Shunde's Innovations
Photo: Sohu
By Henry Hing Lee Chan

Shunde's Innovations

Apr. 23, 2019  |     |  0 comments

Shunde has abundant natural resources and has experience in operating a cash-based agricultural economy. By improving and perfecting the “mulberry-dyke and fish-pond model” for hundreds of years, Shunde locals were knowledgeable about how the market economy runs and understood the importance of efficiency and sustainability in running businesses. In contrast to subsistence farmers, Shunde locals had extensive experience working as artisans, workers and merchants—the employment model that was a forerunner of work specialization in the modern economy. The spirit of innovation and entrepreneurship was deeply ingrained in the culture of the Shunde populace, and this awareness flourished after 1978.

The “mulberry-dyke and fish-pond model” and today’s recycling economy

The mulberry-dyke and fish-pond model was a system designed to maximize the potential of all production resources in the Pearl River Delta region. It was environmentally friendly and very efficient in resource utilization. Production steps involved digging deep fish ponds, elevating the dyke surrounding the pond, planting mulberries along the dyke bases, and farming freshwater fish in the pond.

The production cycle started from planting mulberry trees to engaging in silkworm farming and ended with selling the fish raised from feeding silkworm waste. An environmentally-friendly ecosystem with almost zero waste between mulberry, silkworm and fish was created—the farmer planted mulberry trees along the dyke and used the leaves to feed the silkworms. Silkworm waste was fed to the fish, and after harvesting the fish, the fish waste that had accumulated at the bottom of the pond was excavated and used to strengthen the dyke base and served as fertilizer for the mulberry trees. In this system, both silk and fish were the final products. The process was a production chain and what happened at one stage affected the other stages. It was therefore crucial to maintain efficiency at each stage and manage the entire system holistically. A famous saying in the Pearl River Delta summed up the relationship between organisms in the ecosystem: healthy mulberry trees lead to healthy silkworms, healthy fishes, good-quality fertilizer, and more silkworm cocoons. As the raw silk was an export commodity and its price subject to global market fluctuations, the Shunde populace developed an early knowledge of the global economy and the operation of the market. Fish was a cash agricultural product and was sold to neighbouring cities. Hence the Shunde populace also learnt about being a cash agricultural product trader.

A complete, scientific and self-sustaining pond community with the mulberry trees, silkworm, fish, and mud forming a symbiotic ecologically-friendly environment enhancing each other was established. The system effectively prevented waterlogging of low areas as the pond is dredged after the fish harvest and the soil was used to build up the dyke and provide fertilizer to the mulberry trees along the embankment. All silkworm waste and fish waste were used again in the system, eliminating environmental pollution.

The “mulberry fish pond” model was a forerunner of today’s much-touted recycling and sustainable economy.

Development of the fish pond not only developed businesses related to mulberry, silkworm and fish farming, it also drove silk-related manufacturing businesses.

Figure 1. Mulberry fish pond model

In the heyday of the silk industry at the turn of the 20th century, Shunde was a famous town for Guangdong’s economy. In 1922, its raw silk production accounted for 97% of the total Pearl River Delta production and 80% of the province’s raw silk exports. However, during the Great Depression, both price and sales plummeted, and by 1938 raw silk sales were only one-fifth of 1922’s. The downturn reduced the size of the mulberry fish ponds significantly, and other crops, mainly sugarcane, slowly replaced many mulberry trees.

The mulberry fish ponds remained a significant agricultural production model until the 1970s. The 1978 reform accelerated the decline of the silk industry. The sericulture required intense labour input, a long production cycle time, and carried higher risk, so most farmers gave it up and shifted to work at TVEs following the industrialization. The remaining mulberry fish ponds changed to fruit-based, flower-based, and sugarcane-based fish ponds. These crops require much less labour input, and by now, most mulberry fish ponds have disappeared in Shunde. After 1995, some ponds relocated to less developed peripheral areas of the Pearl River Delta. However, the emphasis on good management and the orientation towards the market economy learnt from mulberry fish farming has become part of the entrepreneurial culture of the Shunde people.

