The Shunde Economic Phenomenon
Photo: HKUST Entrepreneurship Center
By Henry Hing Lee Chan

The Shunde Economic Phenomenon

Apr. 02, 2019  |     |  0 comments

Since China’s reform and opening up started in 1978, Shunde has transformed from a productive agricultural region into one of the important members of the Pearl River Delta — the world’s factory. Before the reform and opening up, Shunde was not well known in China. Historically, Shunde was a rich agricultural area in Guangdong, boasting a cultural atmosphere and spawning many wealthy overseas Chinese. At the same time, Shunde is also a famous culinary capital in southern China. A popular saying goes, 'Eat at Guangzhou, but the cook must be from Fengcheng' (the old name of Shunde) — such is the esteem for Shunde cuisine.

The reform and opening up in 1978 changed the historical destiny of Shunde. The pioneering spirit of the its people made Shunde a nationally recognized reform forerunner in the 1980s and 1990s. From 1978 to 2017, the population of the district increased from 780,000 to more than 2.6 million, and the regional GDP increased from 475 million yuan to 301.6 billion yuan. In the 40 years of reform and opening up, the nominal GDP of the district has increased by 634 times, and the population has also increased by more than three times. In the past 40 years, the per capita GDP has risen from 612 yuan to nearly 119,000 yuan, a remarkable 200-fold growth, which is higher than the 155-fold growth of 385 yuan to 59,660 yuan of the country.

In 2017, the per capita nominal GDP of Shunde was 119,000 yuan — equivalent to more than 18,000 US dollars, far exceeding the 12,000 US dollars per capita nominal GDP defined by the World Bank as marking developed country status. Shunde has now firmly entered the ranks of economically developed regions.

Table 1. Population and income data of Shunde

Shunde’s remarkable achievements in economic and social development have enabled it to be ranked first among China’s top 100 cities/jurisdictions with comprehensive strength for seven consecutive years. It has also been listed ten times as one of China’s top 10 well-off demonstration cities and counties.

Government reforms have created the Shunde economic phenomenon of today

Shunde made two important contributions to China’s reforms in the 1980s and 1990s. First, in the 1980s, Shunde’s pragmatic and enterprising people pioneered a government-led development model based on collective economy, industry and key enterprises, and they also created some of the first 'three-plus-one' enterprises. The 'Shunde Model' is based on the development of township enterprises, enabling Shunde to become the first among the 'Four Tiger Cubs of Guangdong'.

Before China’s reform and opening up, the commune system in the agricultural planned economy dictated that all agricultural harvests belonged to the communes; the farmers were compensated with agricultural products according to the work done; and the agricultural products could not be bought and sold freely. The enterprising nature of the farmers was suppressed.

Under the industrial planned economy, state-owned enterprises controlled major production resources, enterprises were managed by government departments, and small service units were collectively owned by villages and towns. All large, medium and small production units were state- or collectively-owned. There was no need for an individual’s entrepreneurship, and productivity was low.

The reforms that began in 1978 allowed farmers to contract land leased from the villages, greatly boosting rural productivity. At the same time, the reforms enabled many farmers to leave farming behind to join the huge labor force for emerging light industries. The government began to allow individuals to set up township enterprises to engage in light industrial manufacturing or other activities, so as to absorb labor force from the remaining agricultural population.

In the Guangdong model, the village or town was nominally the owner of the township enterprise, and the investors only needed to pay a certain fee to the township. The operation and finance of the enterprise were controlled by the investors, which created the conditions for the emergence of private enterprises. The Guangdong model was different from the Sunan model in which the villages and towns collectively funded the operation of township enterprises and retained actual ownership.

The Guangdong model not only retained the legal and social framework of the collective economy, but also introduced the efficiency and flexibility of private enterprise, thereby injecting vitality into the Chinese economy that had just started to reform.

In the early 1980s, Shunde became the pioneer of the township model of Guangdong enterprises. Shunde adopted an open and encouraging attitude towards the establishment of township and village enterprises and successfully absorbed the surplus rural labor force after the reform of the agricultural sector. This Lewis labor transfer mechanism not only provided cheap labor for emerging labor-intensive industries, but also greatly increased the local GDP. It also encouraged aspiring local entrepreneurs to invest in their own personally managed township enterprises.

At the same time, Shunde actively supported the emerging ‘three-plus-one’ model for export processing, and the emerging township enterprises were mostly concentrated on the exports business. Under the ‘three-plus-one’ system, Shunde’s township enterprises carried out materials processing, sample processing, and assembly of parts. Overseas suppliers provided free imported machinery and technology to compensate for the processing labor. The model addressed the problems of shortage of equipment, technology and capital for township and village enterprises in the early stages of economic development. Shunde set up one of the first ‘three-plus-one’ enterprises in the apparel industry. It quickly became an important compensation trade center by cooperating with Hong Kong, one of the world’s largest garment exporting outlets. Shunde Dajin Clothing Factory was one of the first township enterprises in China to engage in the ‘three-plus-one’ compensation trade. The success of Shunde’s economy in the 1980s earned it the moniker ‘Shunde model’. The average annual GDP growth rate of Shunde in the 1980s was 22.3%.

