By Steve Ranger
TechRepublic
It’s a hot summer evening in Shenzhen, but it’s still cool inside the Apple store. The young shoppers are checking out the phones and nodding along to the music by a British indie band of the early nineties. The music they’re listening to is not only older than they are, it’s also older than most of the mega-city of 12 million people, too.
A mere 35 years ago, Shenzhen was little more than a fishing village clinging to the coast, peering enviously at wealthy Hong Kong across the water. But then it was chosen to become the first of China’s special economic zones under Deng Xiaoping — an area where foreign investment and entrepreneurialism was encouraged.
Since then it has rapidly grown into a massive metropolis — one of the largest cities on the planet — and along the way it has also become the manufacturing heart of the global tech industry. If Silicon Valley is the world’s software epicentre, then Shenzhen is home of hardware.
Today, the city’s seafront skyline sprawls along Shenzhen Bay, almost as impressive as Hong Kong. The downtown mega-mall where the Apple store is situated is stuffed with the highest of high-end western brands alongside an indoor ice-rink. I browsed very carefully in a shop where particularly garish shirts retail for several thousand dollars. In the workday rush hour outside, expensive sports cars and imported 4x4s vie for space with buses on the city’s roads, another sign of the affluence that manufacturing technology has brought to the town.
Despite the walkways draped with foliage and the trees that line its main roads and the vast, grand public buildings, it’s not the sort of town you might casually fall in love with. It has been built so fast it’s hard to find its beating heart. But there’s little doubt of its furious ambition. The pricey mall also features an exhibition of a new flats already being built in the hills on the edge of the city.
Shenzhen is best-known for being home to giant manufacturers like Foxconn, but it also houses hundreds of smaller factories that create everything from individual gadget components to finished devices. While the city has been anonymously churning out electronics for decades, now it’s changing again, becoming notable as both a hub for hardware startups and some of the largest Chinese tech companies that yearn to be bigger players on the world stage.
As such, more than any other Chinese city, it embodies many of the issues that surface when discussing the country’s increasing role in the technology industry, both as a gigantic market viewed hungrily by western tech companies, but also as an increasingly confident creator of its own hardware and software.
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The Huaqiangbei shopping district is a kilometre of technology stores — every hot Chinese and western consumer tech brand is plastered across dozens of small outlets. It’s become a standard stopping off point of in Shenzhen for those trying to understand the complicated ecosystem of tech businesses large and small that keeps the city producing millions of devices each year.
Chinese pop songs blare out of speakers and salespeople wave and shout — and occasionally sing — into microphones as they try to attract the attention of shoppers passing by, umbrellas held high to ward off the afternoon sun. Most shops seem to be doing good business as the workers of Shenzhen — also now one of China’s most affluent cities — check out the latest devices.
But there’s more to Huaqiangbei than this. To step off the bright street through one of the dark doorways into one of the many markets along the road is to step into a vaulted cathedral of components.
These markets can be four or five stories high, with floor after floor of every electronics component imaginable. Smartphone screens, chips, memory, batteries and hard drives for sale individually or by the thousand from factories around the city. The further up the building you go, the more sophisticated the products — basic components on the ground floor to drones and smartphones at the top.
Some of the malls are bright and fresh, some are scruffy and musty. Many of the components are new, others recycled from old equipment. Among the jumble of gadgets there are copies, refurbished devices, and locally-built hardware that will never make it to western markets.
It’s a surprising homely scene, the future in a domestic setting. Bored men sitting at their stalls glance up briefly as I pass, then go back to counting memory cards. School kids struggle on with their homework surrounded piles of processors more powerful than all the computers that existed on the planet just a few years ago and babies snooze oblivious to the jumble of techno-wealth that surrounds them.
Shenzhen doesn’t just make components. Thanks to the so-called “Shanzai” open design culture, there are now also plenty of locally-designed and built devices too. Apple’s “Designed in California” is being replaced by designed in Shenzhen. A number of western accelerators are now tapping into that expertise to both get hardware built fast and cheap.
