Chinese tech hub Shenzhen becomes key trade war battleground as US strikes at Huawei, its ‘dragon’s head’
- As home to some of the country’s biggest exporters and tech firms, including Tencent and ZTE, few other places in China are more exposed to Washington’s tariffs
- No company is more important to the city than Huawei, which has been hit by a range of US sanctions that could have a profound knock-on effect
In the restaurants and coffee shops at the heart of southern China’s hi-tech powerhouse the main topics of conversation have shifted from industry gossip such as IPOs, mergers and innovations to the trade war with the US and Washington’s campaign against Huawei.
So all-consuming has the topic become in Yuehai – the western district of Shenzhen that houses the social media giant Tencent, telecoms maker ZTE and drone maker DJI – that locals joke that it seems more like a trade war between the US and the city, or even the district, itself.
Over the past 40 years, Shenzhen has been transformed from a sleepy fishing village just across the border from Hong Kong to a city of more than 12 million people where the hi-tech sector accounts for just over a third of its gross domestic product.
Given the importance of the sector, many are now waking up to the possible impact the trade war will have on its future.
One tech firm employee, who only gave his surname Lin, said: “The trade war will have a lasting impact, including on sales and the entire market.”
Another resident, who works at an internet company, said he was starting to be concerned about whether his company’s products or sales strategy would be affected.
Beijing has grand plans for the city and has designated it as the key centre for innovation and creativity in its Greater Bay Area plan – a project designed to create an economic powerhouse to rival the San Francisco and Tokyo Bay areas by linking the cities of southern Guangdong with Hong Kong and Macau.
But faced with rising tariffs on exports to the United States and the ongoing onslaught against Huawei – the key to China’s 5G network – government agencies, official think tanks and tech firms alike are now pondering an uncertain future.
Targeting the dragon’s head
“The key is Huawei,” said a policy researcher with the Shenzhen government who spoke on condition of anonymity.
“Huawei is the single most important company at the top of the value chain, the leader and centre of the industry. It is our dragon’s head.”
In a rare report released by the Shenzhen’s statistics bureau in 2016, Huawei was the biggest single contributor to the city’s GDP with 7 per cent of the total, or 143 billion yuan (US$20.6 billion).
The sum was roughly the same as the rest of the top 20 contributors to the city’s GDP, which included such major players as ZTE, Tencent, chip maker Foxconn and vehicle maker BYD.
Although no figures have been published since 2016 due to their sensitivity, many believe Huawei’s importance to the city’s economy has increased and that it now contributes well over 10 per cent of GDP.
Huawei and its affiliates are the city’s biggest employer, with about 80,000 people based at its Shenzhen headquarters and a further 3,000 at a new research and development facility in the nearby city of Dongguan.
The policy researcher said the city authorities “have to do everything we can” to help these tech firms in the current climate.
But now that Washington has banned Huawei from importing US components and frozen the company out of its 5G network due to national security concerns – and urged its allies to follow suit – there is only so much the local government can do.
“You know the key [to Huawei’s problems] is not with Shenzhen. The problem lies in Washington. Shenzhen cannot help to settle the disruption to its supply chain and overseas markets.”
Other companies may also find themselves in Washington’s cross hairs as the rivalry between the US and China intensifies, for example DJI, which currently provides nearly 80 per cent of the drones used in the US and China.
Without naming DJI, the US Department of Homeland Security recently warned American companies about the security risks posed by Chinese-made drones.
So far the company’s official statements have batted away the issue, with spokesmen saying the firm was monitoring the talks between the US and China but did not have magic powers to predict the future.
However, in a possible hint that it may have to become more self-reliant if it is frozen out of the global supply chain, company statements have said that while it seeks the best components available, in some cases it will develop its own technology.
But given its sheer size and importance, Huawei remains the key priority for the local government. “While we will keep an eye on the others, we will definitely focus our efforts on helping Huawei,” the researcher said.
A source familiar with Guangdong’s provincial science and technology department said the provincial government had formed a task force, working with relevant bureaus from Guangzhou, Shenzhen and Dongguan.
The task force has been meeting tech firms that have been, or might be, affected by the trade and tech rivalries between the US and China to discuss the possible impact on business.
“We will continue to do what we need to do,” the person said. “Promoting the tech industry is a long-term thing.”
Long tail behind the dragon’s head
The Pearl River Delta surrounding Shenzhen is a vital part of the supply chain for hi-tech manufacturers, which means the whole region is equally vulnerable to US action.
Neighbouring cities are all part of the 3 trillion yuan ecosystem that supports Shenzhen’s export market, which was worth 1.6 trillion yuan last year.
Allen Zhang, founder of Crazybaby, a maker of earphones, described the supply chain as “the most important thing that makes Shenzhen the capital of manufacturing”.
“There are a lot of satellite cities around Shenzhen such as Dongguan, Huizhou, Zhongshan, and they can form a complete supply chain providing almost everything from raw materials to computer components at very low cost,” he said.
