Inside Shenzhen Digital Economy With Johan Nylander

For today’s session, we are here with Johan Nylander, which is a China correspondent, award-winning author of Shenzhen Superstar.

With Johan, we’ll look at the key ingredients that made Shenzhen successful.

What drove you to research Shenzhen tech landscape?

Johan Nylander: I can explain why I became so fascinated in the city. When I moved with my family to Hong Kong eight years ago, back then I remember my new friend used to warn us about Shenzhen.

He said, “Don’t go there. It’s a dirty, polluted factory town. It’s really dangerous. You cross the border and they will steal your kidney. You can get lung cancer.” I thought, “Wow, sounds exciting.”

So, I started traveling there on and off, and I realized that my friends in Hong Kong, they were wrong about the city. There were a lot of really exciting things happening there, it was way more developed than people in Hong Kong had realized.

And especially when it came to tech startups over the years, I started traveling to Shenzhen more and more regularly when I was doing stories for international media about the technology scene in China.

And after a few years, I realized that my gosh, Shenzhen is really the epicenter of the world when it comes to tech development, especially hardware and the integration between hardware and software. I had to tell the world about this. So, yes. I wrote up the book. Yes, that’s the simple answer.

Is Silicon Valley in trouble now that Shenzhen is becoming a key player in the global digital economy?

Johan Nylander: I would not say that Silicon Valley is in trouble. I think if you look at tech development, both hardware and software, I see it more like both are rising. There are really clever people in Shenzhen, really clever people in Silicon Valley, in Tel Aviv, in Stockholm and other startup ecosystems.

And what I see is that everybody’s gaining from great collaboration. Then, the second part of my answer is that Silicon Valley has some tremendous advantages. I mean, we’re really good at software; software development, business development, branding.

The strength in Shenzhen comes from manufacturing, it comes from software. And I think when the greater things are happening is when you take the strengths of Silicon Valley and you merge it with strengths of Shenzhen in IoT, for example. So, I think both of them can benefit from collaboration.

Will Shenzhen economy become also a key player in the software space?

Johan Nylander: Shenzhen and south China is famous for hardware. It comes from the factory world, manufacturing. But then, you have companies like Tencent. Tencent is, as I’m sure you already know, the world’s biggest gaming company.

It’s also the company behind the WeChat app. WeChat app is… You could say it’s the app of all apps. It’s one of the most interesting internet companies in the world right now. And that’s 100% software-driven company. So, you also have a trend in software and new very exciting software products coming out of Shenzhen.

How did Shenzhen rise to the top?

Johan Nylander: The story behind the city is tremendously fascinating. I mean, it’s the world’s fastest-growing city. I mean, the story has been told and told again but 40 years ago, it was nothing there except rice fields, small fishing villages.

Today, the city’s home to up to 20 million people, depending on how you count. It’s home to some of the biggest technology companies on the planet. And it all happened because Shenzhen was the first region where you could trade free or more free in China.

It was the first economic experiment zone. And that really kicked off, first with factories, and now eventually more in startups, software companies. And it’s been a gradual, gradual development.

And what I find interesting is, the city keeps on developing. It’s not that it went through a stage and now, it plateaued.

In terms of economic growth, it’s still on 8% a year but even more interesting, I see how the companies are modernizing. It’s like they’re changing all the time. It’s become a new species.

Why is it important to understand China in terms of clusters?

Johan Nylander: That’s actually a very important thing to point out, and I’m glad you brought it up. As you said in Europe and America when you look at China, [inaudible 00:08:38] one country but it’s a lot of different provinces.

So, the provinces are sometimes as unequal as different countries in Europe. And as you said, China Inc is run by three superclusters. One is around Beijing, up in the north-east. The second one is around Shanghai, at the Yangtze River Delta.

And the third one, the one that we are focusing on here, is the Pearl River Delta, it’s where Shenzhen is, Hong Kong, Guangzhou. Today, China is trying to rebrand this region as the Greater Bay area.

And it’s very fascinating, all these three clusters, they are tremendous powerhouses. And they have mainly overlapping features, but they also have features that are different from each other.

What’s unique with Pearl River Delta is, traditionally it had a more international approach. Partly because you have… It’s far away from Beijing, and you have Hong Kong which is more international. So, perimeters also help… It’s been catering for the world. And these three clusters are basically driving all of the economic hubs of China. So, that’s a very important thing to point out.

What companies most represent the rise of Shenzen?

Johan Nylander: So, the Pearl River Delta, it was the first part of China where you had international companies moving in. And also the local companies to grow quickly. You had a tremendous amount of capital flooding into the border the early ’80s, from Hong Kong, from Japan, from Taiwan.

Foxconn is a good example, the maker of iPhones and the maker of computers and mobile phone for the other companies. It’s very typical. You have Huawei, the world’s biggest telecom giant. It’s also very typical.

A lot of mobile phone companies, a lot of manufacturing and… So, I think that’s typical of this region. And now, today you have tons of hardware startups. You have tons of accelerators moving into Pearl River Delta.

And very often, specializing in hardware startups. One of the most interesting trends that I see is that you have so many American hardware startups that are taking advantage of these accelerators in Shenzhen.

They spend a few months in these accelerators, they learn how to find components, they learn how to do prototyping and they learn how to do manufacturing, and then also how to go to market.

So, you have a constant stream of American and European [inaudible 00:12:37] startups coming to Shenzhen, taking part in the accelerator programs. Again, I think you have small companies with big dreams. They come to Shenzhen, and then the… To make their dreams come true.

Why is it important to understand the Shenzhen entrepreneurial mindset?

