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Wednesday, April 28, 2021
Relocation of Shenzhen's Manufacturing Industry and Urban Economy Transformation
ANBOUND

Shenzhen, well-known for its strong industrial support, is now witnessing an increasing number of manufacturing companies relocating elsewhere. Quoting statistics from the data technology service company Tianyancha, Chinese media Caixin reported that the number of manufacturing companies in Shenzhen that had their licenses cancelled in the past three years has continued to rise. From 2018 to 2020, there were 225, 976, and 3116 of such companies respectively, a year-on-year increase of 492%, 334% and 219%. In October 2020, the Stanley Black & Decker Group announced the closure of its factory at Shiyan Street in Shenzhen. Prior to this, Philips, Samsung Electronics, Epson, Olympus and other foreign companies have also shut their factories in Shenzhen. Conversely however, Chinese companies such as Huawei, DJI, BYD, and ZTE have successively established new bases around Shenzhen.

There are two main reasons for the relocation of manufacturing companies. The first would be the increase in urban cost, particularly land cost while the other is that the relocation is being driven by policies aimed at the transformation and upgrading of urban industries.

In terms of land costs, according to the statistics from the world's leading property agent Savills, as the first two quarters of 2020 were severely affected by the COVID-19 pandemic, the rent of factories in Shenzhen dropped slightly but was quick to rebound in the third quarter. In the first quarter of 2021, the average rent for industrial plants was RMB 36 /m2, an increase of 6% month-on-month and 12.5% year-on-year; the vacancy rate was at 8%, a decrease of 2 percentage points from the previous quarter, and a decrease of 4 percentage points from the first quarter of 2019. The monthly rent for workshops in an older industrial park located in Shiyan Street at the Bao'an District increased from RMB 35 /m2 to RMB 45 /m2, an increase of 28%. Shenzhen's factories are in short supply, and it is difficult for high-quality factories to find a suitable location. The rising rental rates have continued to erode the profits of Shenzhen's manufacturing companies, causing some low value-added enterprises to relocate to other countries. Since 2015, the number of annual registered companies in Shenzhen's manufacturing industry have been decreasing year by year. According to the data from Tianyancha, the number of registrations from 2015 to 2019 were 34034, 30970, 23540, 20107, and 13,536; by 2020, 10696 were registered as of November 27, which is only one third the number of 2015.

The policy driven transformation and upgrading of urban industries is also an important reason for the relocation of manufacturing industries. The authority now provides land for certain projects that are in the "encouraged for development" category, while projects that fall within the "restricted" and "prohibited" categories have been neglected. Projects that are within the "encouraged for development" category mainly refers to industries important for economic and social development as well as those that play a leading role in the promotion of Shenzhen's industrial chains and industrial clusters. Such industries have a vital impact on the improvement of regional industrial competitiveness and are conducive to the optimization and upgrading of industrial structure, resource conservation and environmental protection. There are twenty industries that are listed in this category, including biology, new energy, internet, new materials, culture, new information technology and aerospace. In Beijing, under the policy of dissolving non-capital functions, the industries that fall within the prohibition list have continued to expand, which has also led to a large number of "policy-related relocations" in the manufacturing industry.

The increase in land costs brought about by urban economic development is seen to be reasonable and conforms to the theory of land rent. This situation is particularly evident in first- and second-tier cities in China. For cities with limited space, land resources will definitely flow to higher value-added industries. In the case of Shenzhen, the constraints of limited land resources are even more apparent. According to official data released in 2018, Shenzhen has about 274 km2 of industrial land, which is much lower than Beijing (about 600 km2), Shanghai (about 595 km2), Guangzhou (about 430 km2) and some other large cities.

Rising urban costs and industrial upgrading have raised the practical question of how best to transform the urban economy. Theoretically, for industrial cities such as Shenzhen and service-oriented cities such as Beijing, the goals, paths and means of urban economic transformation would be different. Looking from the relationship between cost and industrial structures, generally speaking, the need to control urban costs and maintain industrial advantages would be stronger for industrial cities. Meanwhile for service-oriented cities, the ability to withstand rising urban costs is higher and the effect of asset trading on such a city's economy is also greater.

However, in reality things are not always fixed and the economy of a megacity can be an extremely complex. The relative equilibrium of the industrial structure and appropriate control of the rapid rise of urban costs are necessary for every city. For Shenzhen, maintaining the proportion of manufacturing industry development and the competitiveness of related industrial ecology should be the long-term goal, for the very reason that manufacturing being an indispensable aspect of Shenzhen's urban economy. If the manufacturing industry was to excessively withdraw from Shenzhen, its urban economy will undergo significant changes. For this reason, there are some specific requirements for Shenzhen's urban economic transformation. For instance, Shenzhen may allow part of the manufacturing links to be relocated, but it needs to retain the headquarters as well as the capital, profit and management centers of the manufacturing company. At the same time, Shenzhen should focus on the allocation of regional resources, maintaining the industrial ecology of the manufacturing industry and preserving the integrity of the supply chain within its influential areas. This enables Shenzhen to maintain and strengthen its influence on key manufacturing systems not just at the manufacturing link level, but also at the industrial ecology and capital control level.

Beijing can be used to serve as a case study when it comes to "de-manufacturing". If non-economic factors are not taken into consideration, from the sole perspective of the urban economy the implementation of Beijing's policy to relieve the general manufacturing industry and population will objectively have a certain negative impact on its economy. As a capital and service industry city, Beijing's economy is naturally different from that of Shenzhen, but if Beijing does away with much of the manufacturing industries, the urban economy will inevitably lack industrial support particularly for the productive service industry, not to mention the industrial ecology will also be affected. When encountering a large-scale public health crisis such as the COVID-19 pandemic, weaknesses in the economic structure of cities that are highly dependent on service industries are sure to be exposed. Researchers from ANBOUND have previously pointed out that in Beijing's industrial strategy, excessive "de-manufacturing" has become a structural problem in its urban economy and the damages on the industrial ecology will bring about long-term negative effects. It would not come as a surprise if high-tech manufacturing industries conceived in Beijing were to decide to relocate elsewhere in the future.

Final analysis conclusion:

China's overall economic transformation is accompanied by its urban economic transformation. However, the transformation of the urban economy needs to take into account a variety of factors, such as the universal law of urban economic development, the resource endowment of the urban economy, the industrial balance of the urban economy and each urban economy's specific characteristics. Regardless of how the urban economy is transformed, as China serves as the "world's factory", the country's urban economy needs to maintain a certain degree of manufacturing support.

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