Many western companies with international expansion ambitions are looking to expand their operations in Asia and considering where to focus.
We've just returned from a scouting mission to Shenzhen in China's Guangdong region on behalf of a global IT group, investigating startups with a view to finding cutting-edge technology. This has confirmed huge opportunities for certain international companies which may currently be overlooking the area.
By rapidly evolving into a thriving center of artificial intelligence (AI), Shenzhen looks to be an attractive location not only for western AI pioneers, but for manufacturers seeking highly automated operations.
From Fishing Village to Economic Powerhouse
A subway ride from Hong Kong, Shenzhen has grown from a fishing village of just 300,000 people in the 1980s to 13 million today. It was designated as a Special Economic Zone in 1980. Just 40 years later, it now ranks third in China for economic output, behind Shanghai and Beijing.
It's been dubbed by Financial Times in the past as the "Silicon Valley of Hardware." It's known for Apple's R&D center and the HQs of Huawei, ZTE, Tencent, DJI and TP-Link. With an estimated 90 percent of the world's electronics manufacturing in the area, it's long been a top choice for western electronics companies with global manufacturing plans.
The wider Guangdong region has historically been known for low-end manufacturing of clothing, beverages, and toys. But times have changed in recent years.
China's average wages have increased around 12 percent annually since 2001, as young workers have demanded better jobs and higher pay. At the same time, the Chinese government's efforts to improve the environment led to 80,000 factories being penalized in 2017 alone.
As a result, international manufacturers have increasingly been shifting their focus from Guangdong — and China generally — to lower-cost southeast Asian countries such as Vietnam, Thailand and Indonesia. The latest developments in Shenzhen, however, may well alter this.
From our recent mission to Shenzhen, it's clear the area is expanding fast from its hardware roots to become a thriving center of innovation in software and AI too. This, in turn, is bringing new levels of automation and efficiency to the manufacturing and logistics industries in Shenzhen and wider Guangdong, putting them back in a strong position to compete with southeast Asia.
We visited many of Shenzhen's ground-breaking companies over the last month.
Malong Technologies won first place in Google's global computer vision contest. Its AI technology beat human vision accuracy and is now helping customers to pre-empt machine failures and defects.
Wolf Yuan, the company's business development director, told us the government has provided not only two 1,700-sq.-m. (18,300-sq.-ft.) floors of rent-free space, but tax breaks and subsidies.
"The local government is eager to support this industry, as it's championed at the national strategic level," he says. "Since Shenzhen has always been at the forefront of China's technology development, more AI companies will be setting up offices in the area to take advantage of the subsidies."
With supply chain warehousing and transport vital for efficient manufacturing, Whalehouse — a new Shenzhen company with investment from YF Capital (part of Alibaba), GSR Ventures and Baidu — is pioneering the use of robotics and autonomous guided vehicles (AGV) in China. This is bringing up to 80-percent reductions in labor costs and six-fold increases in space efficiency.
According to CTO Jun Zhang, "Space savings, labor savings and ease-of-use are key for autonomous warehouses. We've registered international patents for our systems because the market for autonomous logistics is not only in China but in developed countries such as the U.S., Germany and Japan, where rent and labor costs are even higher."
GoodScan is using 3D modeling to reduce package processing from five steps to just one, taking only one second. Its software rapidly obtains millimeter-level measurements of packages' widths, heights, lengths and weights while simultaneously capturing their barcodes and photos. This efficiently determines transportation, labor and packing needs which, according to CEO Xiao Zhang, increases worker productivity and is saving millions of dollars for customers such as Huawei, JD and Ascendia.
Extreme Vision runs a marketplace with 6,000 algorithm developers who deploy AI solutions at one-tenth of general market prices. With an average age of 26, many of those developers join straight from school.
Co-founder Iris Liu says highly educated job-seekers join startups such as hers because of their desire for self-fulfillment. Company equity and a sense of mission appeal to young workers more than they did to their parents.
"Shenzhen's population is young and diverse because of lenient requirements for residency registration compared with Beijing and Shanghai," Liu explains. "Also, hiring in Shenzhen emphasizes personal ability above alma mater, network or work experience."
This inclusive culture is rooted in the city, where there are an estimated 7 million unregistered migrant workers. Even amongst the 13 million who are registered, many are first- or second-generation immigrants.
What's happening in Shenzhen won't appeal to all. Higher wages have still driven some manufacturers out of the area — including companies such as Huawei, Foxconn and HP, which have set up in in Chengdu, as Site Selection documented in November 2017.
But the Shenzhen developments are starting to alter this trend and attract significant interest. They're helping the area to maintain its position as the world center of electronics manufacturing, and to cultivate a talent pool of highly skilled software and AI experts.
Our prediction is that clear specialisms will develop in many regions of China — in the way Hainan province is setting its sights on being the center of medtech innovation and medical tourism.
Shenzhen's fast-emerging AI focus — backed by focused government policies — should make it a prime focus for western companies innovating in AI or looking for links with the latest AI technologies. It should also be of interest to broader manufacturing businesses seeking cutting-edge levels of automation.
If you're a western tech or manufacturing company looking for a new base in Asia, we think Shenzhen is well worth a look.
Emma Hsu and Stewart Randall are business expansion experts in Intralink's Shanghai office. Intralink is an international business development consultancy specializing in east Asia. With a 28-year track record and offices in Silicon Valley, Boston, London, Oxford, Shanghai, Tokyo and Seoul, Intralink helps western companies expand in China, Japan, South Korea and Taiwan. For more information, see www.intralinkgroup.com.