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Friday, October 11, 2019, 18:38
Shenzhen as next 'Silicon Valley' in China? Still needs top level design
By Cheng Yingqi
Friday, October 11, 2019, 18:38 By Cheng Yingqi

It was not long ago that people would think of Beijing's Zhongguancun Science City with the mention of  "China's Silicon Valley". Yet it is no longer just the case, as Shenzhen has been taking the lead of the country's technology innovation.

In late August, Guangdong provincial government approved plans for setting up three more provincial key labs – the third group being approved since late 2017 – bringing the total number up to ten.

Leaders of the labs include some of the top names of China's science community, Wang En'ge, former vice-president of the Chinese Academy of Sciences, Cao Jianlin, former vice-Minister of Science and Technology, etc. And investment to each lab amounted from 1 billion yuan to 13.5 billion yuan, aiming to create new research highland of international significance in the Guangdong-Hong Kong-Macao Greater Bay Area. 

This, however, presents a paradox. If the 192 national labs in Zhongguancun – 73 national engineering labs and 119 national key labs by the end of 2017 – failed to inject the Silicon Valley–style innovation power into Beijing, how could a dozen provincial labs manage to foster Shenzhen and its surrounding cities counterparts to like the San Francisco Bay Area?

The answer lies in the different development path of the two cities.

Beijing, boasting of the best educational resources in China, follows a top-down approach of research-development  – research is highly dependent on national R&D plans drafted by science administrators, aiming at publication in world-top science journals and winning national awards. 

In 2017, Beijing spent 4.2 percent of its GDP on R&D, the most generous in China, and pocketed 36.1 percent of all national science and technology awards.

Shenzhen, on the contrast, takes a bottom-up approach in R&D activities. 

Although the investment intensity – the percentage of R&D investment in GDP – was 1.5 points lower than Beijing, over 90 percent of the investment came from private enterprises. 

Beijing never released such numbers officially, though, former vice mayor Yin Hejun once disclosed in a public speech that the business sector – both State-owned and private – contributed 34.1 percent to total R&D expenditure, lagging far behind Guangdong’s 85.4 percent and Shanghai’s 57.8 percent.

The research-development pattern influences the innovation process in various aspects.

The first is the degree of market acceptance. With a top-down approach, product development starts only after the researchers feel the technology is ready – either published in first-class journals or being recognized worldwide – may be too advanced to fit in existing applications.

As a result, without solid market investigation, startups struggle to realize potential customers’ vague and individualized demands with their too awesome technologies and usually switched company strategies from time to time, wasting time and resources. 

For example, DeepGlint, once a rising star in visual recognition technology, had tried retail business, transportation industry, and then public security before finally deciding to turn to a less futural technical route.

Second, the valuation method and attractions to risk capital differentiates. 

The bottom-up approach, aiming to develop new technologies to enhance existing revenue, has more predictable financial gain but moderate PE ratio for venture capital to cash out. 

The top-down technological innovation, although with bigger chance of revolutionary change and hundred-fold return, remains unproven by the market, which thereafter requires deeper industrial insight, greater patience and maybe a bit of luck for investors.

Third, the flow of people and information is smoother among the small and medium companies with the bottom-up approach.

All the innovation, either new technologies or new business model, originates from people. Therefore, a free and constant flow of talents from companies to research institutes and vice versa will establish some sort of consensus on the future trend of industry development, avoiding overall strategic miscalculation. For example, in the 1980s both Digital Equipment Corporation (DEC) and Hewlett Packard Enterprise (HP) missed the early days of the boom of workstation and RISC markets. 

However, HP, based in Silicon Valley where employee turnover is frequent event, quickly became a leading producer, taking 31 percent of the RISC computer systems market by 1990, while the East Coast’s DEC still had no presence.

Silicon Valley becomes unique because it was neither top-down nor bottom-up, but the combination of the two. 

There are thousands of startups and the world’s most active venture capitals investing in new technologies, generating R&D vigor to energize the bottom-up innovation system. 

At the same time, it has plenty of government-sponsored research projects that encourage original innovation without economic goals – which makes technological revolutions possible. 

Finally, people, technology, ideas and understandings of the industry move fast and smoothly among startups, established companies and research institutes, ensuring the dynamic balance of the system.

In this sense, both Beijing and Shenzhen has half-completed innovation system, with Beijing lacking grassroots innovation atmosphere and Shenzhen lacking top-level design for world-class breakthroughs. 

Now Shenzhen seems to recognize its own limitations and thus invests heavily in basic research, to facilitate its position as “China’s Silicon Valley”.

That reminds me of Henry Ford’s famous quote, “If I’d asked customers what they wanted, they would have told me, 'A faster horse'!" To replace horse transportation with automobile, it is equally important to understand the work principle of gas engine, to design a machine with more than 20,000 parts, and to develop a mass production line that lower the cost to commercial grade.

The author is the industry research director of CASH Park Developing Co., ltd.


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