In 1986, Toshiba manufactured the first laptop computer in a bid to satisfy Japanese consumers’ needs for space and convenience.
It was largely the work of an engineer, Tetsuya Mizoguchi, working on his own steam at the company’s Ome factory, 25 miles outside Tokyo.
Mizoguchi understood two things: that Japanese offices were too small for desktop computers.
And secondly, that tech-savvy, generation Y consumers would be quick to adopt a device that would allow them to take their work home with them.
He was right of course. The Japanese Generation Y, born between 1977 and 1994, proved to be early adopters of a whole range of technologies long before their Western counterparts.
During the “Heisei Period”, demand for sophisticated, portable hardware – improved by the convergence of audio and video technology – rocketed across Japan.
Where can we find an equivalent story today?
You’d have to say Shenzhen. It has the advantage of China’s huge, frantic, ‘mobile first’, scaled up early adopter society. It has an entrepreneurial culture, atmosphere and facilities that make Silicon Valley seem laid back. Ok, we’re not talking about 10x ‘moonshot’ leaps here but the compounding incremental improvements constantly flowing from the ‘mobile first’ economy is still far in advance of the rest of the world.
Well noted is that over 40% the appreciation of China’s MSCI stock index came from Alibaba and Tencent alone.
Chinese upstarts Oppo and Vivo have seemingly come from nowhere to disrupt the future filled Indian smartphone market at the expenses of Apple, Samsung even, local leader Micromax and its own Chinese competitors Huawei, Lenovo and Xiaomi.
And if it’s not Oppo or Vivo it will be others forming fast behind them that will fan out from Southern China to India, Indonesia, Malaysia, Eastern Europe, Nigeria, Kenya and even to US and European heartlands with offerings that are not just cheap, but high spec and carrying new features, and which employ innovative paths to market.
Apple, Samsung, Google and Microsoft need to brace themselves for the ‘Shenzhen effect.’
A $4.6 trillion economy within 15 years
I remember how back in the 1970s and 1980s the Japanese would say that their great strength was the quality of their customers as they trounced the West in semiconductors, computers, consumer electronics and cars.
It was true.
If you watched a Japanese person inspecting a new camera compared to his or her US or even German counterpart in those days the difference was marked.
The mantra was—if we can satisfy a Japanese customer then the rest are a pushover.
Of course, there was more to it than that.
The clever orchestration and subsidisation of the Japanese economy by MITI and a great deal of copying from Western blueprints played their parts much to the chagrin of Japan’s competitors.
In the end, a combination of hubris and a failure to go full throttle in electronics in consumer goods, among other things, sent Japan spiralling into a couple of lost decades and economic atrophy.
Meanwhile, in Asia’s fourth or fifth largest economy – China’s Great Bay Area, with headquarters in Shenzhen, and with a GDP of over $1.5 trillion – an almost impossibly competitive and fast moving entrepreneurial culture prevails.
Companies that can emerge from this cauldron become very strong and world competitive and like the Japanese before them have, at epic scale, the world’s most tech savvy, impatient, early adopter customers constantly putting burrs under their tails – 500 million, give or take a few million of them.
The Party planners are counting on a lot further to go with the Shenzhen effect.
They see the Great Bay Area as a $4.6 trillion economy with fifteen years, depending increasingly on global trade, and lubricated by the essential financial skills and networking of Hong Kong.
This is partly why Xi Jinping went out of his way in the Great Hall of the People yesterday to stress that his regime will not allow “one inch of land to separate from China”—HK or Taiwan. It got the loudest and longest applause of all during Xi’s three hour and half hour speech. HK is essential to both Guangdong’s future and the BRI project.
As an aside: Noticeable among my Chinese friends aged under 35 is their patriotism and their evident assumption that China can now do anything.
Shenzhen is to consumer electronics what Hong Kong is to same day bespoke suits and specs. You can get virtually any component in a bazaar there, have a prototype created for you or a small batch production run made in a matter of hours.
It is the ‘go to’ place for entreprenuers. The sheer numbers of entrepreneurs striving to make it in an eat lunch or be lunch environment, where to misquote and modify Mao, ‘a thousand experiments bloom and 999 fail’, at first boggles the visitor’s mind.
The U.S. and Chinese startup ecosystems are very different. Both have a winner-take-all dynamic, but that dynamic is far more intense in China. There is far more trial-and-error — as well as rapid product cycles — as companies scramble to win market share from each other, quickly.
We need to keep keeping in mind that China’s ‘mobile first’ society is still barely five years old and is the creature of huge, densely populated, mostly Eastern cities with over 700 million smartphone users between them, who are predominantly young, educated, geeky, low paid, aspirational people.
A launch pad for the mega-cities of 2025 such as Mumbai, Kolkuta, Delhi, Mexico City, Lagos, Kinshasa, Karachi, Dhaka, Jakarta. No wonder India is such a target.
And it won’t just be smartphones that the Shenzhen effect will hit, but also personal robots, VR/AR systems, devices of all types, shapes and sizes will flood global markets—some of which will fly and some of which won’t.
Alibaba forecasts that the Chinese market for 3D printing alone will swell to $20bn by 2020. As MIT’s Neil Gershenfeld noted some time ago: “my ability to do anything in 3D manufacturing rests on a global supply chain that crucially passes through places like Shenzhen…I need high-torque efficient motors with integrated lead screws at low cost, custom-produced on demand. All sorts of the building blocks that let us do what I’m doing currently rest on a global supply chain including China’s manufacturing agility. Shenzhen sees the future isn’t mass producing for everybody. That’s a transitional stage to producing locally. ”
Four Takeaways
Global competitors need to understand that Chinese companies:
<> Are innovating not just copying – if not in tech then in product, path to market and monetization. A lot of grit and cleverness went into the development of Alibaba and Tencent. Alibaba isn’t China’s e-Bay or Amazon, categorically different and Tencent leads Facebook rather than copies it with WeChat.
<> They are hyperscaling much more intensely than their US counterparts because the TAM is so much larger giving them scale economies and fast and voluminous feedback.
<> They operate with an intensive, paranoid ‘we’re at war’ mentality, so winners emerge very strong and adroit.
<> Have huge talent pools at their disposal. They may not be able to hire one super-star engineer from the US but they can hire ten cheaper home-based engineers to do the same job.
Meanwhile, back in the Great Hall of the People, Xi Jinping recently picked out aerospace, cyberspace and transport as where the next big wave of innovation in China needs to occur and where considerable State resources will be forthcoming.
The Great Bay Area is well on its way.
If you’d like to read an in-depth report on China and it’s experiments and stretch goals for technology, covering the most interesting investments angles, risks and intended consequences, then drop me an email – michael@signumintel.co.uk
At Signum, we investigate and advise on how technology is reshaping the global economy: looking at the stretch goals, stacks, platforms, scarce resources, risks, threatening clusters, cascading errors and unintended consequences of our bargain with technology. All information in this briefing is provided in good faith and is accurate to the best of my knowledge. This document is for information purposes only and does not impart financial advice. We recommend you do further due diligence before taking action based on the information in this report.