Figure 2. Mulberry-dyke and fish-pond

Economic development model spearheaded by the Shunde government

Shunde has been an acknowledged leader in governance innovation since the Chinese reform started. The county built its economy around industrialization in the early 1980s, and its commitment to the manufacturing industry has been steadfast. At different periods, the government pioneered innovative measures befitting the prevailing economic environment to promote economic growth. In the early days of reform, Shunde lacked funds, skills and technology. (For more information, please refer to “Shunde and the World Economy”). The government controlled almost all of the meagre production resources, and its people had little resources of their own to venture into productive endeavours. To jumpstart economic development, the government adopted the developmental state model which was prevalent in East Asia. In this model, the governments of the four Asian Tiger economies played the “innovative leader” role in galvanizing the limited resources available and guiding the upgrade and transformation of the economy.

At the start of the reform, the initial conditions for industrialization present in Shunde were poor. The central and provincial governments focused their industrial investment on Shunde’s neighbouring provincial capital city, Guangzhou, which had an existing industrial base, while foreign investment from Hong Kong and Macau flocked to Shenzhen’s Special Economic Zone due to favourable policy. As an agricultural-based county that was handicapped by a traditional socialist system that used the agricultural surplus to support industrialization, the county could not generate enough excess capital for industrial investment. The Shunde government had to adopt innovative policies to solve this problem.

The governments innovative reform process

In the 1980s, the Shunde government adopted the developmental state model. This model emphasized manufacturing and collective ownership and encouraged hidden industry champions. In August 1978, the Shunde government allowed Rongqi Town and Hong Kong Dajing Co., Ltd to jointly set up the Dajin Clothing Factory (Rongqi Town and Guizhou Town were merged in 2000 to form today’s Ronggui Town). Dajin Clothing Factory was one of China’s first TVEs to engage in the compensation trade export model. (For more information, please refer to “Shunde and the World Economy.”) The success of the model enabled Shunde to become the leading “four tiger cubs of Guangdong”.

The “four tiger cubs of Guangdong” refer to Nanhai, Shunde, Dongguan and Zhongshan. These four small and medium-sized counties in the Pearl River Delta were the pioneers in China’s economic liberalization in the 1980s.

The four counties’ economies took off in the 1980s, and the “tiger cub” nickname reflected their success and was comparable to the then-popular four Asian tigers of Hong Kong, Singapore, South Korea and Taiwan, although at a smaller scale. Each of the cubs had its economic model; Shunde, Zhongshan and Nanhai’s models relied more on local entrepreneurs, while Dongguan’s model relied more on overseas investment from Hong Kong, Macau and Taiwan. All the models were based on the manufacturing industry and they had contributed to the making of the Pearl River Delta in the 2000s as the factory of the world. The four counties grew to become critical constituents of today’s Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

Under the compensation trade export model, the foreign partner provided funds, machinery, technology, management staff and raw materials, while the Shunde partner provided the factory floor and labour. The foreign partner bought all the finished products for export and paid the factory rental and the labour component of the product to the local partner after deducting the corresponding payment over the use of the equipment and other capital input they provided. The compensation trade model relieved most of the investment commitment from local Chinese partners sans labour and factory space and allowed them to build up their industries at a period when they could not raise enough funds to invest in industries. The Chinese provision of labour input skillfully used the fact that labour at that time was extremely cheap—only about 10% of international standard and aplenty in China. In the case of land and factory space, the Chinese just converted old factories or constructed simple ones based on local materials. Again, not much investment was needed.

At the end of the contractual period in which the local Chinese partner has settled all obligations to their foreign partners over the use of their investment, the Chinese partners acquired all assets to become independent TVEs.

Many TVEs adopted the compensation model (please refer to “Shunde Economic Phenomenon” for more details), and Shunde resolved the problem over the shortage of funds, skills and production technology that existed during the earlier stage of reform. The local partners behind the TVEs were fast learners; they not only learnt the production skills used in the production of the first export products but also improved the process and earned the trust of overseas customers. At the end of the cooperation period, they not only retained their original export market but expanded it. The use of international export standards as a production benchmark also gave them a leg ahead of domestic Chinese competitors regarding quality. By the late 1980s, Shunde manufacturers had carried an implicit seal of quality among Chinese consumers, and TVEs had both the technical know-how and the management skills to expand in both the Chinese domestic market and overseas market. Many TVEs changed their business model from the compensation-trade to joint partner arrangements with foreign partners. The larger TVEs could already export on their own and operate freely without international partners.

