Stop 5: Shenzhen

Shenzhen Notes by Steve Kirn

Impressions of the place

Shenzhen is a city that grew from a population of about 30,000 in 1980 – when it had just been designated as China’s first Special Economic Zone – to over 3 million people in 2010, just 30 years. And it continues to grow at a rapid pace, listed as one of the fastest growing cities in the world.  It has been a magnet for foreign investment, including a great deal of manufacturing, and more recently in finance and other services, aided in no small part by its close proximity to Hong Kong.

As you approach the city from the airport, you are struck by the intensity of construction projects, and by the seemingly impossibly tall buildings still topped by construction cranes that “don’t look like they belong up there that high”.  There seems to be a competition among Chinese cities to build ever-taller buildings, a sort of architectural arms race that is clearly intended to demonstrate economic power and success.

There is a lot of water, with the city being in a river valley that made it a population center for centuries before its rapid expansion as a Special Economic Zone.  But it looks like competition for land is leading to a good deal of landfill projects, and concrete channels (visible from the hotel window) that contain the river within a defined channel, rather than spreading out as it had done naturally, as evidenced by broad, flat wetlands along its shores.  Wonder what will happen to those?

Our hotel is fine, but the nearby train station and the sidewalk to get there was populated by some very questionable people, including some who were clearly psychologically disturbed, homeless, drunk (or drugged) and a few who certainly were up to no good, especially when spotting Western tourist “marks”.  Prostitutes solicited business brazenly and openly, right at the edge of the hotel property.  The juxtaposition of these apparent societal castoffs, and the surrounding, modern development was striking.

There was little time to tour the main “downtown” part of the city itself, but perhaps it was a better learning experience to see some of the side of China that would not play as well in a tourist brochure or on a picture postcard.  Which is the “real” China in 2011?  Probably both.

Business tour – manufacturing

Our business tours included a trip to one of the manufacturing areas, specifically Umbra – the Canada-based manufacturer of window shades, rods and other window treatments, as well as a wide array of home décor items, sold at major retailers throughout North America (about 75% of its business).  While product design operations remain primarily in Toronto, manufacturing has moved almost completely out of North America. (Only a few plastic items are now made in Canada.)

Umbra opened its own manufacturing operation in Shenzhen in 2003, converting a large, warehouse-style building into a light manufacturing facility.  Employment there has grown from 34 employees to a regular workforce of 500, with an additional 300 people working during peak seasons.  This one plant makes 50% of all of Umbra products, and serves as a consolidation point and final-finish operation for 30+ other factories and suppliers.

I was struck by the number of people on the production lines, and the amount of hand labor.  Very little “automation” here, and not a robot in sight!  While it makes you wonder about efficiency, there is no doubt that it adds great flexibility.  They can handle very small order sizes, with rapid turnaround, simply by having the workers switch to a different task.  No expensive downtime or retooling required!  The workers appear quite young, for the most part.  Despite the “graying” of Chinese society, we saw very little evidence here (or elsewhere) of older-aged people.  Where are they?

The tour of the workers’ (required) company housing was quite fascinating.  The building looks to be of about 1960’s or 1970’s era construction, though it may be newer.  Accommodations are basic, but include a private shower and toilet area – not always part of such arrangements – a smallish main room, and an enclosed  balcony  area that provides electricity and an area for basic cooking (e.g., with rice-makers).  Meals are actually provided to the workers, but the privacy, and access to what amounts to a small “village” with shops, cafes and services makes for what we understand to be quite acceptable living, especially by former standards.

The apartment doors are all unlocked, ad we are free to wander around people’s apartments, take photos, etc.  It feels strange.  Is there any theft or crime, especially with so many living in small spaces, in close proximity and density?  We didn’t hear of any such problems.

Walmart and Sam’s Club

A tour goal: See what the world’s largest retailer is up to.  We had visited a two-story Walmart in Chengdu – basically akin to a U.S. supercenter, but with an enormous grocery that occupied a full floor.  Shenzhen is the China HQ for Walmart, so we were interested to visit.

“Growth” is not just restricted to buildings and population.  Retail sales are growing at an average 18.4% annually.  Yet retailing remains fragmented in China, with the top 100 retailers accounting for only 11% of total sales.  Big opportunity!  Walmart opened its first China store in Shenzhen in 1996, and has now grown to over 66,000 employees across its China operations, plus another 28,000 at Trustmart, a subsidiary that Walmart operates under its original name.  The business strategy is tiered and diversified, with customers segmented primarily by income level.  There are also multiple store formats (329 stores in 98 cities) to address different customer needs, including Supercenters, Sam’s Clubs, Neighborhood Markets, small “Smart Choice” outlets, and Trustmart.  The pricing strategy is similar to that in the U.S.:  EDLP.

Even mighty Walmart has to contend with gaps in infrastructure (being quickly remedied, if construction is any sign), inefficiency in operations (also noted throughout our tour, but hey, if you have enough low-paid people, inefficiency can be tolerated ……….for a while.)  And then there is the government – but Walmart claims to have worked to align their needs with the government’s priorities, and addressing infrastructure and productivity issues is at the top of both of their lists.  For example, Walmart has worked with farmers to reduce food waste and increase yields – practices that benefit not only Walmart, but the farmers (and community) in general.

The Sam’s Club was quite striking – not least because it has the highest sales of any Walmart store in the world!  It is notable that in some categories, e.g., electronics, Sam’s maintains the distinctly Chinese practice of creating branded “shops”, staffed by the manufacturer’s people (for example, SONY).  There are also a number of leased shops or counters on the floor in such categories as watches and fine jewelry.  Other categories are merchandised and staffed by Sam’s own people, as in the U.S.

Walmart seem poised to grow, and wins a lot of awards as a great place to work.  They plan more multi-format offerings, especially in Tier 2, 3 and 4 cities.  They find that having multiple formats in a given area yields both greater market penetration and efficiencies of scale.  Walmart clearly shows the results of having “stuck with it” and learning during their first, lean years on entry into China.  It remained a bit surprising to see ex-pat managers – not Chinese nationals — still leading some functions, and making the presentations to us.  Maybe it was that this avoided language/translation issues?

Still, I predict great success for Walmart in China, especially with their ability to segment their operations to mirror customer segments with different needs – and aspirations.

The border crossing process

Our final taste of Shenzhen included an experience that seemed something of a holdover from the pre-1997 days before Hong Kong reverted to Chinese control.  Even though the two cities literally abut one another, the border crossing was akin to moving from one country to another.

It first required lugging all luggage and other items off the bus and through a 45-minute line to clear immigration and customs checks on the Shenzhen side of the border.  Then we loaded everything back onto the bus, drove a few hundred yards, and repeated the unloading, waiting for clearance, then reloading in order to enter Hong Kong.  A major hassle, as the government buildings had clearly not been thoughtfully designed to make this process easy.

In reality, this hassle (actually, a “minor” one, in the great scheme of things) served as yet another useful reminder of China’s transitional status, with one foot still in the past, even as it races toward the future.