Commentary on Bloomberg's Shenzhen Feature: Inside China's Future?Factory

Our company, HAX (investor in global hardware startups) and several of our portfolio companies are featured in the the first episode of Bloomberg’s video series on Shenzhen (which already has 100,000 views in 2 days).

But clearly the star is the city.

Here is a little guide to understand what you’re being shown.

Intro: The Ping An International Finance Center

Ashlee Vance climbs up 115 floors for a view. At 599m (including antenna), it is the world’s 4th and China’s 2nd tallest building. It also has the highest observation deck at 562m.

Shenzhen is home to 1,108 completed high-rises (Wikipedia). In 1978, the tallest building was 5-stories tall. Today, 135 are above 150 m (492 feet) tall. Another 50 are in construction.

New York has 6,486 high-rises (over 35m), of which at least 113 are over 183m (600 feet). (Wikipedia)

Shenzhen View

Shenzhen’s population is estimated at 12.5 million (Wikipedia) though the count is difficult due to the large ‘floating population’ of migrants workers and temporary residents. Shenzhen is at the Southern end of Guangdong Province, which hosts about 108 million people. The United States population is about 325 million.

This graph shows the growth of Shenzhen’s population.

Shenzhen has a very young population. Here is its age distribution in 2010 (red: female / blue: male).

Here is the age pyramid for China (the axis differ so it gives an ‘optical’ difference on top of the data themselves). You can see the effect of the one-child policy introduced in 1979, but less than 20% are above 60 — the bulk is coming. Since the policy ended in 2016, the birth rate has stayed low.

Finally, here is Japan, the world’s first ‘aged’ population (1/3 are above 60).

Shenzhen Speed (Part One: 1‘40)

Most of the factories are not located in the city center, but rather in its periphery, or neighboring cities like Dongguan. It typically takes only 1 to 2 hours to reach thousands of factories of all kinds, employing millions.

China, and Shenzhen in particular, have been benefiting from decades of foreign investment in its manufacturing resources. In fact, you might be ‘investing’ in it every time you buy a phone, a computer or a TV.

“Every time you buy electronics, you’re investing in Shenzhen”

The factory that Ashley visits is Grandsun Electronics, a Chinese manufacturer founded in 1997 and specializing in the production of high speed signal cables and earphones.

They are an OEM (Original Equipment Manufacturer) for Harman (JBL, AKG, Harman Kardon), Skullcandy, Astro Gaming, Panasonic, Pioneer, Creative, Audio Technica, Audeze... Competing brands make their product in the same factory. Interestingly, their CTO is a French audio engineer living in China since 2007.

Ashley talks with Luke Campbell, co-founder and CTO of Nura (and an ear, nose, and throat surgeon). Nura is a startup that created the first headphones that adapt to your hearing. HAX invested in the company in 2016, helped them advance from prototype to product, and launch on Kickstarter, where they raised $1.8 million (the largest ever by an Australian company).

After shipping their first product, Nura received glowing reviews on various media, including kudos for adding features in a software update for existing customers.

Nura also receive a new award at CES in January 2019 for their upcoming earbuds (that also tune to you).

In the video, Luke from Nura explains how Shenzhen is ‘the place where people come to make things’, where the supply chain has everything you need.

Shenzhen is the place where people come to make things

Labor costs have increased but it’s the speed, the availability of components, and the expertise that make it unparalleled.

Shenzhen is unique because of speed, availability of components, and expertise.

Labor Costs

• Shenzhen’s monthly minimum wage is $322 (RMB 2,200). It is the second highest in China, below Shanghai and above Beijing.
• The minimum wage per hour for part-time labor increased by 4% to $3 (RMB 20.30).
• A key discussions managers have around every Chinese New Year is “what is the raise you will give this year?”. A low number (maybe up to 3%?) means that you are encouraging people to leave.
• In the U.S. the federal minimum wage remains at $7.25 per hour, some states have opted to increase it to more than $10. Note that the purchasing power parity / cost of living make a huge difference.
• Minimum wage is $0.8 in Mexico, $1.1 in Russia, $1.2 in the Philippines, $6 in Spain, $11 in France. The highest reported is $14.5 in Australia (Wikipedia).

GDP

• Shenzhen= US$338 billion (2017), more than HK (source: SCMP).
• San Francisco metro = $500 billion (Wikipedia)
• Guangdong Province = $1.43 trillion (source: China Daily).
• California = $2.9 trillion (Wikipedia)

Back to the factory: it is about as good as it gets in a modern industrial environment. Work stations are clean and well lit, not overly crowded, and equipped with tools in good shape.

To compare, I looked online for an image of a U.S. factory of consumer electronics, but… most of those jobs are in Asia now!

The Factory Life (3‘15)

Ashley joins lunch at the factory’s cafeteria to get a taste of factory life.

While food matters, so do cleanliness, lighting, ambient noise, the setup of the work station, the comfort of the chair, the number and duration of allowed breaks, as well as the fatigue and boredom the task generates. HAX mentor and electronics hacker extraordinaire Andrew ‘bunnie’ Huang recommends making QA tools fun to help workers.

That said, making repetitive tasks fun is not easy (though mobile games and casinos found some ways), and most Shenzhen factory workers do not intend to last long on the job. While a few rise up the ranks, most head back home with their savings after a few years.

