IABM Blog - Shenzhen - A Special Economic Zone

IABM Blog - Shenzhen - A Special Economic Zone 29 February 2016

Shenzhen - A Special Economic Zone IABM Blog written by IABM Research Analyst Lorenzo Zanni (lorenzo.zanni@theiabm.org)

Shenzhen Background In 1979, Shenzhen was just a small town of 30,000 people. A year later, the Chinese government's decision to make it a Special Economic Zone (SEZ) resulted in it growing into one of the most developed and technologically-advanced urban areas of the country. Often dubbed by commentators as the Chinese Silicon Valley, Shenzhen today is home to some of the most successful businesses in China. Companies such as Huawei, Tencent and ZTE were all founded in Shenzhen and have grown in tandem with their home region into major national and international enterprises. SEZs are an extraordinary example of how state intervention can effectively shape regional economic development.

In 1980, the Chinese government decided to set up SEZs to encourage trade and foreign investment in specific areas of the country. Deng Xiaoping, the Communist Party leader at the time, was determined to facilitate the country's transition from a centrally planned to a market economy. SEZs benefitted from special policy measures such as free trade areas, technology parks and universities to stimulate regional innovation. The Guangdong Province, situated in the southern part of the country, just north of Hong Kong, was selected as the first SEZ. Shenzhen soon became the major city of the Guangdong Province with the emergence of its vibrant, technology-driven economy.

The concentration of different, and often, complementary industry verticals in the same geography boosted productivity growth and made Shenzhen the fastest-growing city in China. Today, the local population amounts to about 11m inhabitants with GDP growth in the metropolitan area averaging 13% in the last 30 years comfortably ahead of the overall country figure of around 10%. GDP per capita is currently the highest in China at approximately US$25,000. The Shenzhen Stock Exchange ranked 22nd in the latest edition of the Global Financial Centres Index, an indicator of the competitiveness of the city's financial centre. Its thriving financial district is effectively integrated with a group of innovative companies strategically positioned in various technology verticals, as well as a knowledge powerhouse of universities and innovation centres.

Shenzhen today faces the challenge of maintaining an above average growth rate in a period of intense upheaval for China. Government investment in manufacturing is shrinking in favour of a complicated transition to a consumption-centred economy. It remains to be seen whether Shenzhen will take the hit or continue to differentiate itself from the rest of the country.

Technology Industry Overview

The technology industry in Shenzhen is particularly advanced, with electronics and telecom equipment manufacturing representing the largest sector. Other significant contributors include computer software, broadcast technology, light and energy industry, biotechnology, pharmaceuticals and medical equipment. The service sector in Shenzhen represents the largest percentage of its GDP, which indicates that the area is highly developed. Between 2013 and 2015 the government committed over US$50m in attracting foreign, highly skilled individuals and over US$1bn in investment in high-tech and creative industries. This is again different from the rest of China where investment is still mostly concentrated on housing and traditional manufacturing.

LED Industry in China and Shenzhen China constitutes the fulcrum of world LED manufacturing - it accounted for 46% of worldwide sales of LED-based technology in 2009. Some sources argue that this has now risen to around 70%. Light Emitting Diode (LED) technology is considered the most efficient lighting solution today. It offers up to 90% savings in power consumption for equivalent light output compared with other lighting technologies, and also delivers a much extended in-service lifetime compared to traditional lighting technologies up to tenfold. This makes LED lighting the most efficient solution to reduce power consumption, and hence operating costs, in broadcast studios.

Chart 1: Market volume of LED in China, US$bn (Source: Statista)

Chart 1 shows that the market size of the LED industry in China has more than doubled in the last five years reaching US$11.7bn in 2015. Chart 2 illustrates a forecast of the progress in global lamp efficacy up to 2025. Lamp efficacy is formally defined by lumens (brightness) over watts (power). The improvement in lamp efficacy is a direct result of ongoing LED lighting technology development.

Chart 2: Forecast of global lamp efficacy, lumens per watt (Source: Statista)

At the beginning of the 2000s, the client base of Chinese LED companies was mainly made up of foreign customers. The Chinese government then decided to commit a great amount of investment in creating a domestic market for LED products. Various government programs have been rolled out in recent years to increase LED technology adoption in China and favour local LED suppliers.

In 2009, the 21 City, 10,000 LED lights project was launched to enable LED manufacturers to sell their products to local customers. This included a program of subsidies for LED vendors partnering with local governments for the deployment of LED lighting. Some argue that this initiative contributed to an inefficient distortion in the lighting industry as LED manufacturers had a built-in competitive advantage over other suppliers. Product quality standards were also lacking. Moreover, several LED suppliers fell into a state of dependency on state aid and abruptly went bankrupt when the subsidies were removed in 2013. According to LEDinside:

The effect of issuing large subsidies to companie

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