The initial partners involved in the compensation trade mostly came from Hong Kong and Macau and focused on light industry. The 1980s TVE business and operational model helped Shunde integrate into the world economy, and light industry remains a strong pillar of Shunde’s economy today.

To facilitate the growth of TVEs and help them in their export drive, Shunde implemented a series of administrative reforms in the 1980s. The change devolved employee hiring power and wage policies to the factory manager—a departure from the socialist system that placed hiring power on bureaucrats and stressed the wage equality of workers. The factory manager could use a differentiated wage structure to pay his workers based on output and their contributions to the company, and he could hire and fire a worker without any interference from bureaucrats. While the abovementioned management prerogative of the factory manager was a standard operating procedure (SOP) in the outside world at that time, the policy was a first in China.

The Chinese economy in the early 1980s was in an initial transition phase from a socialist economy to a market-based economy. A lot of government policies were based on trial-and-error, and the famous quotation “crossing the river by touching the stones” was used to describe the policy environment. Some of the policies that came from the central government did not properly address issues on the ground, and the Shunde government addressed this mismatch by slightly twisting the original directive from the central and provincial government. It creatively retained the spirit and policy objective of the original directives while taking local conditions into account, thus making those policies workable in the local setting. During that period, the term “transformer” was used to describe the Shunde government: the central and the provincial government is a power plant that sends out high voltage output, and the local government acts as a transformer and lowers the input voltage to make it suitable for local consumers. This transformer description demonstrated the pragmatic spirit that Shunde’s local government adopted in reforms, and the spirit of innovation was the secret recipe behind the success of the county over the past forty years.

By being creative to pioneering in the compensation trade model and putting in place complementary policies to support its success, Shunde was the first to open the door to foreign investments in China. Shunde’s reform and opening up was held in high esteem by the central government and it was chosen by the government to pilot many new policies.

Property rights reform: targeting profitable rather than loss-making TVEs

In 1992, Shunde was selected to pilot the Guangdong Province’s comprehensive reform plan. Shunde seized this opportunity and became the first in China to implement a comprehensive reform which focuses on TVE property rights. The drive converted not only money-losing TVEs to private ownership but also money-making ones.

Shunde was the first local government in China to implement the privatization of collectively owned TVEs. The move generated some controversy at the beginning but proved to be highly successful. The property right reform, implemented in 1993, was named “靓女先嫁” in the local Cantonese dialect and it meant to marry off the family’s beautiful daughter first. The same strategy was used in the 1993 property rights reform, and TVEs and local SOEs that had good management records and were profitable were the first to be included in the reform. This policy was controversial when first introduced because many believed that the change should just target the loss-making companies.

However, the policy proved successful, and Shunde’s economy continued to move into high gear. Many economists attributed its success in the 1990s and 2000s to the removal of the agency problem in TVEs when they were privatized in 1993. After the privatization of well-managed TVEs and local SOEs, management was incentivized to improve their business operations.

The success of the 1993 reform convinced many local governments in China to also adopt the policy.

The property rights reform laid the foundation for Shunde’s current private-business-led economy. In 2017, private businesses accounted for nearly 80% of industrial output value and more than 90% of industrial output growth. The dominance of domestic private manufacturers in the local economy is a distinguishing feature of Shunde’s industrial landscape.

Shunde was chosen to pilot the 1999 administrative modernization reform

In 1999, Shunde was selected as the pilot county to experiment on administrative modernization reform. It reoriented the government’s policy objectives from that of a regulator to a service-centric type. The business-friendly environment helped the county become the top county in China for four consecutive years (2000 to 2003). It was also the first county whose GDP exceeded 100 billion yuan (2006).