Safety nets

The story of suicides blew up at Foxconn in 2010, making the Western world more aware of the externalities caused by its desire for low-cost products.

That year, Foxconn counted 18 deaths for a staff close to 1 million. While it was well below the national average of about 14 per 100,000 (Wikipedia), OEMs understood the business risks and took steps to improve working conditions, and introduced prevention measures such as security cameras and nets.

That said, working 12 hour days, 6 days a week, doing repetitive work in a highly regimented environment can be dispiriting, and dangerous terrain for people already suffering from depression.

To get a sense of the pressure felt by many Chinese left out of the economic miracle, I recommend watching An Elephant Sitting Still, the first feature film by Hu Bo, a 29y.o. Chinese writer and filmmaker who committed suicide in October 2017, right after finishing his movie.

Naps

Many factory workers nap after lunch. Why? It could be a mix of:

• Tiring shifts from early morning,
• Heavy carbs at lunch (rice),
• Lack of sleep due to mobile phones used to chat, play, or blow off steam

Regardless of the reason, it’s an accepted practice in China.

HAX Incubator (5'15)

Every year, HAX invests in and bring 30 to 40 early stage startups from all around the world to Shenzhen.

At our office, Ashley meets Carv, the ‘digital ski coach’ that uses motion sensors in ski boots and machine learning to offer real-time guidance.

Like Nura above, it is one example of this new wave of products that combine sensors and software to provide not just data and connectivity but a personalized experience.

Now, consumer products are media favorites as they are more relatable for their readers, and often more ‘visual’.

But B2C is hard.

For over two years now, we have seen tremendous growth in B2B solutions in enterprise, industry and health technologies.

The reasons are that:

• The problems solved are more clearly identified (lower market risk),
• Customers are ready to pay for ROI (less constraints),
• After the ‘maker movement’ and the boom in consumer startups about 5–6 years ago, the number and quality of B2B projects has grown a lot.

As it travels through the office, the camera shows a gripper from another HAX startup called Elephant Robotics, which makes low-cost collaborative robots for industry.

Offering robots in the $20,000 range instead of $100,000 or more is a groundbreaking for manufacturing automation. While Elephant is not alone in the space, it is likely to become a strong contender thanks to its technology, and its Shenzhen home advantage for faster development speed, lower costs and access to the large local customer base.

According to Jamie from Carv, Shenzhen allowed them to get things done at half the price and twice as fast as in the UK, ‘and sometimes 7 times as fast’.

“Shenzhen is half the price and at least twice as fast as the UK”

Huaqiangbei Electronics Components Market (7'05)

All around HAX office, this market is composed of dozens of high-rise malls with hundreds (thousands?) of stalls, selling all kinds of components and representing factories. It is a popular ‘tourist spot’ for visitors who want to be immersed in Shenzhen’s technology.

Now, how truly important is this market to technology development?

It’s debatable.

We encourage our startups to visit it when they arrive to open their minds to new possibilities, beyond the restricted choice and high prices they were used to back home.

Later, they often do all their ordering on Taobao, the local supercharged Amazon/eBay (or on more specialized websites). Taobao offers incredible variety, and allows customers to connect directly with vendors. Shenzhen also has a variety of suppliers for 3d printing (which can save many hours), custom motors, lenses, and more.

Delivery in China is very cheap and very fast, and components can sometimes be delivered in just a few hours (or even less if the vendor is around the office).

Ashley asks about making smartphones or TVs, but the market goes way beyond those electronic commodities: it is truly about making anything.

The market can help identify components and suppliers at the prototyping stage, but for manufacturing partners when things get serious, it is always better to use trusted personal networks. Often, your factory will also handle the sourcing of components.

The advantage of having done your own sourcing prior to that is that you will know how much things cost, and won’t be over-charged by an unscrupulous OEM taking advantage of your ignorance.

Companies trying to manufacture without taking their sourcing seriously damage their margins. One high-profile example is Beats: after buying them, Apple was surprised to find how much Beats were charged by their partners, and quickly revamped the supply chain.

21st Century Gold Rush? The Next Silicon Valley? (8'25)

This first episode ends on those questions, adding that Shenzhen will need invention and original thinking.

My take here is that Shenzhen does not intend to replace Silicon Valley. Rather, it is becoming its own thing: an enabler and catalyst for electronics innovation.

Patents

If you consider patents as a measure of innovation, the Chinese companies Huawei and ZTE are currently #1 and #2 in the U.S. buy the number of patents registered every year. China caught up with Japan and might overtake the U.S. within 2 or 3 years.

Innovation Playground

Shenzhen embraces the new, and has a clear home advantage for it. As a result, it is the leading city for things like electric vehicles and drone manufacturing.

• Shenzhen already runs more electric vehicles than any city in the world.
• 100% of buses (source: Guardian) and 99% of its almost 22,000 taxis are already electric (source: The Star).

• Despite a head start with electric taxis in 1987 (source: UPS Battery Center), New York has about 14,000 yellow cabs but most are not electric.
• In 2014, Mayor Bloomberg was aiming for 1/3 of taxis to be electric by 2020 (source: City Atlas).

The pace between Shenzhen and other cities is just incomparable.

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Looking forward to the next episode this week, featuring the robot competition Robomaster!