In the 1990s, Shunde made an important contribution to China’s reform and opening up for a second time. At that time, China had opened a new round of reforms after Deng Xiaoping’s famous Southern Tour in 1992. In the same year, Shunde was selected as the comprehensive reform pilot county of Guangdong Province. The Guangdong provincial government supported Shunde to promote comprehensive reforms, with the reform of the administrative management system as the lead and the reform of property rights system as the core. Shunde grasped this historical opportunity and advanced the reform of the property rights system, established a new socialist market economy, and became the forerunner of China’s economic reform.

The transformation of state-owned enterprises and the reorganization of property rights of township and village enterprises benefited managers and investors, and the efficiency of enterprises increased substantially. Shunde’s two largest private companies, Midea and Country Garden, were established in the 1990s and they achieved sales of more than 200 billion yuan in 2017. Many of Shunde’s ‘invisible champions’ were also products of the market-oriented reforms. The reforms of the 1990s laid the basis for Shunde’s private enterprise-led economic model. Shunde’s average annual GDP growth rate in the 1990s was 25.5%.

Shunde’s reform successes in the 1980s and 1990s cemented its high-ranking position in the history of China’s reform. In the process, Shunde cultivated a group of cadres and entrepreneurs at all levels who were highly adaptable and able to implement reforms and changes, making the district an important pilot for China’s reform. In 2009, Shunde was selected by the Guangdong provincial government for a series of comprehensive reforms focusing on the social system and grassroots governance. In 2018, Shunde was approved to build the pilot zone for the reform and innovation of the high-quality development system in Guangdong Province.

Shunde’s economy is dominated by manufacturing

Shunde created a manufacturing-based economic system in the 1980s which continues to exist today. The district government and the business community have never wavered in their backing for the manufacturing industry. The district government has made a series of policies to support and guide the transformation and upgrading of the manufacturing industry, while corporate investment and scientific research investment are also heavily concentrated in manufacturing. The district government is currently running the ‘Technology Shunde’ programme, with the aim of promoting the optimization and upgrading of traditional manufacturing industries through science and technology.

The value-added of Shunde’s industrial output value has consistently remained above 55% of GDP. In 2017, the first, second and third industrial structure of Shunde were 1.5%: 56.3%: and 42.3% respectively. As of February 2018, there were 25,381 industrial enterprises in the district, including 1,726 enterprises with an annual output value of 20 million yuan.

Shunde has formed eight pillar industries — household appliances, machinery & equipment, information & communications technology, textiles & garments, fine chemicals, packaging & printing, furniture manufacturing, and medicine & health care. In 2017, the industrial output value of the eight pillar industries accounted for 77.8% of the industrial output value of enterprises above a designated size. Household appliances and machinery and equipment are the leading industries in Shunde, with output values of more than 200 billion yuan. In recent years, three newly emerging major industries — jewelry, automobile parts, and lighting equipment — have also been developing rapidly. The government is currently encouraging the development of several emerging industries, including smart manufacturing, industrial design, e-commerce, and conferences & exhibitions.

High degree of industrial clusters and high localization of products

Before the reform and opening up, Shunde was an agricultural district with a fledgling industrial base. Most of the county’s industrial investment was concentrated in neighboring Guangzhou. The main ways for Shunde’s town and village enterprises to acquire production technology in the 1980s were through industrial clusters, industry associations, and other private channels. This was because industrial clusters are conducive to information exchange and technical exchanges.

The industrial cluster network, comprising of vertical and horizontal pathways, increases the professionalism of enterprises, improves quality, and spreads risks, and as such it can establish an industrial ecology with a strong competitive spirit. At the same time, it also improves the level of product localization, effectively reduces product costs, and benefits production by means of short turnaround time and fast technology updates.

The key characteristics of Shunde’s main industrial clusters are as follow:

1. Household Appliances: It is the most important industry in Shunde and it produces mainly white goods. It has a large volume and a wide range of products. It also has a complete industrial chain, with more than 3,200 home appliance manufacturers and supporting enterprises. The industry accounts for 15% of the country’s household appliances industry and enjoys the reputation of being ‘the capital of Chinese home appliances’. There are three main advantages enjoyed by the household appliances industry: first, the high concentration of enterprises and a strong competitive spirit; second, reasonable structure and coordinated development of large and medium-sized enterprises; finally, a large number of brands and high brand recognition.

2. Machinery and Equipment: Shunde’s machinery and equipment industry has grown in tandem with the household appliances and furniture manufacturing industries. Shunde has become the country’s largest air-conditioning compressor production base and the country’s largest woodworking machinery manufacturing and sales base. With the transformation and upgrading of manufacturing industries in Shunde and southern China, Shunde’s machinery and equipment industry has maintained a double-digit growth rate for the past five years. Sub-sector industries such as industrial equipment, industrial robots, intelligent manufacturing and automobile parts are developing rapidly.

