Amid rising trade tensions between the world’s two largest economies, the electronics hub of Shenzhen in southern China still serves as a beacon for international hardware startups as one of the easiest places to do business.
Florian Simmendinger, co-founder of Soundbrenner—a company that makes wearable metronomes targeted at musicians—has been in China for three years and said there’s almost nothing that could get him to move production to another country.
“It seems impossible to convince us to look somewhere else,” Simmendinger said. “The only possible reason could be cost, all other things being equal, but that place doesn’t exist.”
While new technologies like 3D printing and computer modeling have made it easier than ever for startups to build their own prototypes in their home countries, China—and specifically Shenzhen—is unrivaled in its selection of components and the expertise needed to make electronics.
Silentmode co-founder Bradley Young echoed that sentiment. He particularly prizes the audio components needed to make his company’s sensory deprivation eye masks that are designed to help users relax.
“There’s nowhere else to go in the world if you’re in audio except for Shenzhen,” Young said. “Ninety-nine percent of all the audio components in the world are produced in Shenzhen.”
While China’s unrivaled electronics supply chain is a boon for global startups, it has given rise to concerns among governments in the U.S., Europe, and Australia. The ongoing trade war has also resulted in the U.S. implementing tariffs on $250 billion worth of Chinese goods so far, which has made some startups nervous about the long-term effects.
China is also being increasingly singled out as a source of potential cybersecurity threats. While larger firms supplying technologies to governments can’t help but get embroiled in geopolitics, smaller businesses are not discouraged.
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Bay McLaughlin, co-founder of the Hong Kong-based startup incubator Brinc, prefers this line of thinking. “In general, these problems are so big and so macro… that is not an issue that startups should be worrying about,” McLaughlin said. “It’s really not a good use of resources for a startup, and I think it’s a little bit academic, actually.”
Both Soundbrenner and Silentmode initially came to China as part of Brinc’s incubation program.
China’s supply unrivaled
While the allure of producing hardware in Shenzhen is still strong, cybersecurity concerns are on the rise.
Concern about supply-chain security in the Shenzhen’s international startup community seems low and the benefits of working in China are too immense to be ignored.
The biggest advantage for a startup in China is access to components and manufacturers. This allows companies to quickly build new prototypes with each new change or innovation and get products out quickly.
“You look at Shenzhen, you just look at the way that city is built, and it’s almost a streamline of supply chain. We don’t have that,” said Kyle Ellicott, co-founder of San Francisco-based startup accelerator ReadWrite Labs, making a comparison with his home country, the US.
With offices in Shenzhen and Hong Kong, ReadWrite Labs is part of a growing number of incubators and accelerators designed to get startups into China where they can get access to the resources they need quickly.
“In the US, manufacturing is still adjusting,” Ellicott said. “But in terms of scale and access to necessary components, [China] is still bar none one of the best places to do it.”
As China morphed into the world’s largest manufacturing hub, its workers also acquired the experience necessary to help it stay competitive. China surpassed the US in manufacturing output in 2010. As of 2016, China’s manufacturing activity was worth $3.2 trillion, compared to $2.2 trillion for the U.S., according to data from the World Bank.
Though Shenzhen is just one city in China’s Guangdong province, where most of the world’s consumer electronics are manufactured, it’s become the place where many foreign entrepreneurs turn to first for building a new product.
The city’s proximity to the financial hub of Hong Kong, manufacturers, and the location of the world’s most comprehensive electronics components marketplace gives young companies access to almost everything they need in one place.
Before he brought Soundbrenner to China, Simmendinger and his partner had some difficulties prototyping in Germany, where they lived. At the time, they could only find two adequate vibration motors for their wearable metronome: one at a shop in Berlin and the other from an eBay seller in the UK.
Once in Shenzhen, they realized how disadvantaged they had been. Simmendinger said when he visited the city’s sprawling electronics district Huaqiangbei, he found one woman with a cart who had every type of motor he might need.
While great companies can be built anywhere in the world, Simmendinger now sees being in China as a competitive advantage. “Do you want to run the race with steroids, with an unfair advantage, or with a cannonball attached to your leg?” he asked.
Alibaba best exemplifies China’s sizable components advantage. The China sourcing giant doesn’t regularly release figures on the number of sellers on its platforms, but a financial report from 2012 listed Alibaba.com as having more than 10.3 million storefronts. The company said in 2015—the most recent publicly disclosed information on this—its China operations had 10 million active sellers, mostly on Taobao. Taobao is China’s largest e-commerce platform among consumers, but it’s also where many startups turn to for components once they’re in China.
Simmendinger said that within China it may only take a week to get a part ordered online. In major Chinese cities, many orders don’t even take that long.
Alternatives to Alibaba do exist for other markets, but they are not nearly as mature. Revsmart Technologies CEO Sunder Jagannathan, another entrepreneur who moved over to China with Brinc, tried using IndiaMART when he was prototyping what would become Headsup, a device that attaches to the back of a motorcycle helmet and conducts audio using vibrations.
Jagannathan said he could only occasionally find what he needed on IndiaMART whereas 99% of the time Alibaba had what he needed. Some of the parts he found in India were originally sourced from China, anyway.
In addition to having all the right parts, Shenzhen is home to the right talent. It’s rare that a startup is trying to make something that manufacturers haven’t seen before. This means they know how to work with the materials, according to Young.
“All the parts are there, all the suppliers are there, all the experience is there,” Young said. “They’ve already worked out the kinks.”
The U.S. government has blacklisted purchases of hardware from Shenzhen-based telecom equipment giants Huawei and ZTE based on national security concerns and allegations of close ties to Chinese government. Similar concerns led to the Australian government issuing a ban on 5G technology from the same companies in August. New Zealand appears to be the latest country to take such a stance.
A Bloomberg story in October further raised concerns by reporting that a unit of China’s People’s Liberation Army used Super Micro Computer Inc. to embed chips providing backdoor access into hardware for nearly 30 companies, including Amazon and Apple. Amazon, Apple, and Super Micro all denied the report, and Apple requested a retraction.
An annual report released in November from the U.S.-China Economic and Security Review Commission did not address the Bloomberg claims, but it did raise concerns about security issues in China’s supply chain. One specific area of concern was IoT devices.
“China’s central role in IT and IoT device manufacturing… creates extensive supply chain vulnerabilities,” according to the report. The report added that the risk involved depends on many factors, including what the device is and who makes it.
For some, the cybersecurity threat is overstated. Simmendinger said he doesn’t believe suppliers would risk their whole business to spy on their customers’ customers. Like many other startup founders without access to millions of users and government contracts, he can’t imagine his company as a target.
Tariffs, too, are not yet enough to drive startups from Shenzhen. “The South China consumer electronics supply chain and manufacturing powerhouse and knowledge is not going anywhere regardless of the trade war, tariffs, et cetera,” Brinc’s McLaughlin said.
Though the tariffs are having some negative effects, McLaughlin said startups are willing to stay and weather the storm provided the policies are eventually reversed. Young said the tariffs were affecting minimum order quantities for Silentmode, but that was it for the moment.
With no end in sight for the trade war and as scrutiny of cybersecurity issues grows among national governments, could things get so bad that startups pack up and look elsewhere?
Soundbrenner, at least, is not likely to be leaving China anytime soon. “Who wants to steal your metronome rhythms?” Simmendinger joked.