One of the leading examples of this is the accelerator programme HAXLR8R, which has used the manufacturing ecosystem in Shenzhen to make it possible for entrepreneurs to prototype and manufacture devices for a fraction of the cost – and speed – it would take elsewhere.
The programme sends entrepreneurs to live and work on projects in Shenzhen for three months. While it can cost hundreds of thousands or millions of dollars to build a product in the US, companies on the programme aim to go from initial idea to final product for $20,000, including airfare and living costs. Once they’ve got a product, the companies then turn to crowdfunding campaigns to sell it.
Cyril Ebersweiler, the founder of HAXLR8R, explained why Shenzhen is so important to the programme: “By being here and able to prototype fast, cheap and efficiently and being able to build at the same time as you prototype, you will get to market faster,” he said. “Prototyping is faster because you can get anything in 12 to 24 hours here.”
Being in Shenzhen means that the startups will be working with the same components that they will end up using in the finished devices (thus reducing the number of potential surprises in the manufacturing process), and the depth of the supply chain means it is possible to find extremely specialised suppliers. “You can find factories that are specialised in bicycle handlebars. Not bicycles, only the handlebars,” he said.
And that also means working much more closely with the manufacturers. Manufacturing is not an afterthought when it comes to brand new products, Ebersweiler says. Instead the manufacturer is a startup’s most important partner. “They are going to produce your product; it’s as much their startup as it is yours at this stage, so ‘parachute’ manufacturing doesn’t work,” he argues.
While Shenzhen had in the past a reputation for copycatting and poor quality manufacturing, Ebersweiler said it has improved greatly in recent years. Some of this is down to the influence of Apple, one of the many companies to have used manufacturers in the area. “The expectations of customers went through the roof,” he said. And as a result, factories could no longer get away with providing poor quality components.
Zach Supalla, founder of Spark, which makes a tiny Wi-Fi development kit that developers can use to build connected products quickly, is one of the entrepreneurs to go through the HAXLR8R programme.
He had previously tried launching a consumer product on Kickstarter with little success, then spent January to May last year in Shenzhen reworking the business and relaunched with the new product on Kickstarter when he returned. “We were asking for $10,000 and we raised almost $600,000,” he said.
“China was such an incredible place to be to develop a product and to learn how to create hardware. We learned a lot about how to move quickly and to develop hardware at a pace that looks a lot like software,” he said.
For example: to get a factory to build a circuit board in three days in the US could cost $1,000; in China, that’s $30. “It let us move a lot more quickly being there and being down the street from the guys who were actually making the [boards],” he said. In China, it’s easier to deal in low volumes which makes it easier to change designs quickly, he added.
“We’ve learned ways to source components that comes from really understanding China. There can often be a negative connotation of working in China and that comes from the experience that people have when they don’t interact directly, they interact at arms-length,” Supalla said.
Still, not everything is easier in Shenzhen. For example, Supalla found it hard to get anyone to make things out of wood. “If you are doing electronics, great, that path is there and there are thousands of people who will help you with that. But, if what you are doing is a little bit off the beaten path, then the processes aren’t there.”
While the hardware hackers are only a small element of the Shenzhen ecosystem, they are a growing component and one that the city seems to be encouraging. It already has a nascent hipster neighbourhood in the form of OCT-LOFT with its funky boutique and inevitable Starbucks.
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Shenzhen is about more than tiny factories. It’s also home to a number of the biggest Chinese tech companies including ZTE, Coolpad, and Tencent, which are all based in the city.
The company out of Shenzhen that has so far achieved the most international attention is Huawei, whose headquarters are not far down the highway from Foxconn’s huge site.
“We learned a lot about how to move quickly and to develop hardware at a pace that looks a lot like software.”
Zach Supalla, founder of Spark
The history of Huawei and Shenzhen are intertwined. The company was set up by a former military officer back in the eighties and it started out by reselling telephone switches into China.
