Shenzhen and learnings for India

From Economist's fantastic survey on the Pearl River Delta (PRD), consider the trajectory of Shenzhen's emergence as an innovation hub,

Between 1980 and 2016 Shenzhen’s GDP in real terms grew at an average annual rate of 22% and today stands at 2trn yuan. The city’s Nanshan district, home to about 125 listed firms with a combined market value of nearly $400bn, has a higher income per person than Hong Kong... Shenzhen spends over 4% of its GDP on research and development (R&D), double the mainland average; in Nanshan the share is over 6%. Most of the money comes from private firms. Companies in Shenzhen file more international patents (which are mostly high quality, unlike many of the domestic Chinese ones) than those in France or Britain.

Local entrepreneurship, innovating both in products and services as well as their business processes in a closed economy, was critical to this success,

Early reformers pushed ahead with unauthorised investment deals with non-mainland companies and retroactively developed the legal framework needed to protect foreign firms. Time and again, grassroots innovators hit on better ways of doing things, even though strictly speaking they were not permitted. When their risk-taking proved successful, communist leaders typically took the credit... The common perception that China is incapable of innovation needs re-examining... a recent study by Britain’s University of Sussex and others for the European Commission... calculate that the average value China adds to its exports is 76% (the EU’s is 87%). The PRD’s companies, which account for a huge chunk of China’s innovation, have been moving up the value chain... Today, Shenzhen is attracting many entrepreneurs keen to develop new ways of making things. The innovators are transforming the entire delta into an advanced manufacturing cluster. Many multinationals have a listening post in the city to stay close to the latest trends... Shenzhen has become the world capital for hardware and manufacturing entrepreneurs.

The cluster effect has been a powerful force for PRD's success and will also be a reason why even with rising wages, not too many of these firms will relocate especially their more value added activities,

Another way Shenzhen is rewriting the rules is by embracing open innovation. In the West, corporate innovation has generally been a secretive, top-down affair. Many factories in the city started by making clever imitations of Western goods, which led foreigners to dismiss the locals as mere copycats. That was a mistake. David Li of Shenzhen’s Open Innovation Lab argues that the copycats have since morphed into a powerful ecosystem of collaborative, fast-learning suppliers and factories. “Anybody can come to Shenzhen with an idea and get it prototyped, tested, made and put on the market at a decent price,” he says. Silicon Valley is obsessed with rich-world problems, he thinks, but China’s open innovators work on affordable solutions for the masses on everything from health care to pollution to banking... 

One of Shenzhen’s most daring startups, Royole, is expanding its output of an extraordinary product: the world’s thinnest foldable full-colour touchscreen display. Liu Zihong, a mainlander, earned his doctorate in electrical engineering at Stanford University, where he dreamt of radical new ways for machines and humans to interact. When he started Royole, he says, he knew it had to be based in Shenzhen. Getting from early-stage research to manufactured product would require a massive amount of what he calls integrated innovation: “Materials, process, device design, circuit design—all needed to be innovated…if you changed one material, you had to change the process.” His team had to develop entirely new materials and factory tools, including custom-built robots, to make his screens, accumulating over 600 patents along the way. He insists this could not have been done even in Silicon Valley, because California cannot match Shenzhen’s ecosystem of “makers”...

Navi Cohen is the co-founder of Revols, a Canadian startup developing affordable, custom-fitted headphones. His firm raised a fortune on Kickstarter, a crowdfunding site. When it tried to develop its product in Montreal, it found things slow and expensive, so it moved to Shenzhen, where supplies were cheap and factories made prototypes quickly. It is now in production. Another promising startup that moved to Shenzhen is Wazer, an American firm. A conventional metal-cutting machine on a factory floor costs $100,000 or more. Shenzhen’s know-how helped Wazer perfect a way to cut any material precisely with pressurised water. Its desktop cutter costs about $5,000 and will disrupt the industry when it comes to market later this year.

It is surely not appropriate to compare Gurgaon and Shenzhen on many dimensions, especially given the locational advantages enjoyed by the latter. But the roles of government and local entrepreneurship may be worth examining. 

Like Shenzhen, Gurgaon emerged from nothing, maybe even around the same time. Unlike Gurgaon, Shenzhen flowered to become an innovation hub thanks to its enterpreneurs and governance. Farsighted local politial leadership contributed to the growth by providing world-class infrastructure and logistics facilities and by not interfering with the typical heavy handedness of government bureaucracies. Gurgaon had the exact opposite in both infrastructure provision and government bureaucracies.

Indeed Chinese bureaucrats are not immune from all the traditional failings of governments. In the context of a new plan to build a 2000 sq km greenfield satellite city, Xiongan, south of Beijing, to decongest the capital, the Economist writes,

Over the years China has tried to build numerous new cities, several of which have been costly failures. More than a decade ago the government declared that the Binhai New Area, a vast development in Tianjin, would be north China’s answer to Shenzhen and Pudong. It has never taken off. Another stillborn project was Caofeidian, an “eco-city” in the Bohai Gulf.

But governments cannot be reflexively blamed for everything. Unlike the spectacular success of companies like Foxconn, Huawei, BGI, Mindray and so on highlighted here, India's hardware entrepreneurial eco-system has not produced global champions. Chinese firms are today at the forefront of areas like consumer electronics, renewables, transportation, telecoms, and construction equipments, and are not far away from dominating markets like those for battery storage, electric cars, medical devices, drones, robotics, cloud computing, machine learning, and so on. 

Consider the example of India's software industry. It is difficult to refute the argument that the likes of TCS, Infosys, Wipro, Cognizant etc missed a great opportunity to build on their platform of success to establish themselves as leaders in emerging markets like artificial intelligence and cloud computing. It is even worse that they may have altogether missed the bus on these emerging technologies. 

Instead, there may have been a resource misallocation towards real estate and IT start-ups, in terms of physical and human capital and entrepreneurial talents. Here too while Baidu, Alibaba and Tencent have adapted western models and innovated to develop new features and services which are now becoming hits in developed markets, India's e-commerce firms have remained just copy-cats of well established western counterparts with little or no meaningfully significant innovation to address any of the country's several development challenges.