While you were busy trying to keep track of Donald Trump’s trade warfare antics and China’s reprisals, you probably missed a powerful force also shaping China’s tech rise: Cities, motivated by sheer FOMO (fear of missing out) and goaded by central government policy and financial incentives, are frantically vying for a role in the country’s digital transformation.
Urban centers are at the forefront of modernization—in 2017, 59% of the mainland’s population lived in cities, up from 46% ten years earlier—and nowhere is the story of China’s remarkable modernization and urbanization told better than in Shenzhen. Almost three decades after being declared China’s first “special economic zone” by reformist leader Deng Xiaoping, this city in Guangdong province bordering on Hong Kong has transformed into an urban colossus, home to at least 11 million people. Shenzhen is a manufacturing hub dubbed the “hardware capital of the world” that churns out all manner of electronic devices spanning hoverboards, smartphones, and VR goggles.
On August 18, officials in Shenzhen woke up to the news that the State Council in Beijing had designated the city a new special economic zone, what state planners hope will be a model of progress for other Chinese cities. Under the new policy, the city will play “a key role” in science and technology innovation in the Guangdong-Hong Kong-Macau Greater Bay Area and will be encouraged to welcome talented foreigners to start businesses in the city. Shenzhen has been assigned the task of leading the way for the rest of the country in 5G and artificial intelligence, regulation and political reform, as well as deepening connections with the financial markets of Hong Kong and Macau.
Why is this significant? Major municipalities in many countries are making available their data, streets, and buildings as testing grounds for new technologies. Berlin Partner for Business and Technology is a municipal initiative that searches for solutions to make the city more efficient, more sustainable and to “expand the international competitiveness of the Berlin-Brandenburg metropolitan region.” In City Zone, the Tel Aviv Municipality and Tel Aviv University have earmarked a 20-acre zone in the northeastern corner of the city where startups, corporations, and policymakers can converge to introduce technological solutions in real-city conditions.
But in China, as conventional wisdom goes, things are different. What makes urban initiatives in the mainland especially significant is both the sheer size of the cities and their willingness to carry through radical transformation—and to pay for it.
In an economy that is centrally managed, government at all levels plays a crucial role in implementing and driving policy, which is prescribed by Beijing. The central government hands policy directives to provincial and municipal authorities, which then turn them into reality in their regions. In the case of Shenzhen, this new status instills pride in the hearts of the city’s stewards but also anxiety as to their ability to deliver on the grand promises.
The conferment of extraordinary prestige on Shenzhen causes sleepless nights and consternation for officials in cities that are dubbed second-tier, which now fear that they are falling hopelessly behind Shenzhen—as well as behind powerhouses Beijing and Shanghai. To stand out from the crowd, key cities such as Xi’an in the northwest, Nanjing on the Yangtze River delta and Qingdao on the coast of the Yellow Sea, are scrambling to position themselves as hubs of artificial intelligence for next-generation transport, data-driven manufacturing, or medical devices.
Attracting top talent
“Cities with good science, technology, engineering, and mathematics (STEM) universities such as Wuhan, Chengdu, Nanjing, are shelling out large tax incentives, grants, and subsidies,” says Andie Wang, China advisor for Oxford Venture Capital Investments. “What they are after really is top talent, luring accomplished entrepreneurs and researchers to return home from overseas, offering them lucrative sign-up bonuses, housing, and children’s education.”
Wang, a native of Qingdao who now resides in Shanghai, is familiar with the workings of Qingdao’s municipal government. She tells of over 100 government officials that have been dispatched to Shenzhen to learn from the Shenzhen model and attract Shenzhen firms to set up shop in Qingdao. “Qingdao has recently launched a massive RMB 50 billion [about $7 billion] ‘fund of funds’ earmarked for tech investing. Like other cities, it seeks to cultivate local startups and breed them into the next set of unicorns in the hope that eventually they will list on the recently launched tech board in Shanghai, the Chinese equivalent of NASDAQ, and in the process lavish jobs and tax revenue on Qingdao.”
Qingdao is an example of a Chinese city that has literally gone the extra mile to hunt down foreign knowhow, with nine business and commerce centers operating in places like Singapore, San Jose (California), Munich, and Tel Aviv. “The city’s party secretary has decided to push the concept of opening up to the world as far as possible,” says Nancy Yin, Qingdao’s chief representative in Tel Aviv, whose job it is to convey the city’s message and tout the lure of its corporate titans such as Haier and HiSense to local business and tech communities.
