In the Zengcheng district of Guangzhou, famous for the “Hanging Green” (Kua Lu) variety of litchi, a literally earth-shaking change occurred for six months. Work proceeded around the clock to flatten a hill at the foot of Nanxiangshan and turn it into a parcel of land nearly half the size of the Hsinchu Science Park. 

Not far from there, the Guangzhou to Shanwei high-speed rail line, the Guangzhou-Dongguan-Shenzhen light rail line and two subway systems are being built, and along with the Guangzhou to Shenzhen high-speed rail line and local freeways will transform this litchi town into a major transportation hub on the eastern periphery of Guangzhou. 

The new transportation network will put Zengcheng within an hour of two international airports, an international port and any city in the thriving Pearl River Delta. Once “one stop, two inspections” facilities become available, travelers will be able to go directly from immigration in Zengcheng to Hong Kong via high-speed rail, bypassing immigration at the China-Hong Kong border.   

The Zengcheng experience represents a microcosm of the massive metropolis arising from the heart of the Pearl River Delta. In March at the National People’s Congress, Chinese Premier Li Keqiang proposed the “Guangdong-Hong Kong-Macau Greater Bay Area Plan” encompassing the merger of 11 cities to create an integrated bay area on the scale rivaling similar areas in New York, Los Angeles and Tokyo. 

The vision would give rise to a megacity and huge industrial cluster. “This is China’s first experiment with the city cluster concept. The Pearl River Delta will be upgraded into the ‘Super’ Pearl River Delta,” says Liu Meng-chun, the director of the Chung-Hua Institution for Economic Research’s (CIER’s) division focused on China’s economy.

Once it takes shape, this Pearl River Delta “megacity” will be inseparable from Taiwan, for three reasons. First, Taiwanese businesses have invested heavily in the region, and in early March Taiwan-based Hon Hai Precision Industry Co. (known also as Foxconn) and its subsidiary, Sharp of Japan, broke ground on a US$8.8 billion Gen-10.5 display panel plant in Guangzhou. 

Second, Dongguan, the city in China with the most overseas Taiwanese businesses, is located there, and third, the Pearl River Delta’s electronics and old-economy supply chains and support networks overlap with Taiwan’s, making the region one of Taiwan’s main rivals.

Zengcheng – Taiwanese Investment Hub 

One of the “hot” cities in the 11-city metropolis arising in the Pearl River Delta is Zengcheng, once a sleepy agricultural center known for its litchis now being transformed into an ultra-high definition display panel ecosystem. 

In November 2016, Hon Hai Group Chairman Terry Gou surprised not only Taiwan but even officials in Guangzhou when he decided to invest again in the Pearl River Delta. He first sent assistants without warning to check out available land in the area and then visited sites himself four days later. 

Zhang Yu, an official with the Zengcheng Economic & Technological Development Zone, describes Gou’s visit as something of a shock. “Before that, we had never seen new-generation panels as a major target for us, and we did not expect Terry Gou to set up shop here,” he says. 

Gou’s ambitious vision seemingly had a fundamental flaw. A Gen-10.5 panel plant and its peripheral suppliers need about 300 hectares of land, but some of the land in the zone had already been set aside by a state-run enterprise for its regional headquarters. There was an unused hill extending from Nanxiangshan, but it did not offer the flat land required for a manufacturing facility. 

Further upping the ante was the impatience of the Hon Hai boss, who made it clear that he hoped “this is a local government that can work efficiently with companies and quickly respond to market competition.” 

Officials at all levels, from Guangdong Communist Party Secretary Hu Chunhua and Guangzhou Communist Party Secretary Ren Xuefeng to local Zengcheng administrators, were spurred to action. They not only persuaded the state-run enterprise to find another location but feverishly set to work to flatten the hill into a 293-hectare parcel of land that is bigger than the Houli section of the Central Taiwan Science Park.      

Government authorities eventually prepared enough land for the Gen-10.5 plant and its peripheral suppliers, achieving the impossible in a mere 100 days. Hu and Ren even joined Gou at the groundbreaking ceremony on March 1, and around 300 suppliers were invited to the festivities to help build the plant’s supply chain.  

From a broader perspective, however, Gou’s investment in a Gen-10.5 panel plant was not a fortuitous gift that simply fell from the heavens into Guangzhou officials’ hands. Zengcheng also caught the eye of Alibaba Group Executive Chairman Jack Ma.

A Change in Recruiting Investment

The Pearl River Delta initiative goes well beyond turning litchi farms into flat panel factories, aiming ambitiously at creating a megacity and a super industrial cluster built on a highly efficient transportation network.