Johan Nylander: it’s a good question because a lot of people when they think about China, they think everything is cheaper and low cost is most important. But when I spoke to hardware startups, they would say like, okay, the things are cost-efficient, it’s good. But the most important is speed.

So, to understand Shenzhen you also need to understand that the city is surrounded by other cities. So, even if Shenzhen is a white-collar city with innovation and finance, it’s surrounded by traditional factory towns like Dongguan, Foshan.

But you still have factories where you can produce this. So, if you’re a startup with a limited budget and you really need speed, you can find your component in Shenzhen quickly. You get in the car and one hour later, you’re down by the factory floor.

So, you can start manufacturing or prototyping more or less the same afternoon. More or less. If you compare it to a startup in America, if you need to ship it to China to do prototyping, the transportation is going to take you two weeks. And then, to get back, another one or two weeks. And then, when we need to make any changes, okay, we need to ship it again two weeks and back again, two weeks.

Here, if you are located in Shenzhen, you can take a taxi down to the factory floor and talk to the local engineers at the factories and collaborate with them how best to proceed. So, speed is crucial. And again, as I said, when I talk to these hardware startups, the speed is tremendous and very important. And you do have that here.

Where would you need to start if you wanted to build a business in Shenzhen?

Johan Nylander: This is one of the most important thing because if you’re interested in Shenzhen, where do you start? It’s a city of up to 20 million people. Where do you start? So, the advice I always give is that get in contact with the local accelerators.

And if that’s not suitable, there are a lot of interesting co-working spaces. And the co-working spaces in Shenzhen, often they also work as… I mean, they’re very social. They will always help you to get in contact with the investors.

So, they must help you to get in contact with the suppliers, businesses to collaborate with. You can always contact both Invest in Hong Kong and Invest Shenzhen. Then, one of the great things with Shenzhen right now is that they really promote the city for international investors.

So, even in the city, you have special free trade zones, with a lot of incentives from the government; cash incentives and you can get free office space, you get free apartments, you can get free kindergarten… And this is all run by local incentive programs.

But again, it’s really hard to know where to start. So, I would start by maybe contacting Invest Shenzhen and Invest in Hong Kong or… I mean, go there just on a holiday trip and check out the place. There’s a lot of co-working spaces, maker spaces, accelerators.

What are some of the biggest risks to be aware of doing business in China?

Johan Nylander: If you took the business in China, there’s a lot of risks. Some would say it’s more risks than advantages. It’s not an easy market. I mean, depending on your business. I mean, first of all, it’s politically sensitive, and then you can have trouble.

It could be difficult to get your money out because of capital control. There’s naturally IP theft. It’s forced technology transfer. You will have all of your data based on local servers, and these local servers might be open for your competitors to take all your data.

There’s a tremendous amount of corruption in the country. It’s easy to get caught up in bribery. I think if you speak to anyone who’s been doing business in China, they would say it comes with a lot of headaches.

I mean, just this detail that you don’t have free open internet. If you want to check your Gmail account or check your Facebook, you need to a VPN and often, VPN doesn’t work. I mean, China comes with a tremendous amount of opportunities, it’s a very lucrative market but it’s also one of the world’s toughest markets.

It’s hard or I would say, almost impossible if you’re a small company to think that you can just go to China, with such and such a shop and tap into the system.

But one thing about the greatest advantages is also that your next-door neighbor is Hong Kong. Hong Kong, as you know, is part of China but it has its own political and legal system. You heard of the expression; one country, two systems.

So, what a lot of companies from the West are doing is that instead of setting up your company in mainland China, you set it up in Hong Kong. Again, I met several European and American companies.

What they do is that you set up your local company in Hong Kong, you do all your hardware innovation and R&D and manufacturing and prototyping in China, but you keep your software development in Berlin or in New York, the way to deliberate and keep your business interest safer.

And also, Hong Kong has no capital control. It’s functioning, rule of law basically based on independent values. So, again, I would recommend people to use Hong Kong as a stepping stone when you enter China.

I lived in Hong Kong for eight years and at the moment, it’s rather turbulent, if you put it like that. But they want countries whose system is according to the agreement with the United Kingdom, it will maintain for 50 years till 2047.

So, until then, we can more or less be certain that you will have stability in terms of rule of law, in terms of your capital and your IP will be safe in Hong Kong. I don’t feel worried living and doing business in Hong Kong. I still feel totally fine and safe in… The music is still playing but yes, of course, it is turbulent in Hong Kong and you should take it under consideration.

What’s coming next for Shenzhen?

Johan Nylander: It’s a good question. I don’t see the city slowing down. The economy is still marching on, with 8%. With the tariffs, the US tariffs, it’s a problem for some of the companies like with Huawei. It might be tough to manufacturing.

I still think that the local economy in China is still going to continue strong, and Shenzhen as a city is going to lead the way in China. It’s the most progressive, it’s the most innovative. It’s the smartest city in the country, and it continues to attract talent, not just from all over China but from all over the world.

It’s becoming more of a metropolis. I still enjoy going there, but what worries me is that China is getting more heavy-handed, more totalitarian if you want.

And if they start to take away those liberties that were the creation of Shenzhen to start with, if they tried to control things more into detail, I think that will be trouble for the city. But I still think that Shenzhen has enough momentum to continue to be the role model of China going forward.

What are you working next?

Johan Nylander: I’m always penning new books. At the moment, I’ve been stuck by the desk for newspapers about the trade wars and about the demonstrations in Hong Kong. But I have some new books in the pipeline, that I’m writing at the moment.

They will be on the same theme as about the rise of Asia. It’s about the gravity of economy and innovation is moving towards the east, and this trend that I feel is very strong and it’s a very convincing trend. So, my future books will be on these topics.

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