Open Innovation in Shenzhen: An Interview with David Li

On 26th June 2017, I interviewed David Li at his Shenzhen Open Innovation Lab (SZOIL) What appears below is a fairly heavily edited version of our conversation. Any errors are my own fault. 

HS: Shenzhen is perhaps most widely known for its electronics markets. Can you tell me how these emerged here? 

DL: Shenzhen has really shifted the means of production. Understanding the history of Shenzhen and its electronics markets requires understanding it in this way: in terms of large-scale shifts in the global economy over the past thirty years. Everything comes together in Shenzhen, and this is really unprecedented in scale. It makes 90% of the world’s electronics, and around 87% of mobile phones. That’s an unprecedented scale, unprecedented in industrial history.

The key is that in the 1990s, computer manufacturers and OEM/ODM companies began to consolidate. Compaq acquired Digital then merged with HP, for example. There was increasing vertical integration. And this consolidation was combined with outsourcing to companies such as Foxconn. This worked very well for these very big companies, placing big orders and for millions of units.

But it didn’t work well for everyone. Many specialist users and specialist markets required smaller orders — perhaps just a few hundred thousand or even tens of thousands of units. Foxconn wasn’t interested in such orders. So a market emerged: smaller shops, many of them former Foxconn or OEM employees, who could deliver smaller orders.

By the late 1990s, it was the entertainment market that was huge — CD players and DVD players. But as long as a machine played DVDs the brand doesn’t matter too much. And then, by the early 2000s, mobile phones came along. And it didn’t take too long to figure out that demand was extremely high. Small-volume manufacturers had one of the biggest market opportunities ever — selling phones to everyone, to rural people, to the third world. And this was the beginning of the shanzhai phone industry.

This happened at more or less exactly the same time the government had given up on Shenzhen, in the late 1990s. Shenzhen was China’s experiment with capitalism, but the central government mostly thought this experiment was over. But it was really from 1998 to 2008 that this really took off.

HS: How does the process of designing and making phone or other electronics products actually happen?

DL: Shanzhai phones are niche, small volume productions. There may be demand for just 50000 of one particular model, so this was not about developing new technology. Rather it was about doing things as fast as possible. A firm might be working with as many as six new designs for a phone per week, each with small variations. This works under conditions of intense time pressure, very open systems creation, and no litigation.

This is not just copying it’s also about cooperation. If one guy has a new type of phone design, rather than have it copied, he’s happy to allow others to put their case and logo on it and sell it as their own. Or, perhaps they need different functionality but they want your case. Fine, then I’ll sell you that. This is about monetizing everything you’ve created.

It’s important in this story too understand the place of the Shenzhen companies ZTE and Huawei too. In the 1990s, no Chinese mobile network operators bought or used their equipment. Chinese firms used US technology. So ZTE and Huawei had to go to the middle East, Africa, and South America to sell their products. Many of their representatives made extensive contacts there, as they were setting up new telecom towers and building networks. And they realized that their friends back home could supply exactly the kinds of phones that would sell in these markets: cheap phones in small batches.

HS: How do “makers” fit into all this?

Shenzhen is also shifting the narrative about who can create. We usually think of makers as graduates of Stanford or Berkeley, not in a garage anymore perhaps. But these guys produced Juicero! This narrative is so outdated, but it is still pervasive.

Shenzhen has turned making into a street fair or street market. Look for the guy with the man-purse and the striped polo shirt walking around in Shenzhen. He is the real maker. In fact, really anybody off the street can be a maker if you have ideas and the right market. There is no barrier. There is no pitch to a VC where they turn you down because you don’t have the right degree.

When it came to Shenzhen, Bunnie‘s [Huang] narrative was pretty dominant. Bunnie saw the electronics markets and was like “it’s awesome! You can build anything!” “But Bunnie you forget the fine point that you have a PhD in electrical engineering from MIT.” Of course you can build anything if you have a PhD in electrical engineering from MIT!

But in Shenzhen actually anyone can be a maker. Our role [at SZOIL] is educating people so everyone can make hardware. We are bridging the gap between global perception and local reality. This is how hardware gets made now.

HS: Can you give me an example of this?

