15,000 Tech Companies To Leave Shenzhen? How Come?

(Chinese Version)

With the rise of house price and the complaints over it in Shenzhen, a piece of rumor saying that Huawei was to leave Shenzhen due to the high housing price was widely circulated on WeChat friends circle in mid-May. Near the end of May, it was reported that ZTE was to leave Shenzhen as well. According to South Daily, Li Yan nan, Secretary of Party Working Committee of Heyuan National High-Tech Zone revealed that ZTE was to move its manufacturing base from Shenzhen to Heyuan.

Later on, another piece of news again shocked many people. In an internal speech, Shenzhen s mayor Xu Le revealed that over 15,000 enterprises would move out of Shenzhen. (Note: Mr. Xu revealed the information at the Imperial Springs International Forum held on May, 29th in Guangzhou. According to him, ZTE would move its production and assembly line to Heyuan, a city in the east of Guangdong province, and keep its major business in Shenzhen.)

Due to the high housing price?

In the internet age, many cities are closely related to concepts such as technology and innovation, and Shenzhen is one of them. Some Japanese media referred to Shenzhen as the “Silicon Valley” in China.

It is obvious to everyone how rapidly Shenzhen had developed over the course of years after being established as one of the special economic zones. According to CICC s report, Shenzhen s per capita GDP hit $24,000 in 2014, higher than that of the three other mega cities in China, that is, Beijing, Shanghai and Guangzhou. Even so, Shenzhen s Q1 GDP increased by a staggering 7.8% in 2015, which is much higher than the national average. It is estimated that Shenzhen s GDP will surpass that of Hong Kong in 2016.

Tech and internet companies such as Huawei, Tencent, ZTE are undoubtedly the very backbone of Shenzhen s economy. If Huawei, one of the leading tech companies even in the world, is to leave Shenzhen, Shenzhen s future will certainly be compromised. Shenzhen, leveraged with special legislative power, used to be a prominent place for tech companies, so it s natural that people would correlate the exit of tech companies to the rise of house price.

It is reported that the average housing price per square meter rose from RMB 29,577 at the end of 2014 to RMB 56,149 by the end of 2015, an increase of over 90%. So is the rising house price accountable for the exit of tech companies in Shenzhen?

Whether we admit it or not, the rising house price is certainly one of the reasons why tech companies are gradually moving out of this innovation center. For example, FOXCONN has been gradually moving its factories from cities such as Shenzhen in the Pearl River Delta area to cities in central and east China since a decade ago. On after another factories were established in cities such as Taiyuan(2003), Chongqing(2009), Chengdu(2010) and Zhengzhou(2010). The inconvenient truth is that high house price has already become an obstacle for Shenzhen s development.

There is even a joke on this matter: a decade ago, a guy sold his house located near the fourth ring at around RMB 600,000 to start his own company. After a decade s sweat and tears, the company developed pretty well, and he could make a revenue of RMB 4 million every year. However, in order to send his child to school, he had to spend all the money and even borrow some more money from the bank to buy the house back. He could have kept the house a decade ago and made a fortune, yet he chose to sell the house and start his own company.

Or rather a signal of the industrial upgrading in Shenzhen

According to Mr. Li Qin, the move of ZTE s production and R&D base from Shenzhen to Heyuan is part of the plan to support eastern Guangdong province. “Over 15,000 enterprises will move out of Shenzhen recently,” he added.

If so, the most important factor why tech companies move out of Shenzhen is actually government s support policy for eastern Guangdong. In the background of the “double transition” plan, Shenzhen has begun to gradually move the low-end manufacturing industry to other regions of Guangdong.

In 2014, Shenzhen and Heyuan co-issued the Shenzhen-Heyuan Counterparts Work Plan. According to the plan, Shenzhen municipal government will transfer part of its manufacturing industry to Heyuan and hold the share through government funds.

“In the future, over 60% of industrial enterprises above state designated scale will be from Shenzhen,” Zhang Min, vice director of Heyuan Bureau of Economic and Information Technology, said.