Reform of the government system

In 2009, under the premise of maintaining the organizational structure, Shunde District was allowed to manage the economic, social, cultural and other aspects of the prefecture-level city authority to carry out large-scale administrative reform.

Combining government functions to a smaller number of departments was a vital part of the 2009 administrative reform. By redefining government functions and aggregating similar tasks to fewer departments, administrative efficiency was improved.

Power over commerce, local taxation, food safety, land usage, urban planning, public security, social security management and many other areas were devolved from the provincial and municipal government to Shunde’s district government. In most areas relating to economic development, Shunde’s official ranking was elevated from a district under the Foshan City government to that of a county directly under the Guangdong provincial government.

In the reform, Shunde consolidated 41 party, government and grassroots-government-funded non-administrative organizations into 16 departments. These 16 departments included six administration departments, five economic departments, and five social service departments. This streamlining process led Shunde government to become the district government with the least number of departments in China. In November 2010, the government department streamlining experience was promoted to 25 other counties by the Guangdong Provincial Government.

Intensifying the innovation drive to build a high-tech Shunde

The competitive advantage which Shunde enjoyed in the past now faces challenges from newcomers who have imitated its model at a lower cost. Using economies of scale to lower costs; building an ecosystem and an efficient supply chain to offer innovative, cost-effective products; speeding up technological innovation and improving product design are now insufficient to sustain fast economic growth.

Moving into emerging high-value-added industries is the best option for Shunde’s economic growth. However, this move is constrained by problems such as insufficient innovation capability, shortage of relevant talents and the fact that Shunde has little core technologies in emerging high-value-added industries. To address the shortcomings, the Shunde government developed a technological development plan called ‘Technology Shunde’. The program is intended to work alongside the GBA project and develop Shunde’s high-value-added emerging industries.

The Shunde government announced a series of measures aimed at promoting innovation. The focus was on seven aspects: nurture high-tech enterprises, build new R&D institutions, improve enterprise technology, build incubators, develop core technologies in the targeted industries, build up an innovative talent pool, and promote fintech.

In March 2016, the Shunde government established a Financial Development Bureau to promote fintech, support promising new high-tech start-ups and help emerging industries obtain finance for expansion. Kecan Group, a venture capital holding company, was set up by the Shunde government to invest in technology park construction and establish incubators to attract talents. Kecan also set up incubators in Shenzhen with the aim of convincing successful start-ups at the Shenzhen incubator to move to Shunde once their products have reached the commercial production phase. Similarly, Kecan set up an office in Beijing to attract successful start-ups to move to Shunde for their manufacturing operations. A one-billion-yuan venture capital fund was set up by Kecan to invest in promising start-ups in Shunde.

Shunde has fourteen innovation platforms under operation and they can be classified into three groups. The first group comprises six platforms related to servicing home appliances, furniture, horticulture, and the garment and machinery industries. They provide business consultancy, testing, design and training services to the industries.

The second group comprises five platforms in fundamental research related to the industries. The district government has cooperated with universities and research institutes to set them up, and they provide postgraduate research training, conduct application-type research and focus on adapting the research findings into production.

The last group comprises three incubator platforms for innovative and entrepreneurial start-ups. Their businesses focus on forming teams, project incubation, and technology-based coaching for the enterprises.

On top of the 14 platforms, Shunde has also been building three important scientific and technological innovation clusters: the Sino-German Industrial Service Zone, the Wisdom Valley of Southern China, and the Shunde New High-Tech Industrial Development Zone. These clusters are found in the south, east and southwest regions of Shunde respectively. The Sino-German Industrial Service Zone is an intelligent manufacturing industrial park; it focuses on smart manufacturing, robotics, and modern exhibitions. The Wisdom Valley of Southern China is an area designed to attract company headquarters, talents, as well as high-end R&D and service industries. The High-Tech Zone comes with complete facilities and impressive ecological design and serves as a modern industrial base for businesses.