Bringing cities and suppliers closer together means lower freight and import and export costs. When Terry Gou visited Zengcheng, he specifically mentioned the convenience of the high-speed rail line connecting Guangzhou and Shenzhen. 

“At one end is Shenzhen, where China’s reforms got started. At the other end is Guangzhou, which has been a center of commerce for a thousand years. These two engines encompass a population of more than 10 million people, and serve as an artery for talent, capital and technology,” says Zengcheng official Zhang as he talked up Zengcheng’s attributes.    

“Zengcheng happens to sit at the midpoint of this artery, and from here you can reach any city in the Pearl River Delta in an hour. It’s less than an hour from Foxconn’s headquarters to Zengcheng,” he says.   

Add to that two other high-speed rail lines, subway and light rail systems, and freight trains, and a transportation network that is faster and offers more alternatives emerges. Alibaba Group subsidiary Cainiao Co., a big data-driven logistics platform, set up its biggest logistics base in southern China in Zengcheng, next door to Hon Hai’s flat panel complex.  

Yet Guangzhou’s massive operation to back Terry Gou’s ambitions was motivated by a more far-reaching vision than simply attracting a new generation flat panel display plant. 

  The last foreign-invested flat panel factory to be located in Guangzhou was by South Korea-based LG Electronics Inc. in 2009. That year, the Guangzhou municipal government also formed an LCD panel technology innovation alliance consisting of LG, Guangzhou Kaide Holdings, South China University of Technology, and the Guangzhou Research Institute of O-M-E Technology.

 So how is Terry Gou’s project different? “When LG’s Gen-8.5 plant moved in, what we were interested in was its productivity and ability to drive GDP,” explains Howard Ren, president of the O-M-E (optical, mechanical, electrical) technology institute.

“With Foxconn’s Gen-10.5 8K display panels, we are no longer concerned about how much output value it will generate. Instead, we are attracted by the range of industries it can stimulate and the openings it can create for the development of new sectors and businesses,” Ren says.

In this day and age, focusing on manufacturing alone will only lead to falling output value, Ren argues. 

“8K high-definition displays are used in monitoring devices, face recognition, and medical and virtual reality applications. An 8K ecosystem economy can be forged around this technology,” he says. 

 One example of how an ecosystem takes shape involves genomics company BGI, which has received considerable support from the Shenzhen government. No sooner had BGI Chairman Wang Jian appeared at the Hon Hai groundbreaking ceremony than he announced a partnership with Terry Gou to invest in a “Foxconn Technology Town” in Zengcheng that will develop 8K technology for genomics research and precision medical applications. 

 It was no wonder then that Guangzhou had no problem with Gou saying: “In the future, Guangzhou will become a trendsetter in technology innovation, and the ranking of Beijing, Shanghai, Guangzhou and Shenzhen” will have to be reshuffled.”

Shenzhen – Taiwan’s Biggest Competitor

The Pearl River Delta megacity aspires to revamp the region’s reputation as a technology knockoff hub and become known as an innovative and entrepreneurial “Silicon Valley of the East.” 

In an article published in April, the Economist described Shenzhen this way: “Shenzhen has done more than any place on the mainland to debunk the outdated myth of “copycat China”, becoming the global hub of innovation in hardware and manufacturing. Its entrepreneurs are coming up with entirely new industries. It has been the driving force behind the upgrading that should help the Pearl River Delta withstand competition.”

To get a glimpse of Shenzhen’s copycat ecosystem, the general manager of SEG Maker general manager, Sam Wang, took CommonWealth reporters into the Huaqiangbei Electronics Market. He told a story of an engineer from Silicon Valley who visited the market in April and spent 2,000 renminbi (about NT$8,700 or US$290) on parts that he used to build a passable iPhone6s.

“If there’s an electronic component you can’t buy at Huaqiangbei, you won’t be able to buy it anywhere in the world,” Wang says, of the market, which includes a distribution center for used iPhone parts.

As Wang’s story suggests, Shenzhen stands out as the world’s strongest copycat ecosystem, but Huaqiangbei actually represents much more than that, also bringing to life world-class Chinese companies. Perhaps the most representative example is Da Jiang Innovations Science and Technology Co. (DJI).

DJI set up shop 11 years ago in one of Shenzhen’s urban villages, and the drone brand it built from scratch now has a 70 percent share of the global market and an estimated value of US$10 billion. 

Da Jiang Innovations Science and Technology Co. has leveraged Shenzhen’s mobile phone supply chain to make drones more compact and easier to fly. Vice President Paul Xu calls DJI’s products “robots that can fly.”