Here at SZOIL we are looking at the reality in Shenzhen. And the reality is that very few ideas are unique. We were helping a German company who wanted to make a dog tracker — a device for tracking your dog on your phone. They spent eight months designing their device in Berlin. When we checked with our manufacturers here they said that it would need to be significantly redesigned to make in manufacturable. But the manufacturers here also had their own design for a tracker that they could ship in two and half weeks. Now the German company had to make a choice between spending more money and time on their own design or having 100 units ready to ship in two and a half weeks.

And now there’s the “White Label” brands. You can pay these guys 50% upfront and they’ll put your logo on it and have it ready to go within a very short time. The “White Label” brands make almost anything. 85% of what we see from overseas we can find as White Label already.

We are constantly doing this: liaising between overseas companies and manufacturers in Shenzhen. There’s no signing of NDAs and huge data file transfers; we just need a five page presentation. The Shenzhen ecosystem is open; it is doing it cheap and continually iterating. New ideas are always popping up. So, to make a new product, don’t spend eight months trying to engineer a new design. Someone’s already doing it, already making it! Rather, the attitude should be: “Let’s work together!” and not “I won’t have coffee with you without you signing and NDA.”

HS: So where can you see this process at work?

Our role is to facilitate conversations between startups and Shenzhen. The media is mostly interested in “cowboys” and “young explorers” but that’s not it! That’s not how new products are made here. When you go to the electronics markets you usually see the “eye-level shops” — the big brands you recognize. But look two racks down: for half the price are brands you’ve never heard of. How do these things happen? Where do you find the guys making these?

Look for the fifty-year old guys flying business class around China. They’ve been making hardware in Shenzhen for twenty years and doing it in style! Every quarter they do their market research, asking around shops in their own cities. Then they come down to Shenzhen and go to talk with the factory boss they’ve been working with for ten years. They drink tea and discuss their ideas. The factory boss says, “ok, we can make this one, and this one.” And so they call in the industrial designers who make the prototypes.

Then, while the prototypes are being made, they spend a lot of time going to nice dinners, singing karaoke, and playing golf. A few weeks later the businessman goes home with a suitcase full of prototypes to try to sell at home. That’s how you make hardware in Shenzhen. In style! But this story is rarely told because it’s so different from the global narrative, and not cool enough. This is not Steve Jobs in the 1970s. But we are not living in that world.

The hype around startups makes it difficult to do this work. Sometimes startups coming to Shenzhen want millions of dollars. But we have a guy in our WeChat contacts who can make what you want and supply it in the next two weeks. But after the investment bubble burst last year, things got much better.

HS: So what do you think Shenzhen is doing that is not being done elsewhere?

One thing is that it is working much more closely with Africa. Everything will be coming out of Africa in the next five years. Everything is hacked together; there’s no regulation, no infrastructure. It’s like Shenzhen thirty years ago. There are lots of interesting projects.

The other thing Shenzhen does is diversity. Now smart speakers are one of the next big things: being able to interact with machines via voice. But this will have to be personalized, to adapt to different languages. Not everyone wants a British lady in a box. This is a great business idea and is going to be super popular. Every speaker is going to talk soon. But, by the time it gets to Huaqiangbei, it won’t be politically correct speech necessarily; it will be diverse. We want things that are close to our own culture.

HS: What sort of critique does this offer of “maker movements”?

People think that “makers” will bring design to Shenzhen. But there are already 15000 working designers in Shenzhen. So it’s not about that.

Shenzhen offers better ways to do business and to make hardware. Compare these two videos, one made by the developer Scotty Allen [his video here] and one from the Wall Street Journal. There are two very different narratives here, the first is a lone “cowboy” while the WSJ one shows two women sitting quietly, drinking tea, and creating a phone. This second one is much closer to how Shenzhen does business. And it contains a more subtle message: that making is about education.

To some extent, the maker movement has gotten ridiculous. Makers are trying, like Trump, to take manufacturing back from China. At least Trump has a chance of being successful. They think of technology creation as a globalized mom and pop shop. But things you create don’t have to be manufactured by yourself. Like the Web, if you want to host a website, you don’t have to set up your own server. No-one creates websites for themselves anymore but this is what makers think they have to do with hardware.