Promoting high-value-added emerging industries is on the to-do-list for most GBA second-tier cities, and attractive financial incentives are offered to attract successful companies to locate to their towns. For Shunde, the government believes that aside from financial incentives, other non-economic factors like providing conducive business and living environments are what attracts talents and emerging industries. Some reforms have recently been implemented to facilitate business operations and help outside talents relocate to Shunde. An example is the 1121 Reform, which aims to create a conducive business environment by streamlining business procedures and providing quality support services.

Shunde is known for implementing comprehensive plans to attract talents and industries. The skill reflects Shunde’s creative spirit and its ability to think out of the box, and is the hidden factor contributing to its success.

Innovative management of private companies

The rise of Shunde’s home appliances industry reflects the entrepreneurial spirit and innovative ability of its private companies. Entrepreneurs in the home appliances industry understand the company’s strength and weakness, and their business model leverages on internal strength and avoids pitfalls related to its shortcomings. They built large industry supply chains, achieved economies of scale, and speedily incorporated the latest product design and technology innovation in their products. Shunde’s home appliances are known for being cost-effectiveness. But, most of the innovations in Shunde’s home appliance industry are applied ones, few of them touch basic functions.

Shunde went through three industry evaluations in the past 12 years and is undisputedly the country’s home appliances capital. Since China’s reform and opening, the industry has attracted more than 3,200 home appliances and complementary companies using imitation, import and innovation. It currently has an output value of over 200 billion yuan. There are 84 home appliances companies with sales of over 100 million yuan, and 4 with sales of over 10 billion yuan. These four companies include Midea, Hisense, Galanz and Vanward. Additionally, 200 companies are among China’s top 500 corporations. In recent years, new emerging stars such as Viomi and Deerma have surfaced, and GMCC and Sunwill have become invisible industry champions.

Shunde’s home appliances industry currently has five national-level technology centres and 21 provincial-level technology centres. It has the highest number of national-level technology centres in the country and holds one of the highest numbers of patents. By 2017, the industry includes more than 200 national high-tech companies.

Another feature of Shunde’s home appliances industry is that many companies are willing to work in a niche area. Apart from large companies like Midea, many companies sell a single range of products but have an output value of 500 million to 1 billion yuan. The extent of specialization in the home appliances industry of Shunde is uncommon in China.

Branding also plays an indispensable role for Shunde’s home appliances companies. After being named China’s home appliances capital again in 2014, Shunde further implemented a movement to market its brand regionally and internationally. There is no surprise that in 2018, Shunde was once again crowned the home appliances capital. It has nine home appliances brand classified as nationally famous brands, almost one-third of famous national brands, 31 famous provincial brand and 57 well-known provincial brands.

Shunde’s trademark registration data fully reflects the emphasis on brand innovation. Currently, the number of famous brands in the region, famous brands in Guangdong Province, collective trademarks, and international trademark applications in Madrid are 34, 143, 21 and 229 respectively. More than 93,000 valid registered trademarks have been filed, and the district boasted an average business trademark of 4,800 per ten thousand business entities, among the highest in China.

The challenge of continuing innovation

However, Shunde’s home appliances also face the problem of continuing innovation challenges. Most of its innovations are application innovations rather than entirely new product innovations or essential function innovation. The industry is moving to address this issue by doing more basic research, acquiring technology from overseas acquisition and moving into complementary technology to search for a breakthrough.

In the context of fierce international competition brought by the new industrial revolution and the challenges posed by other cities in GBA following the closer integration of Pearl River Delta economy, Shunde’s government will face new opportunities and challenges when trying to guide private companies innovatively. Competitors from all around the world and the GBA will be fighting for the same talents and companies, making the goal to build a high-tech Shunde a more difficult one. Regarding opportunities, however, cooperation in the GBA may be beneficial for Shunde’s industries as Shunde can tap into the vast talent pool and business opportunities offered by Shenzhen and Guangdong. A case in point is the relocation of DJI’s manufacturing facility into Shunde. DJI is the largest civilian drone manufacturer in the world, and it chose Shunde for its expansion.

The GBA integration presents both a challenge and an opportunity to Shunde; as long as Shunde’s government and private companies continue to innovate, the GBA will become an essential platform for Shunde’s economic development.

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