Pearl River Delta: China’s new “Silicon Delta” [Guest Column]

HONG KONG—China’s Pearl River Delta was once dubbed the “factory floor” of the world. These days, however, it is more accurate to call the area Silicon Delta—a high-technology and innovation hub for the world’s second-largest economy.

For the past 35 years, Guangdong province, where the Delta is located, has been at the forefront of China’s economic development and reform efforts. Since the late 1970s, when China began to open its economy to international trade and investment, the cities around the mouth of the Pearl River—Guangzhou, Shenzhen, Zhuhai, Foshan, Dongguan and others—have transformed
themselves from small towns into industrial powerhouses producing garments, toys, electronics and textiles for the world.

Now, with wages rising and industrial-sector growth slowing down, Guangdong and the Pearl River Delta are reinventing themselves one more time, and are once again at the forefront of China’s economic reform efforts. The regions are moving up the economic ladder by focusing more on advanced manufacturing, high-tech, and service industries.

Transformation already happening

Over the course of little more than a decade, the area has become home to some of the world’s largest high-tech companies.

Huawei Technologies and ZTE Corporation, which make telecommunications equipment and both employ tens of thousands of people, are headquartered in Shenzhen. Companies like Lenovo, TCL, BYD, Apple, IBM, Philips, BGI, Lucent and Olympus have manufacturing bases and research and design capabilities in the region. Guangdong’s economy has swelled, and is now larger than Indonesia’s.

Many of the Pearl River Delta’s cities, meanwhile, are becoming centres of higher-tech, more advanced manufacturing and services.

Take Shenzhen, an urban giant with well over 10 million inhabitants, as an example. The city has become a “Silicon Valley” for high-tech hardware, spanning everything from telecoms equipment, information technology, biotechnology and pharmaceuticals to computer manufacturing, smartwatches and aerial drones.

Ample engineering talent and lightning-fast logistics aid the progress from prototype to product, as does plentiful spending on research and development (R&D).

In 2013, Shenzhen spent 58 billion yuan(CAN$12.1 billion), or four per cent of the municipality’s GDP, on R&D, more than any other part of the Chinese mainland. The total value of high-tech products made in Shenzhen reached 1.4 trillion yuan in 2013, up 9.3 per cent from the previous year. That accounted for 50.4 per cent of the total output value of industrial enterprises.

Many of Shenzhen’s high-tech giants also spend a significant portion of their earnings on R&D. Huawei alone last year spent 40.8 billion yuan or 14.2 per cent of its turnover on R&D. Some 76,000 Huawei’s employees work in R&D—about half of the total workforce.

Shenzhen and the entire Pearl River Delta region has now evolved into an advanced manufacturing ecosystem with clusters of factories working symbiotically to turn the area into a one-stop shop for many high-tech and innovation projects.

The Pearl River Delta’s transformation has had strong government support.

In May, Beijing announced its “Made in China 2025” policy, which aims to promote IT, robotics, aerospace, railways, electric vehicles and other advanced industries in a bid to move China’s economy way from the low-value manufacturing model that fuelled growth in the past.

Echoing this, Guangdong province issued the “Guangdong Province Intelligence Manufacturing Development Plan (2015-2025)”, which likewise aims to promote innovation and the use of cutting edge, value-added industries among local companies, helping them to improve their manufacturing capabilities and establish brands in China and beyond.

In reaction to rising labour costs, Guangdong-based manufacturers are investing heavily in robotics and other automation equipment. The Guangdong provincial government has announced that Guangdong will spend 943 billion yuan on replacing human labour with robots within the next three years, and plans to have 80 per cent of its factories automated by 2020.

Last year, the provincial government has budgeted more than 672 billion yuan to develop rural areas over the next five years and prompt labour-intensive manufacturing to relocate from cities into Guangdong’s rural regions. The goal is to free up space in the increasingly overcrowded Pearl River Delta, thus helping manufacturers there to keep moving up the value chain.

Hong Kong’s key role

Hong Kong is an integral part of the Pearl River Delta’s transition towards higher-tech manufacturing, services and innovation. For many years, the city was the “shop window” for Guangdong—the place from where goods made in China were sold and shipped to the rest of the world. This relationship has shifted in recent years, and has become much more of a two-way street.

For the Pearl River Delta, having a global financial centre on its doorstep has helped many companies, including the likes of Tencent, to access funding—whether via a listing on the Hong Kong stock exchange, or by obtaining backing from private equity firms for new ventures.

On the talent front, a large amount of mainland Chinese attend Hong Kong’s universities every year before entering the workforce or setting up businesses in the Pearl River Delta, just 20 or 30 kilometres away. Many others tap into Hong Kong’s research resources, gain important entrepreneurial know-how and employment experience, which they later deploy in the mainland.

This provides crucial input as the Pearl River Delta moves from low-tech to high-tech manufacturing, spearheading China’s transition towards sustainable, consumption-driven growth.

For Hong Kong, meanwhile, the Pearl River Delta’s advances will bolster the city’s economic prospects for years to come, cementing its role as key a knowledge hub for China.

The relationship is deepening—and it is a win-win for both sides.

This story was originally published in the South China Morning Post and HSBC.com in October 2015.