Since then it has swelled to become the second largest telecom equipment company and the third largest smartphone maker in the world, a $39 billion corporate giant that has designs on becoming a major supplier of technology to business, too.
The company’s grand two-kilometre-square chrome and glass campus is a world away from the cramped booths of Huaqiangbei. One the buildings that houses its not-to-be-photographed testing labs is even dubbed the “White House.”
But, in many ways, it’s much the same as any other big tech company campus, although few have the same sub-tropical weather, setting, or low cost on-site housing where staff can live for the first two years of their employment. The best rooms with food cost around £30 a night, with a basic room to be had for more like £12. The need for accommodation is a reflection of the soaring costs of living accommodations in booming Shenzhen. Some Silicon Valley employers may wish to take note.
It’s lunchtime when I arrive on the Huawei campus, which means the canteens are full. Around 40,000 people work on the campus every day. Employees start work at 8:30am and usually clock off at 5:30pm. At lunchtime some snooze on the bedrolls they store under their desks or join in with the communal exercise programme.
The founder of the company very rarely gives interviews, and Huawei has an unusual rotating CEO structure where a number of execs share that job in six month shifts. In a tech world where companies are often helmed by rock star CEOs to create identity and glamour for otherwise dull companies, Huawei’s more collective leadership perhaps makes it harder for Westerners to come to grips with the organisation.
While it’s the second largest networking equipment company in the world, there’s one set of telecoms that you won’t find buying Huawei equipment: the providers in the US.
That’s because in 2012 the US House of Representatives intelligence committee published a fiercely critical report warning that the use of Huawei networking equipment could “undermine core US national-security interests.” Much of the concern revolved around the relationship between the company and the Chinese government.
Huawei has consistently denied these and other claims, insisting that is a private, employee-owned company. But the issue has refused to go away, and as a result the US remains a very tough market for the company, even though it has had significant success elsewhere.
It’s one example of a bigger, broader issue for Chinese tech companies. The Chinese state is regularly accused of carrying out large scale internet espionage campaigns and has been criticised for implementing its “Great Firewall of China” to restrict access to Twitter, Facebook and other news and social sites. These decisions by the state have had a knock-on effect on to make it harder for Chinese tech companies to compete in certain countries and industries.
Other countries however have taken a more nuanced approach when it comes to Huawei. In the UK, for example, Huawei has been a major supplier to BT’s critical national telecom network for the last decade, although BT was required to set up a government-monitored unit which inspects Huawei’s equipment for any potential security flaws.
A report published by the UK government last year said the only weaknesses discovered to that point could be attributed to “genuine design weaknesses or errors in coding practice.”
And of course, in couple of years since the House of Representatives report, NSA contractor Edward Snowden revealed the massive internet surveillance projects being run by US intelligence agencies (in a shop in Shanghai I saw a paper cut of Snowden on display with Chairman Mao and Che Guevara, perhaps offering a different perspective on his actions to what the NSA might have).
Still, Huawei execs are well used to answering questions about the US market: ” You pay more attention to the US market than we do,” joked William Xu, executive director and head of strategy at Huawei, when asked about it. And when asked if he thought it was ironic that, considering the criticism of Huawei, it was the US that had been caught spying, Xu did not give a direct response but laughed and responded through his translator: “I think you get the answer.”
Perhaps unsurprisingly, the company would rather talk about its R&D than the accusations. The company has 150,000 staff and claims that 70,000 of them work in research and development. It says it spent $5 billion on R&D last year and now has almost 40,000 patents.
Huawei is betting big on a massive increase in data traffic on the world’s networks, thanks to the internet of things. The company predicts there will be 100 billion networked devices by 2020. That could put Huawei in the right place at the right time by increasing the demand for network equipment to handle of that traffic. The company even has a research lab called 2012 after the cheesy disaster movie of the same name, which is looking into the consequences of this flood of traffic, and another called Noah’s Ark, which focuses on big data.