Hainan’s lofty goals
About 2,500 kilometers due south lies Hainan, an island province in the South China Sea just south of Guangdong province, amicably referred to as the “Hawaii of China.” In 1988, as Hainan became a separate province (until then it was a part of Guangdong), it was also designated one of China’s first special economic zones (SEZ’s) and the first time an entire province was an SEZ.
By many indications Hainan is about to get a serious boost, on the heels of President Xi Jinping’s announcement in April of last year at the Boao Forum, Asia’s Davos, of the launch of a free port in Hainan alongside the existing SEZ, as a part of his signature Belt and Road Initiative, in which Hainan will go on to become a window on reform and opening up. The State Council went on to release a plan in October 2018 for the ambitious transformation of Hainan by 2035 into a regional and global hub of technology, commerce, and services akin to those available in Hong Kong and Singapore.
Tasked with these lofty goals, Hainan officials now experiment with creative initiatives that they hope will attract foreign startups to land on the island and integrate their technologies into the local economy. For example, they want to enable developers of medical device to accelerate clinical tests and pilot their products in the hospitals of Haikou, the province’s capital; and help makers of smart irrigation systems to reduce water consumption and increase fruit yield and quality in the coconut orchards and rubber tree fields on the eastern shores of Hainan.
Peter Yang, a co-founder of PreShares, a fund and incubation firm for foreign startups operating in China and a co-founder of a new tech accelerator in Haikou, is a staunch proponent of a grand vision for Hainan. “Hainan is where Shenzhen was 30 years ago,” he asserts, “no doubt in my mind that visionary entrepreneurs should make the move to Hainan now to take advantage of resources and benefits heaped on by the local government.”
Nanjing is better known among history buffs than entrepreneurs in the West, but this is one city that is pushing hard and thinking creatively about upgrading itself as a global knowledge hub in the Yangtze River Delta. Home to regional R&D and manufacturing plants for major global multinationals such as Ford Motor, Korea’s LG, and Bosch Siemens Household, the city has been going to great lengths to attract startups that develop technologies for next-generation cars, advanced manufacturing, and robotics.
“Money has been flowing in Nanjing mainly to Chinese startups,” says Oscar Prat Van Thiel, a 13-year China veteran who works for a German exhibition company and the Nanjing government. “But in 2019 and especially since Nanjing Techweek conference in June that attracted startups from the US, Israel, Europe, and Korea, there is an emphasis on the accelerated internationalizing of the city.”
With a population of about 10 million, Nanjing, like many other comparable cities in China, is administered by districts. “Each district is assigned specific partner countries to focus on,” explains Prat Van Thiel. “In this way, agreements are being reached with entities in the UK, Finland, Israel, Germany, the Netherlands, Switzerland, Austria, and the US Bay Area.” But in most cases, these formalistic documents remain a written word and seldom result in actual business.
“Cities like Nanjing are mulling various approaches to breathe life into these memorandums and are ready to back up their intentions with budgets,” asserts Prat Van Thiel.
Tech hubs in abundance
Innovation platforms, launchpads, soft landing pads—all of these are terms tossed around, but they mean the same thing: A tech accelerator of sorts under the guidance of local government in which foreign entrepreneurs match up efficiently with Chinese partners, customers, and investors.
Startup founders bemoan China’s cities and the myriad of “hi-tech parks” that all wave the same perks—cheap co-working space, favorable regulation, and low taxes. The dearth of foreign teams in these office spaces makes it clear that these staple benefits are not enough to attract the talent—especially B2B startups that target businesses in China, rather than consumers—to dive into the stormy ocean that is the Chinese market.
Sorely missing are launch pads adapted to the real needs of startup teams, providing carefully curated projects focused on commercialization, lightly overseen by the government, matched with real business customers, often funded by Chinese VC firms. A legion of non-Chinese artificial intelligence companies with solutions for autonomous vehicles, new agricultural methods, and medical devices are waiting on the sidelines to see this materializing.
Mighty Shanghai is forming a RMB 500 million fund to boost its drone industry and lure 100 unmanned aerial vehicle (UAV) makers from China and around the world to the city by 2021 with subsidies and preferential policies, as reported by TechNode in late August. This fund followed the inauguration a year earlier of the East China UAV Base in the city’s Jinshan district on the shores of Hangzhou Bay, where teams can research and develop their drones, then test them in real-life conditions. Shanghai is the most cosmopolitan and wealthiest of Chinese cities, but other cities are also well equipped to create hospitable conditions in which foreign companies can flourish. It remains to be seen which one will be the first to make a real difference.