Propelling the company to the top has been the iPhone copycat ecosystem and the robot technology Shenzhen has aggressively developed. But DJI has also had a key backer: DJI Chairman Li Zexiang who was DJI CEO Frank Wang’s teacher. A professor in Hong Kong University of Science and Technology’s Department of Electronic and Computer Engineering, Li focuses his research on control and robotic systems. He also founded his own company specializing in motion controllers and controller-based systems, called Googol Technology Ltd.

Most companies getting involved in drones start with aerodynamic components as their point of departure, but Li’s experience led Wang on a different path, focusing instead on flight motion controllers.

In the company’s sixth year in 2012, Wang shocked the industry when DJI rolled out the world’s first multi-rotor drone equipped with an aerial camera. 

That milestone and the company’s success since then could not have occurred without the copycat phenomenon because of their dependence on the Shenzhen’s smartphone supply chain. 

“DJI’s drones are robots that can fly,” says DJI vice president Paul Xu. “Multi-rotor drones were already on the market more than 10 years ago, but because of their big gyroscopes, it was impossible to miniaturize the product or make it affordable. 

“That changed in 2011 with the arrival of smartphones, which dramatically lowered the prices of gyroscopes and accelerometers, and enabled them to be reduced in size and mass produced for drones. Frank Wang noticed the trend early, and applied it to multi-rotor drones,” Xu says.  

Shenzhen quickly emerged as the drone kingdom, and potential rivals sprouted up, but DJI continuously upgraded its products and rolled out new versions in reaction to consumer feedback. In Wang’s hands, drones have gradually become flying robots powered by artificial intelligence.

Transformation: Contracting Out, R&D In

To unlock the mystery behind Shenzhen’s upward transformation, you have to go to one other place, the Shenzhen Development and Reform Commission, and learn the name Xu Qin. 

On April 1, Chinese President Xi Jinping announced the creation of the Xiongan New Area in Hebei province south of Beijing. On the same day, Xu, who had just been appointed Communist Party chief of Shenzhen in December 2016, was transferred to Hebei province to serve as governor and bring the Shenzhen experience to Xiongan. 

For nearly nine years, Xu was the key figure behind Shenzhen’s transformation. 

Xu arrived in Shenzhen in 2008 from the National Development and Reform Commission to take over as the city’s executive vice mayor, and Sun Haibin, the director of the High-tech Industry Department of the Shenzhen Development and Reform Commission, says Xu made a huge difference.

Shenzhen had already experienced two industrial upgrade plans, the first to attract basic manufacturing (shoe, furniture contracting) and the second to bring in the electronics sector (such as Hon Hai putting in a big plant to assemble iPhones). 

Xu Qin sparked a third-stage industrial upgrade focused on the high-tech sector and innovation, putting in place an innovative city plan to develop seven major strategic emerging industries and four industries of the future, Sun says. He also invested 5 billion renminbi to support innovative companies, research organizations, institutions of higher learning, high-tech industry research and innovation and convert the results into viable products.

Those initiatives show that Shenzhen, a city now dominated by private companies, knows how to support them without getting in their way.

“It’s the companies that are on the front lines facing competition, and innovation and R&D are the foundation of their survival and development, so they put their money on products that will have markets in the future,” Sun says.

The share of total spending on R&D in Shenzhen by private companies is 15 percentage points higher than in any other province or city in China, and of the world’s 10 companies with the most patents, three are based in Shenzhen.

According to Sun, strategic emerging industries contributed 53 percent of Shenzhen’s 9 percent growth last year, and the city’s goal now is to emulate Silicon Valley, Boston and Israel and encourage even more R&D and innovation and spawn companies that are more like Huawei, Tencent and DJI.  

Revenues Exceeding Taiwan’s

Taiwan should see the fast-paced development of Shenzhen as an alarm. What many people don’t realize is that the city of Shenzhen takes in far more in fiscal revenues   (from taxes, fees, income, interest and asset sales) than does the entire country of Taiwan. Its revenues last year totaled 790 billion renminbi, compared with the equivalent of about 500 billion renminbi for Taiwan. There are three main reasons why.

Reason No. 1: High Concentration of Headquarters

Shenzhen hosts the headquarters of more than 350 publicly listed companies. Among them are several companies – Ping An Insurance, China Merchants Bank, Tencent Holdings, Ping An Bank, and China Vanke Co. and Huawei – that made the list of the 50 most profitable companies (measured by after-tax net income) in CommonWealth Magazine’s 2017 Greater China Top 1000 Survey. And profitable companies mean hefty tax revenues. Shenzhen collected more than 130 billion renminbi in taxes from its 50 biggest tax-paying companies alone last year as of the end of November.