3. Furniture Manufacturing: There are 16,376 enterprises involved in furniture-related industries in Shunde, including about 5,000 furniture manufacturing enterprises. Longjiang is ‘the capital of Chinese furniture manufacturing’ and is China’s largest raw material production and distribution center and the largest furniture material market. Lecong is ‘the capital of Chinese furniture trade’ and has an extensive influence on the world furniture industry. Shunde’s furniture manufacturing cluster is the most complete industrial cluster in China’s supply chain system.

4. Fine Chemicals: Shunde is the ‘hometown of Chinese coatings’. There are about 150 coating companies in the district, mainly in furniture coatings and architectural coatings. Furniture coatings enterprises account for about 50% of the industry, while architectural coatings enterprises account for about 40%. Shunde’s fine chemical industry has grown steadily alongside the furniture manufacturing industry.

5. Information and Communications Technology: Shunde’s ICT industry focuses on the production of whole machines with Lunjiao as the core, and also the production of small household appliances and electronic components and spare parts with Daliang and Leliu as the core. More than 90% of the components required by Shunde’s ICT enterprises can be found in the district.

6. Textiles and Apparel: There are more than 3,000 textile and garment production enterprises in the district, ranging from textiles, fabrics, printing and dyeing to clothing and apparel, etc. There are many clusters in this industry such as the Junan Denim Industry Group, the Xingtan Printing and Dyeing Industry Group, and the Lunjiao Gambiered Guangzhou Gauze Industry Group.

7. Furniture and Hardware: Leliu in Shunde has three honors to its name: ‘the capital of Chinese Home Hardware’, ‘the capital of Chinese hinges’ and ‘the capital of Chinese sliding rails’, and is the largest home hardware industry cluster in China. At present, Leliu has 1,200 hardware and spare parts manufacturing enterprises.

8. Lighting: Leliu is also one of the places in China with the highest concentration of domestic lighting manufacturers. It has nearly 1,000 lighting fixtures enterprises and related supporting enterprises, accounting for 60% of the domestic commercial lighting output value.

9. E-commerce: Shunde has more than 10,000 online merchants engaged in B2C and B2B transactions, more than 15 e-commerce platforms, and nearly 20 e-commerce industry parks under construction. Among them, Longjiang Furniture Industry Park has been recognized as an e-commerce demonstration base by the Ministry of Commerce; Europol Intelligent Network, Midea Group’s e-commerce and Flying Fish have been recognized as national e-commerce demonstration enterprises by the Ministry of Commerce. Shunde has 25 enterprises listed as the provincial top 100 e-commerce enterprises, ranking second in the province. It also has a total of 118 e-commerce demonstration enterprises. Shunde and other manufacturing industry bases in the Pearl River Delta provide a wide range of goods for e-commerce. Shunde’s home appliances, furniture, home decor, food, steel, plastics, hardware and building materials, machinery, and denim industries are all expanding their businesses through the new e-commerce channels.

These industrial clusters have consolidated the position of Shunde’s manufacturing industry in the market. In 2017, the export value of the whole district was 138.3 billion yuan, and the import value was 38.1 billion yuan. Such a huge trade surplus highlights the advantages of maintaining a high level of localization in Shunde’s products.

The international market: Brand building and quality assurance

In the early days of reform and opening up, Shunde’s entrepreneurs took the lead in entering the international market through the ‘three-plus-one’ model. They recognized the difficulties of production and quality control of products to be sold overseas, and also realized the importance of brand building. Shunde had 10 years’ prior experience than the rest of China in the area of light industrial manufacturing with products that are of international standards. This first-mover advantage played a key role in the subsequent establishment of the Shunde brand. As at the end of 2016, Shunde had 34 well-known national trademarks, 151 famous Guangdong province branded products and 146 famous Guangdong province trademarks. In the international market, ‘Made in Shunde’ is a valuable business card.

Industry dominated by private enterprises: Quick response to the market

Shunde’s private enterprises occupy a dominant position in the manufacturing industry. In 2017, private enterprises accounted for more than 77% of industrial production, contributing 80.89% to the industrial growth of the district. In 2015, China’s overall exports fell, yet Shunde’s exports remained stable. GDP growth in Shunde has consistently been higher than the national level in the same period. These data show that private enterprises have relatively efficient adaptability to market changes. The Chinese government has recently launched a series of policies to support private enterprises, thereby affirming the important position of private enterprises in the development of the market economy.

Towards the future of the Greater Bay Area

With its wealth of experience gleaned from economic development, Shunde has numerous assets — such as deep level of marketization, high degree of industrial clustering, high localization of products, flexible private enterprises, and a cooperative relationship between the government and enterprises — to offer to the future development of the Guangdong-Hong Kong-Macao Greater Bay Area. Several of Shunde’s pillar manufacturing industries have low overlap with other Greater Bay Area industries. With further integration of the Greater Bay Area economy and the subsequent expansion of regional cooperation, Shunde’s industrial clusters will benefit greatly from industrial upgrading. The role of Shunde in the Greater Bay Area will be analyzed in another article.

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