The South China Morning Post previously reported that Huawei has been preparing for disruption to its exports by putting contingency plans in place and consulting its suppliers.
In particular, it has been contacting non-US suppliers to check whether they use American components or technology, which would make them unable to provide equipment under the terms of the US ban.
The impact on the supply chain will be clearer in the next two to four months, according to Qiu Dongmin, a senior consultant from Dongguan’s Defangxin Certified Public Accountants who has many manufacturing clients in the delta.
“The impact of sanctions on Huawei’s mobile phone business will not be immediately felt as most of the phone orders are already booked in the April to June period by Huawei and other big companies,” he said.
“But between August and October, the suppliers would usually be getting additional orders from Huawei and other manufacturers to meet the demand for their bestselling phones. That will be the key period to watch for the whole supply chain in Shenzhen, Dongguan and Huizhou.”
Qiu said he believed it was practically impossible for companies like Huawei to check with every supplier.
“The suppliers will not want to give Huawei all their technical details in any case. I believe the tech companies might need a month or so to have a clearer picture as there are many pieces of conflicting information circulating,” he said.
“One thing for sure is that everyone is worried. Some are worried about their companies’ future, some are worried that they might become the next target for the US.”
Three companies from Huawei’s supply chain confirmed that representatives from the Chinese company have reached out in recent days to confirm whether their products or services contain key American technology.
Last year Huawei’s procurement budget of US$70 billion saw it placing orders with more than 13,000 domestic and global suppliers.
Of these suppliers, Huawei considers 92 as core to its business, including 33 from the US, 25 from mainland China, 11 from Japan and 10 from Taiwan, with the remainder coming from places such as Germany, South Korea and Hong Kong.
Overseas traders face choppy waters
The impact on Shenzhen and the Greater Bay Area is not only being felt by suppliers but also by exporters.
While the city already offers export credits to businesses to help cover the costs of global trade, a drop in the city’s trade with the US is inevitable as a result of the higher tariffs.
According to data from the Shenzhen customs, in the first quarter of the year, 17 per cent of the city’s trade by volume was with the US, worth a total of 57.4 billion yuan, but this represented a drop of 5.9 per cent compared with the previous quarter.
Guo Wanda, executive vice-president of the Shenzhen-based China Development Institute, said that while the trade war was obviously having an impact, Shenzhen’s overall exports had actually risen by 3.3 per cent last month.
“Companies might have to cut employee numbers and some smaller ones might even face closure, that’s entirely possible,” he said.
“But from the viewpoint of Shenzhen as a whole, the impact is controllable. It will affect Shenzhen’s economy but it doesn’t mean that it will slide drastically.”
Guo also pointed to the impact on neighbouring cities, saying that because places such as Dongguan and Foshan had more exporters, the US tariffs might have a more profound impact in those places.
Despite the growing pressure from the US, companies in the Greater Bay Area had increased their 5G development, he said.
“We should speed it up as the Greater Bay Area has two of the 5G leading companies in the field, namely Huawei and ZTE.
“There are other opportunities too. Huawei is using its ‘spare tyres’ now, including its own operating system and parts. This will create a new supply chain to drive the growth of technology development.”
Help at hand
The Shenzhen government is also continuing to invest heavily in its tech sector. According to official figures, the city spent about 100 billion yuan, or 4.16 per cent of its GDP, on research and development last year, up slightly from 4.13 per cent the previous year.
It plans to increase this to 4.25 per cent by next year, which would be more than the 4.2 per cent spent by global tech leaders such as Germany and South Korea.
The city is also looking to grow its strategic emerging industries – which includes fields such as information technology, biotechnology and new materials.
Last year these contributed 37 per cent of the total GDP, down from 40 per cent in the two previous years. But by the time its current five-year plan ends next year, it has a target of 42 per cent.
Shenzhen is also continuing to offer tax breaks to encourage innovation and attract high-level tech talent – a policy that effectively underwrites more generous pay packets without costing their employers anything.
At the 2019 Future Forum held last month, an innovation summit, Wang Lixin, one of the city’s deputy mayors, announced that the city government would offer tax breaks to both overseas and local talent, with certain individuals paying no more than 15 per cent income tax.
“Suppose you earn 1 million yuan a year. Under the new rules, you will need to pay 150,000 yuan as income tax, which saves you about 300,000 yuan compared with the current level,” Wang said.
While further policy options are still being considered, the authorities have also taken practical steps to help exporters.
Ivan Zhai, executive director of the Hong Kong Chamber of Commerce in China-Guangdong, said companies, especially exporters to the US, had been seeking advice from Shenzhen’s commerce bureau about the latest US policies.
“Besides handling the additional tariffs, a key concern is compliance with the US International Trade Commission’s section 337 investigations,” he said.
These concern intellectual property rights disputes – a key US grievance in the ongoing trade war – and according to exporters they were becoming more frequent, Zhai said.
“Companies sought training last summer on how to be 337 compliant and how to appeal if they were found to be violating the rules.”