Reason No. 2: More Big Taxpayers

Also as of November 2016, companies in the seven strategic emerging industries and four industries of the future had paid 160 billion renminbi in taxes, and the city added 1,800 entities paying 1 million renminbi or more per year in taxes last year, to bring the total to nearly 12,000. Encouraging innovation and startups has created a growing pool of big taxpayers.

It should also be noted that local governments in China generally rely heavily on the proceeds from sales of land to raise revenues, and Shenzhen is no exception, raising 108.7 billion renminbi from land sales in 2015. But that accounted for only about 15 percent of the city’s receipts and is not the city government’s most important or fastest growing source of funds.   

Reason No. 3: Keeping Old Economy Contributors

Sun says that labor-intensive, high power consumption, heavily polluting sectors along with the electroplating and tooling sectors are all fundamental to a strong industrial base, and Shenzhen has not summarily kicked them out. Instead, it has clustered companies in these sectors in industrial parks, where their pollution can be managed. For old-economy stalwarts that cannot afford Shenzhen’s relatively high costs, they are encouraged to keep their R&D facilities in Shenzhen while relocating their manufacturing to neighboring cities such as Huizhou and Dongguan, Sun says. 

In other words, Shenzhen realizes that upgrading does not mean saying goodbye to valuable old economy enterprises.

Dongguan – Taiwan’s Home in the Delta

One of major cities in the envisioned Pearl River Delta megacity, Dongguan, once hosted the biggest cluster of Taiwanese businesses in China, many of them contract shoe manufacturers. But Dongguan has reinvented itself into a robotics hub. 

The number of lawfully registered Taiwanese businesses in the city exceeded 7,000 at its peak, the most of any place in China. In more recent years, however, a hot topic of debate has been if it was Taiwanese businesses that pulled out of Dongguan or if they were driven out by the city. 

 Dongguan Mayor Liang Weidong explained to CommonWealth that in the past five years, the investment represented by Taiwanese companies closing their factories, halting their operations or relocating was US$980 million. But Taiwanese also injected US$3.83 billion in investment during that time. 

As some Taiwanese enterprises have shut down or moved away, others have taken their place, Liang says. The total number of registered Taiwanese companies in the city has stabilized at 3,400 to 3,500 companies in recent years, and their investment in Dongguan has not only not fallen but actually gone up, according to the mayor.

Of the city’s top 20 exporters, six are Taiwanese-invested, including Primax Electronics Ltd., Delta Networks Inc., and Global Brands Manufacture Ltd.    

So what have been the opportunities available to those who have stuck it out in Dongguan? In a word, robots. In 2014, Dongguan announced a policy to substitute people with robots, and encouraged the use of robots made in the city.

Seeing the Robot Opportunity

A cluster of roughly a dozen robot manufacturers has sprouted up on more than three hectares of land in Dongguan’s Songshan Lake area, called the Songshan Lake XBot Park. It is currently developing robots that can make moon cakes or assemble mobile phones, and has targeted an output value of more than 100 billion renminbi and at least 10 publicly listed companies by 2024.   

Bonnie Shi, the founder and CEO of the park’s signature company, QKM Technology, was also a student of DJI Chairman Li and a fellow alum of DJI’s Frank Wang. Shi and Wang both studied robotic controls at Hong Kong University of Science and Technology, but where Wang chose to throw himself into the consumer market, Shi chose the industrial road.    

QKM Technology founder Bonnie Shi (above) is developing robots geared toward light industry in Dongguan’s Songshan Lake XBot Park, helping the city evolve from a shoemaking center into a robotics hub.

Shi set up QKM (Quotient Kinematics Machine) in Dongguan in 2011 because she spotted a trend. China’s population dividend was gradually eroding, and the days of investing of labor-intensive manufacturing were likely coming to an end. At the same time, however, huge businesses with 80 million workers, mostly in light industries such as electronics, food and hardware, had built up in China over the previous 30 years of development and could not disappear overnight. 

Instead, there was the opportunity for robots to replace workers in these industries, though success was not a given. Most of the industrial robots used in China at the time were in the automotive sector or on other production lines with a standardized process, and were not suitable for use in light industrial applications.  

QKM has sought to fill that gap with a special lightweight industrial robot with a wingspan of about one meter that hold items up to 20 kilograms in weight, similar to a human being’s range of movement and weight-bearing ability. The robot has also been given intelligence and flexibility, it can be repaired or upgraded remotely, and it is easy to adjust, making it suitable for use in many different industries. QKM hopes its baby can gradually replace those 80 million workers to keep the businesses viable. 

