Shenzhen: Innovation at the speed of the network

THE STORY OF SHENZHEN

Since becoming a SEZ (Special Economic Zone) in 1979, Shenzhen has grown in population from about the size of Ghent in Belgium (250k inhabitants, including the nexxworks HQ, yay!) to the size of Belgium (11m). The Shenzhen economy alone is about the size of the economy of Denmark, Portugal or South Africa. The city expanded like networks do: from the bottom up. It was growing so fast that local planning authorities had difficulties keeping up with the speed of the network.

FROM THE FACTORY OF THE WORLD

Shenzhen started out as a cheap supplier for products designed by Western companies and widgets loved by Western consumers. Before long, the low prices in Shenzhen were challenged by other Chinese and Eastern production hubs. Manufacturers in Shenzhen were forced to become innovators themselves.

Huawei* was one of the first companies to take bold steps. They moved from producing phone switches to providing all of the networking and communications equipment involved in you reading this blog. BYD* only used to produce batteries for mobile phones. Today, they design and manufacture ever more complex (parts of) mobile phones and electric vehicles. This transformation was possible because, in the shadows, mavericks had put their newly acquired skills to use in making ‘shanzhai**’ products. Think of cheap iPhone lookalikes, bought by Chinese consumers looking for a bargain. As a result a wide pool of creative and skilled ‘makers’ emerged. In this ecosystem companies such as DJI* were born, often taking the lead themselves. DJI is now a global market leader in the drone industry. Its drones are designed, tested and built in Shenzhen.

Shenzhen (and China as a whole) is no longer building cheap products. Incumbents have transformed themselves, startups operate, these days, in a vibrant ecosystem, manufacturing a wide range of mainstream to niche electronic products. Because of the abundant supply of any part you could ever need, companies in Shenzhen are able to innovate at a speed unimaginable anywhere else in the world. When you can have a new part delivered in hours, not weeks, the speed at which you can test and deploy your designs grows exponentially.

TOWARD A GLOBAL INNOVATION HOTSPOT

The ‘shanzhai’ thinking moved on to copy Western digital services. At a much faster speed than the hardware transformation, the same trends surfaced. Most consumers had a smartphone, thanks to rising living standards. In a mobile-first society, the demand for digital services was booming. At first copying eBay, PayPal or Facebook, Chinese companies quickly started tweaking to local consumer needs.

The best known example is Tencent*. The first product they launched was the messaging service OICQ, which was not only in name very similar to the American-owned ICQ. Due to threats of lawsuits, the name of the platform was eventually changed to QQ. Today QQ is just one of the platforms with more than a billion users owned by Tencent. This rapid growth resulted in a transformation on the other side of the world: today, Western platforms such as Facebook, Messenger and WhatsApp are looking to the East to define what's next in their product roadmaps. The Chinese platforms found out how to actually generate revenues from their users, by selling them emojis, filters and stickers. These platforms deliver the user an experience, rather than giving advertisers an audience.

The most interesting transformations happen at the intersection of software and hardware. Uber was only possible after smartphones, GPS and Google maps were available. Hardware companies such as Huawei and BYD have started developing the software that works best with their own devices. DJI integrates both hard- and software in their products. Developers in Shenzhen can experiment with new chips and sensors months before they are launched. It’s all being built right next door to them.

AND WHAT'S NEXT?

The Shenzhen ecosystem brought millions of people together. First, creating demand for cheap products. Later, serving as a strong starting-point for new innovations. Today, Chinese customers value convenience over price. They no longer buy ‘shanzhai’ phones and now think that Western apps are slow, inconvenient and look stupid.

Shenzhen is still growing. The BGI* (Beijing Genomics Institute, sequencing the genome of almost everything that has DNA) moved to Shenzhen a few years ago, because of the unique combination of skills, hard- and software found in Shenzhen. Ever more young Westerners are founding their hardware startups in Shenzhen, again because of its rich and collaborative ecosystem.

It doesn't end here. Moving forward at breakneck speed, Shenzhen is still vulnerable to being disrupted by other cities, regions or countries. That's why Shenzhen recently launched a new initiative: the city is building overseas innovation hubs. That way, it hopes to become an international, collaborative innovation platform. This plan should enable them to reach the skilled staff and abundant resources needed to continue growing.

In my next post, I'll further explore what the startup ecosystem and business culture are like in China. To conclude, I’ll explore what lies ahead for China and how governments cope with disruptive forces.

Nexxworks is organizing an ‘Innovation Tour’ to China in May to explore the innovation track record of the East as well as the speed and scale of the Chinese innovation approach. Find out more about our trip to the Chinese Silicon Valleys here. 

*we’ll be visiting all the companies mentioned in this article during our trip.

**counterfeit, imitation