It also wants to boost its enterprise business, as it believes the enterprise market holds much greater potential for growth than the rather staid telecom networking world. It argues that the skills it has built on the telecoms side can help as enterprises have to deal with big data. The enterprise business only accounts for seven percent of the company’s revenue — compared to 70 percent for the network business and 23 percent for mobile.
“We have more experience with scaling up large installations because of our telecoms background and more experience with the kind of reliability that people will need,” said Ron Raffensperger, CTO of the Huawei’s IT business.
And as the exhibition centre housed at its Shenzhen headquarters shows, the company is also moving rapidly beyond the dowdy world of telecoms equipment into smartphones. It is now the third largest smartphone maker in global sales behind Apple and Samsung.
While it might have some difficulty in getting western consumers to say Huawei correctly (it’s pronounced wah-way; it even considered developing a new brand to counter the problem), in the consumer market it doesn’t face the same suspicion that it does in US carrier market. Indeed a visit to the company’s flagship store in Huaqiangbei is a distinctly standing room only affair — although red-hot Xiaomi is now the largest smartphone brand in China.
The company only started selling smartphones in 2010, managing to sell a mere three million devices that year, which rapidly rose to 20 million smartphones in 2011, then 32 million in 2012, and in 2013 it hit 52 million.
This year shipments are likely to reach 90 million and the company has aspirations to be bigger. “We believe we can be a challenger for the tier one, for Apple and Samsung,” said Shao Yang, Huawei’s consumer business group marketing director, in a meeting at the company’s headquarters.
It’s a relatively unlikely goal, at least in the short term, as Huawei remains a distant third at the moment.
IDC analyst Francisco Jeronimo said over the last two years Huawei has done a good job of improving the quality of the handsets in its portfolio, and has benefitted as other phone manufacturers like Nokia and HTC have declined. And the company’s heritage as a provider of mobile network infrastructure has helped it build better relationships with operators too. Still, Jeronimo said for all of this Huawei is also likely to face a new challenge from China, too, in the shape of smaller, faster moving rivals: “The problem is they will face stronger competition in the next few years from their homeland,” he said.
But all of this shows how fast moving the smartphone market is. While western markets may be reaching saturation point, there’s still plenty to play for in emerging markets.
And it’s not just in the mobile space that attention is shifting to emerging markets. The growth of companies like Huawei reflects how international the tech world is becoming. Since the inception of the tech industry, the West — and particularly the West Coast of the US — was both the engine of tech innovation and also its most important market. Neither of those assumptions are likely to remain true over the next 50 years.
So whether it’s the companies out of Shenzhen or the server makers of out Taiwan or any of the thousands of tech companies coming out of emerging economies, dealing with this new wave of competition may be one of the biggest challenges for the tech industry over the next couple of decades.
And of course, it’s not just Chinese companies that are looking to international markets, but also US companies keen to get a foothold in China. China is a source of competitors, but it’s also the biggest consumer electronics market in the world, and tech companies eagerly want access to all of those potential customers.
Intel, for example, revealed in September it spent $1.5 billion on a stake in a Chinese chipmaker to get hold of technology but also to get a better position in that increasingly important market. Lenovo, another Chinese giant, has acquired two chunks of IBM to further its international ambitions and has become a major employer in the US in the process. Soon it will be increasingly hard to point to the geographical home of some of these firms.
Not far from its grand shopping mall, Shenzhen has a tourist attraction called Window of the World. Like the ones in many other Chinese cities it’s a theme park grand tour of the world’s greatest hits — Pyramids, Arc de Triomphe, and Eiffel Tower, the sort of thing that is a big hit with families on those subtropical humid nights.
As I stroll past it I ponder the contrast between these sights and their famous cities, and the anonymity of Shenzhen, a city that, through the gadgets it creates, has such a big impact on the wider world, and yet remains relatively unknown.
Still, if the march of Shenzhen’s tech companies — both large and small — continues, it may not be that way for very much longer.
Steve Ranger travelled to Shenzhen as a guest of Huawei