No sooner had QKM’s robotic star made its debut than major venture capitalists and Apple offered their support. 

“The fact that my mentor [Li Zexiang] is an authority in the field was very helpul to us. Right off the bat, we were able to raise funds from Sequoia Capital, drawing attention to QKM when it was founded, and we also got research projects from Apple. When Apple sends us specs, we do as it asks and design robots that meet its requirements,” Shi says.

The day CommonWealth reporters entered QKM’s factory, the company was assembling automated robots customized for the food industry and iPhone assembly lines.      

Worth noting is that many components on QKM’s production line were made by Taiwanese companies, such as Advantech Co., Delta Electronics Inc. and TBI Motion Technology Co., an indication that overseas Taiwanese businesses have been among the beneficiaries of Dongguan’s support of a robotics ecosystem.  

Dongguang Mayor Liang Weidong cited the example of Taiwan-invested Janus (Dongguan) Precision Components Co. as one of the winners. The company has gradually evolved from making structural plastic parts for mobile phones to manufacturing machine tools, robots, and automation equipment and engaging in system software development. Its sales grew 40 percent last year to more than NT$20 billion, and its profits grew 127.9 percent to nearly NT$600 million, with the company’s revenues and profits are expected to double in the next three years.

On a macroeconomic scale, Dongguan’s GDP grew 8.1 percent in 2016, outperforming the 6.7 percent growth rate for China as a whole, suggesting that talk of Dongguan’s supposed stagnation may be overblown. When its industrial parks have vacancies, new tenants quickly move in. 

Anson Fu, vice president of Dongguan-based Jian Shen Technology Group, has invested heavily in automation and training, leading a Taiwanese company there to observe that Chinese companies are upgrading faster than their Taiwan-invested rivals.

In the Dongguan facility of Chinese company Jian Sheng Technology Group, Vice President Anson Fu has put up big photos of Terry Gou, Lite-On Technology Corp. Chairman Raymond Soong, Dell founder Michael Dell, and Samsung Chairman Lee Kun-hee – all Jian Sheng clients – in the staircase employees have to pass by with the message: Our Heaven. 

He said he wants employees to know who the company’s true guardians are and where their jobs come from.  

Fu also plasters the factory building with huge pictures of outstanding employees.

“When employees who have performed well see enlarged photos of themselves, it’s like Chairman Mao’s likeness hanging over Tiananmen Square. Who wouldn’t be happy,” Fu says, arguing that enhancing the efficiency of employees involves providing both financial incentives and a sense of accomplishment. 

In the past few years, Jian Sheng’s workforce has shrunk from about 500 people to just over 300, but the company’s revenues have risen because of the ability of one employee to do the work of three people. Shen Yi-ling, the child of a Taiwanese businessman based in China, praises Fu’s employee management and training as more intensive and successful than the practices of Taiwanese-invested companies there.

“The question of whether or not you can do manufacturing in Dongguan is no longer an issue. What matters is whether or not you can create value and improve efficiency,” Fu says.

Will Taiwan Follow Pearl River Delta’s Lead?

To the CIER’s Liu, a longtime observer of China, proposing the Greater Bay Area project 20 years after Hong Kong was returned to China is not only aimed at better integrating Hong Kong into the Pearl River Delta but also to help the Pearl River Delta become more like Hong Kong in terms of its deregulated environment, culture and economic freedom. But the Pearl River Delta also has built-in advantages over Hong Kong such as technology and old-economy manufacturing clusters. To Taiwanese companies and innovators, the region’s transformation is proving irresistible.             

Once a hotbed of copycats, the Pearl River Delta has everything from innovation and R&D to manufacturing and markets, and because of its similarity to Taiwan, it will eventually be the island’s biggest competitor.

The confluence of a small hill turned into a flat parcel of industrial land and high-speed rail lines, subways, light rail and freeways represents the emergence of a megacity and major industrial cluster. Overseas Taiwanese investment has been unleashed, driving a new round of urban economic competition. 

Whether or not Taiwan follows, it won’t be able to shield itself from the Pearl River Delta megacity’s dynamism. The existence of overseas Taiwanese businesses and overlapping supply chains ensure that Taiwan will be swept into the coming whirlwind of regional competition.  

Translated from the Chinese by Luke Sabatier

---

Related Articles

♦ The Survivors are Kings

♦ Taiwanese Startups Flock to Pearl River Delta