei, the world’s largest telecommunications equipment manufacturer, epitomises the story of Shenzhen’s evolution. Although it still gets the majority of its revenue from its original business (sales of telecoms networking equipment), Huawei has made a major push into smartphones, starting out by making budget handsets for others and now developing its own brands. Huawei has struggled to break into the US market – where regulators are cautious about its alleged links to the Chinese military – but it has been expanding quickly elsewhere, and it is now the number three smartphone vendor in the world by unit volumes, after Samsung and Apple (see page 50). Huawei has also invested in the industry supply chain, including its own chip producer HiSilicon, another Shenzhen-based unit, which has ambitions to be one of a select few global champions in chip design.

ZTE, another global leader in telecommunications equipment that’s also headquartered in Shenzhen, has diversified into smartphones too and has a goal of becoming the world’s second-biggest phone manufacturer within five years. It has been making progress, including the US market, where it is the fourth-biggest smartphone brand behind Samsung, LG and Apple.

Other local heavyweights include BGI, which accounts for half of the world’s gene sequencing capacity, and BYD, a maker of rechargeable batteries and last year the world’s biggest seller of electric vehicles.

This new breed is fuelling Shenzhen’s transformation into arguably China’s most developed economy. Last year’s GDP growth was 8.9% (versus 6.9% nationwide) and much of it came from innovative industries like biotech, new energy, the internet and information technology, which accounted for 40% of the local economy. Incomes per capita in Shenzhen aren’t much less than South Korea’s, while research and development spending is at a similar level to the Koreans at about 4% of GDP (China’s national average is 2.1%).

 

California dreaming?

Shenzhen’s success has seen it start to draw comparisons with Silicon Valley. The city is home to Tencent, whose WeChat messaging app is used by hundreds of millions of people.

But Shenzhen doesn’t bring ideas and investors together in quite the same way as its Californian equivalent. Indeed, the Zhongguancun district of Beijing probably has better claim to a direct comparison to the Valley – given its links to universities and research institutes, the local network of legal and accounting firms, and the expanding community of tried-and-tested tech entrepreneurs.

How Guangzhou looked in 1978 – not a skyscraper in sight…

Shenzhen’s fans say that it’s not a question of modelling their city on Silicon Valley. Instead it offers something different to the American tech paradise: an ecosystem that draws on the expertise of thousands of seasoned engineers and factory bosses. Of course, Shenzhen has been a manufacturing heartland for years. But its new cohort of companies are developing homegrown ideas and building their own empires, with notable breakthroughs from firms like DJI, the drone maker, and OnePlus, a mobile phone brand that has built up a following with tech-savvy customers in Europe and the US.

DJI opened its first office in Shenzhen in 2006 and is now valued as an $8-billion brand, leading the global market in sales of consumer drones. It’s also a great example of how Shenzhen is showing its edge in making ‘real’ things like next-generation consumer electronics and wearable tech. These advantages are anchored in a local supply chain that’s perfect for getting products from the drawing board to the production line in double-quick time.

What has evolved over the past three decades is a “makers’ culture” that clusters together an ecosystem of suppliers and assemblers. (Apple boss Tim Cook was likely thinking of Shenzhen when he told analysts: “You can take every tool and die maker in the US and probably put them in a room that we’re currently sitting in. In China you would have to have multiple football fields.”) In its earlier incarnation that meant if you wanted to get something copied, there was nowhere better or faster at doing so than Shenzhen (the word for fake in Chinese is the somewhat similar sounding shanzhai). More recently this ecosystem has adapted to a new ethos: marrying an expertise in the making of hardware to collaborative work in design. Most of the new activity is based on local ingenuity rather than expertise parachuted in from overseas. Its proponents describe it as a process of experimentation, that usually tries to improve an existing product, instead of directly copying it. As such, it comes close to what tech insiders call ‘hacking’, a process in which manufacturing skill becomes a fundamental part of value-creation.

The maker culture is helping early-stage companies, since it offers shorter timeframes and lower costs in prototype design, and greater flexibility for production runs. Specialist incubators like HAX, a leading accelerator service for hardware and connected devices, are working with start-ups from around the world to help them prototype their products before they head into major funding rounds. Shenzhen is being promoted as the one-stop shop, where entrepreneurs can refine their product ideas, find suppliers and subcontractors, line up distributors and even respond to shifts in demand as the marketplace evolves.

Li Keqiang, the Chinese premier, has visited some of the workshops – known internationally as ‘hackerspaces’ – in the city. “Makers have revealed the incredible entrepreneurship and creativity of the people,” he applauded. “This kind of vitality and creativity will be an inexhaustible engine for China’s future economic growth.”

 

Difficulties for Dongguan

While Shenzhen is a shining example of success, nearby Dongguan is going through a more difficult transition. It has been slower than Shenzhen to move away from lower-end manufacturing, and its economy is more reliant on the kind of contracts that have started to shift to lower-cost locations in other parts of Asia. In the past Dongguan was reputed to make one in every four pair of shoes sold worldwide. But fewer of its companies have invested in scaling up their businesses, developing their own brands or establishing their own research and development expertise.