As we can see from the above information, high house price is certainly one of the reasons why tech companies move out of Shenzhen, yet the main reason is Shenzhen government s support plan for other regions of Guangdong. As a matter of fact, in July, 2013, such support plan has already been laid out by the Guangdong government and Guangdong provincial party committee.

Statistics suggest that GDP of the Pearl River Delta region accounted for much of the total GDP in Guangdong. According to Bureau of Statistics of Guangdong province, the GDP of the Pearl River Delta region reached over RMB 5.3 billion in 2013, while that of the rest region in Guangdong together reached roughly RMB 3.9 billion.

It is possible that Guangdong carried out such policy after learning the lesson from FOXCONN s leave. To help lower the cost for the manufacturing industry in Shenzhen, the government could just move the industry to other regions of Guangdong, which will not only save the manufacturing industry from high house price and provide them with an alternative, but also boost local economy in these regions.

A good thing in the long run, yet high house price remains a problem

If you ve ever watched the romantic film “Outsourced”, you wouldn t be surprised at how the manufacturing industry can be separated from mega cities. For example, Apple, which ranked the first in the 2015 Most Lucrative Company list with an annual net profit of $ 39.5 billion, achieved such high profit by keeping merely the R&D, design, marketing business in the US while outsourcing its manufacturing business entirely to foreign contractors.

However, since 2012, American talk shows have been listing the return of Apple s manufacturing business as one of the discussion topics. This year, Donald Trump again brought up this issue and boasted that the tax rate of products made outside of the US should be raised to 35%, forcing companies like Apple to bring the manufacturing business back to the US and creating more job opportunities for Americans.

However, few people endorsed such strategy. Division of labor is the global trend now, and the responsibilities of different parties are growing even more segmented. Were Apple to bring its manufacturing business back to the US, it has to increase the sales price of its products, otherwise it won t make much profit at all. However, if Apple would increase its price, less people would be able to afford an iPhone, and people wouldn t be able to buy an iPhone, since the productivity would go down along with the narrow profit margin. For sure, no Apple s fans want to see things get that far.

Let s look back and have a look at Huawei. As one of the most international enterprises in China, Huawei owns the right to use a land of over 6.833 million square meters in total by the end of 2013, among which 1/3 is based in Dongguan (around 2 million square meters), 1/4 is based in Shenzhen (around 1.6 million square meters). Huawei has employees in both the support division (including administration, legal affairs, customer engineering, etc.), and R&D division in the Shenzhen headquarter, as well as office personnel and R&D engineers in municipal cities such as Beijing and Shanghai, and major provincial capitals across China, including Nanjing, Chengdu, Xi an and Wuhan, along with other major cities such as Hangzhou etc.

From the perspective of the structure of modern economic system, the more mature an economy is, the more thorough the division of labor will be. For example, Wall Street is the financial center of the US, Silicon Valley the technology center, Hollywood the film & TV series center. However, there s no such clear division of labor in China. Despite the high house price, I am glad to see the transition of the manufacturing industry from Shenzhen to other regions of Guangdong province. For sure, such transition might do hard to Shenzhen s GDP in the short term, yet in the long run, such transition will usher in a new era of Shenzhen.

It s good to see that Shenzhen has already been taking steps to drop the low-end industry and march towards a city based on innovation and technology. Shenzhen municipal government has been highly advocating the innovation-motivated development strategy, and that R&D has already accounted for 4% of Shenzhen s GDP. As a matter of fact, Shenzhen has already surpassed developed countries from this aspect, and ranked only behind Israel and South Korea. However, the ratio will continue to rise in the future. Although people are quite worried about the transition, I am more concerned about other things, such as the maintenance of normal economic order, the control of life cost, and the improvement of the living environment, etc.

No matter how wealthy Shenzhen is, what will help the city continue to thrive is talents. To attract and keep talents, Shenzhen municipal government has already issued three documents, yet government policies are certainly not enough to achieve this goal.

For sure, moving the manufacturing industry out of Shenzhen is a wise choice for Shenzhen in the long run. However, when so many people are worried about the news that Huawei and ZTE were to move out of Shenzhen, the government need to realize that no talent nurturing policy is more effective than giving ordinary people who work in Shenzhen hope.

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[The article is published and edited with authorization from the author @Shitianhao01, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.