China's Fastest Growing City Wants to Be the Next Silicon Valley — Local Systems May Get in the Way

Qilai Shen | Bloomberg | Getty Images
  • As China tries to build up its own technology, it looks difficult for other cities to replicate the success of Shenzhen, home to tech giants such as Tencent and Huawei.
  • For example, the city of Xi'an has many similar ingredients for success but has lagged so far as analysts point to the dominance of the state.
  • Shenzhen also benefits from its proximity to Hong Kong.

BEIJING — As growing pressure from the U.S. pushes Beijing to build up its own technology, local systems are getting in the way.

Over the past forty years, experimentation with business-friendly policies in the southern Chinese city of Shenzhen helped turn it into the equivalent of Silicon Valley with homegrown tech giants such as Tencent and Huawei. But so far, other cities have yet to repeat Shenzhen's success.

Meanwhile, national urgency for self-sufficiency in tech is central to a five-year development plan announced in March, with ambitious goals for research and development in seven "frontier" technologies such as semiconductors.

The central directive has local governments striving to do their part.

A 4.5-hour flight north from Shenzhen, the city of Xi'an has many of the right elements for tech innovation: research or manufacturing centers for semiconductors, aerospace and other high-tech industries; talent from local universities; and significant foreign investment. Both Samsung and U.S. chipmaker Micron have major operations in Xi'an, which was also the fastest growing major city in China last year.

Xi'an Mayor Li Mingyuan said in a statement last month to CNBC that tech innovation is at the top of his list for high quality development under Beijing's five-year plan. He said that by 2025, Xi'an aims to achieve output in advanced manufacturing of more than 1 trillion yuan ($153.85 billion) and support more than 10,000 high-tech businesses, for total GDP of more than 1.4 trillion yuan. That's about 40% growth from Xi'an's GDP in 2020.

But analysts say the state is stifling Xi'an's potential.

The biggest difference between Shenzhen and Xi'an is that businesses form the major part of Shenzhen, while Xi'an needs to reduce the role of the government, said Qu Jian, vice-director of the Shenzhen-based think tank China Development Institute.

While each city has to determine its own path, if Xi'an wants to follow that of Shenzhen, then the market needs to play a bigger role, Qu said. Innovation is also difficult for a country to complete on its own and is more efficient with international cooperation, he added.

A rough comparison of the two cities' companies listed on the mainland A share market reflects the disparity in state dominance. About a third of roughly 40 Xi'an-based stocks were privately run, versus about two-thirds for well over 300 Shenzhen-based ones, according to data from Wind Information.

When describing Xi'an's push for technological innovation, Mayor Li pointed to contributions from the city's non-state and foreign businesses. He noted how last year a local solar company named Longi Green Energy Technology became the largest publicly listed company in Western China, and claimed it is the world's largest manufacturer of monocrystalline silicon wafers.

Li added that Micron has invested a total $1 billion in its Xi'an facility, which accounts for 90% of the company's global production capacity. Micron did not immediately respond to a request for comment.

However, looking more generally at China's national history, multiple state-led efforts to build up the local semiconductor industry have struggled to take off, McKinsey analysts wrote back in 2014.

As an ancient capital of China, Xi'an also faces physical restrictions on urban expansion due to historical structures and artifacts, said Perry Wong, managing director of research at the Milken Institute. He expects the Chengdu-Chongqing urban area in southwestern China has a better chance at becoming a center for tech innovation.

Shenzhen is "also enjoying (a) high degree of policy freedom that no other city in China has," Wong said, noting Xi'an would need to think creatively to mimic that kind of growth. "You cannot make a duplication of Shenzhen."

Drawing from Hong Kong

One benefit Shenzhen has had is its proximity to Hong Kong, a semi-autonomous region just over the border that has enjoyed greater democratic freedoms and alignment with international business standards than the mainland.

As Beijing strengthens its control of the region, an inevitable choice for Hong Kong companies will be to work more with the mainland.

Hong Kong's businesses can share their experience and talent to contribute to China's development, said Tu Haiming, a Hong Kong member for a national political advisory body, called the National Committee of the Chinese People's Political Consultative Conference. Tu spoke broadly of greater integration with the mainland in areas such as finance and academia.

When it comes to tech, that talent doesn't need to look as far as Xi'an. Chinese semiconductor giant SMIC announced last month it was building a new $2.35 billion factory — in Shenzhen.

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