PRD

Where the PRD sits in Guangdong

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The city also suffers from an image problem as the sin capital of China. Despite regular clampdowns on its red-light districts, the slur has been hard to shake off. “Many wives feel anxious when their husbands take business trips to Dongguan,” its deputy governor Liu Zhigeng admitted in 2009. “It’s disgraceful.”

Liu has been in the firing line since then for Dongguan’s failure to upgrade more of its industrial base. And the accusations took a nastier turn in February when he was reported to be the target of an anti-graft investigation himself. One of the key allegations in the local media was that his relatives had profited from the sex-trade business.

 

Journey to the West

The story of how the western part of the PRD has developed is a little different. Encompassing the cities of Zhuhai, Zhongshan, Jiangmen and Foshan, the area didn’t grow quite as explosively as some of the cities in the east. The factories took longer to go international too, in part because they had more of an early focus on serving the domestic market. However, they too were exporting by the 1990s, led by appliance makers such as Midea, Kelon and Galanz (the world’s largest microwave oven manufacturer).

In general terms, the eastern region focuses on electronics and tech products while the west bank is better known for household appliances. Even today economic activity on the western side of the Pearl River is generally less advanced than in the east, although the cities there have been registering faster rates of growth than the provincial average for Guangdong.

Jiangmen and Foshan are large economies in their own right, for example. Specialisation in particular products is another feature of their success: Zhongshan started out with lighting and casual wear; Jiangmen in textiles, paper and batteries; and Foshan in ceramics, furniture and home appliances.

By developing their own clusters of component makers and assemblers, they have likewise created supply chains that help to reduce the costs of production. Factories pool purchases of raw materials and consolidate shipments of finished goods, and they can outsource work during the busiest periods, avoiding investment in capacity they wouldn’t use in quieter times.

The region is also poised to benefit from the opening of the Hong Kong-Zhuhai-Macau Bridge, which will provide the first direct road access between Hong Kong and the cities on the western side of the Pearl River.

 

How Foshan prospered

Foshan may be the biggest city you’ve never heard of. Located in the southwest of the Pearl River Delta it houses more than seven million people. It already enjoys higher per capita GDP than Shanghai or Beijing, and its local economy has lifted it into the World Bank’s high-income category.

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Foshan’s points of production

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Foshan’s remarkable rise was the topic of a study by the Hong Kong-based Fung Global Institute last year. As with other cities in the region, entrepreneurs from Hong Kong played an important role in the beginnings of its market economy, drawing on family connections to the area. Foshan also benefited from the relaxation of hukou rules in the mid-1980s. By 2012 it was home to 3.7 million migrant workers and their families, or about half of its population.

But Foshan differs from its neighbours in important respects. As a city it had few of the special privileges afforded to Shenzhen and less of the political clout that helped businesses based in Guangzhou. That meant that more of the impetus for its economic acceleration has come from the grassroots, the Fung Institute report says.

Foshan is also unusually concentrated on light manufacturing, with far less of the heavy industry seen a half-hour’s drive north in Guangzhou. Because it lacked larger, state-owned enterprises at the outset of the reform era, many of Foshan’s new businesses originated from town and village enterprises instead. Smaller but nimbler, they were allowed to keep a larger share of their profits than state enterprises, and the successful ones grew into substantial businesses. The appliance manufacturer Midea (see page 50 for a company profile) is one of the best examples, rising from its origins as a township business to later list on the Shenzhen stock exchange.

8.3%

Foshan’s estimated GDP growth rate last year

The origins of Foshan’s industrial base have made the city’s private sector dominant in its economy. Another outcome is that the city boasts more business clusters than almost any other part of China (see map on page 26). With most of its original industries linked to townships or villages, there was less option for companies to move in search of improved prospects. That made clustering more inevitable and Foshan’s first-mover advantage has allowed the hubs to attract more investment, making it harder for others to break into the same business areas. ­

This has resulted in a roster of local companies, rather than relying too heavily on foreign-invested production (a common criticism of Dongguan, a city in Guangdong which has similar prefectural status). But municipal governments have also played their part in paving the way for Foshan’s future. For example, bureaucrats funded the first exhibition space for furniture in Lecong in the 1980s, and today there are three million square metres of showrooms in the same district. The Fung Institute study praises the local planners as “policy entrepreneurs” and highlights how Foshan’s rise to the top was both a bottom-up and a top-down process. True, there hasn’t been a centrally-imposed master plan, says the Hong Kong-based think tank. But the local officials have taken guidelines and incentives by the central government, which have then been implemented creatively and competitively, the study notes, through “push and pull, experimentation and evaluation, positioning and bargaining”.

Last year Foshan’s GDP grew 8.3%, handily beating the national average.­­


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