The Pearl River Delta: a region of copycats or a center of innovation?

Do you know the Pearl River Delta Region? And what comes to mind when you read something about Chinese products? Probably images of cheap ‘made in China’ junk of low-quality or imitation products (copycats), manufactured in enormous factory halls in bad circumstances. And that is not surprising, as indeed it is what most people think. But did you know that a region in China currently is investing billions in stimulating innovative companies? And that the city of Shenzhen within that region currently became the hardware capital of the world? This particular region is called: The Pearl River Delta.

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Welcome to the fascinating Pearl River Delta region

The Pearl River Delta (PRD), is a megacity located in the province of Guangdong in the south of China.  The megacity consists of eleven heavily interconnected cities al strategically based in an enormous river estuary which joins the South Chinese Sea. The eleven cities also comprise of Special Administrative Regions (SAR’s), Hong Kong and Macau, these regions have their own separate political and economic (capitalist) system but are to a large extent dependent on China and the PRD region (Hong Kong Trade Development Council, 2018). 

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According to British newspaper The Guardian, the PRD took over Tokyo’s position as the largest urban area in the world, in both size and population, since January 2015. The PRD has an astonishing estimated population of 65 million people, which is comparable to the entire population of the United Kingdom, all within a space as big as Croatia (The Guardian, 2015). 

Since the 1980’s the PRD has developed into one of the most important economic centers of China and South East Asia, and it is still growing. While this important economic and commercial ‘motor of China’ is home to only 4.3% of the population of China, it has managed to become the generator of 9,1% of China’s gross domestic product (GDP). This comes down to $1.2 trillion, comparable to the entire economy of Mexico. With an estimated nominal GDP per capita of $17,182, the PRD is one of the richest regions of China and also in the world (World Bank, 2015). The strategic economic position is also reflected in the massive export rates, 29% of China’s export takes place in the PRD region (Geoshen, 2018). 

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A copycat imago 

The PRD is well-known and also infamous for its economic status as the ‘factory of the world’ and their reputation as a ‘center of copycats’ (South China Morning Post, 2017).The term ‘copycat’ refers to ‘products that have been designed, branded or packaged to look exactly like that of a well-established competitor (often a product form the western world), and it is usually cheap imitation’ (Monash University, 2018). There are countless examples of situations in which companies are suing Chinese companies for plagiarism, copying their product or even worse business espionage and attempts to gain information by hacking. 

The Gross Domnestic Product of the PRD comes down to $1.2 trillion, comparable to the entire economy of Mexico

Today the PRD is still developing rapidly, and not only ‘copycats’ but also an increasing number of innovative companies and start-ups, especially active in the hardware and automotive sector, originate from the PRD (The Economist, 2017). So, the question is, is it deserved that the PRD is still seen as a center of copycats and not as an important center of innovation? This research article aims to find the answer on this question as well as factors that might have had an important effect of this transformation. Immanuel Wallerstein’s World-systems analysis is used as an important guide through the article.

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How did The Pearl River Delta region develop into the ‘’factory of the world’’?

In order to investigate if the PRD has become a center of innovation or one of copycats, it is essential to understand how the region originated and how it developed itself into an incredibly productive area nicknamed the ‘’factory of the world’’ (South China Morning Post, 2017). 

Before the economic reforms of China and the opening of several economic zones to the rest of the world in 1979, the PRD region was struggling with poverty and the economy was mainly based on fishing and agriculture (Geoshen, 2018). In terms of Wallerstein’s World-system analysis, the PRD would be classified as a periphery, mainly active in producing primary materials, with low surpluses and minimal profits (Wallerstein, 2004).

After the econd orld war, China also had to deal with huge losses, political instability, and economic damage, what dragged the country into a destructive crisis. In those turbulent times, the region was sparsely populated, and the vast majority lived on the countryside, often poorly educated. Only 28% of the population lived in cities, mainly in Guangzhou (Geoshen, 2018). 

Before the 80s, there was no such thing as a modern industry in the region and the infrastructure between the area and other parts of China was of very poor quality, which was not conducive for trade. Nevertheless, the region was located on a strategic location in the delta of several rivers, the Chinese government had big plans for the region. Hong Kong and Macao were, for a long time, for a long time, under the influence of the United Kingdom and Portugal respectively and already had a good infrastructure and a stable economy (MacauHub, 2017).

It was no surprise that the PRD was chosen as a Special Economic Zone, since it was traditionally known as China’s gateway to the world

In 1979 the Chinese Communist Party began to re-organize and open their economy in a controlled way, by selecting several, so-called Special Economic Zones (SEZ’s). Those SEZ’s are free-market-oriented zones on strategic locations with several favorable benefits in order to stimulate the economy. The PRD was chosen as one of those few SEZ’s, together with Xiamen, Zhuhai and Shantou (several other regions would follow). These areas were selected and created by China’s former leader of the communist party, Deng Xiaoping as a part of China’s economic reforms in order to modernize China.

It was no surprise that the PRD was chosen as a SEZ, since it was traditionally known as China’s gateway to the world. For a long time, Hong Kong was a British enclave and Macao was Portuguese stronghold, and a lot of other western superpowers tried to take over the area. Besides that, the region could benefit of the ‘free ports’ and the already existing infrastructure in Macao and Hong Kong (Breznitz, 2014). The economic shift soon turned out to be a real economic success. 

Because the new regulations of the PRD, the region had a huge pull effect on migrant workers and global, regional and local businesses. The new tax and business incentives were very attractive and favorable for Western multinationals, and cheap labor and the low prices of real estate ensured that a lot of companies invested in the region. The PRD received an estimated share of 30% of all foreign investments in China (Geoshen, 2018). 

Western companies started to build many factories, machines, and warehouses in the area, and subsequently, the region transformed from an agricultural zone into one huge factory (Thomas Chan, 2017).As a result of the enormous number of factories and companies, the supply of jobs in the PRD was immense. The region became a very popular destination for millions of migrant workers from the relatively poor Chinese mainland. As a result, the population of the PRD grew explosively, and the villages transformed into cities (Geoshen, 2018). 

Due to the free-market-stimulating regulations implemented by the government, the PRD developed itself from a periphery into an economic center on a regional scale and a semi-periphery on a global scale (Breznitz, 2014). The region transformed itself into an industrial powerhouse within a large transit economy, mainly focused on the manufacturing and production process of semi-finished products on a large scale (for example, garments, toys, and textiles), with a moderate surplus (Wallerstein, 2004). In this stage, the PRD reached their infamous economic status as the factory of the world.

The common perception of the PRD became that they were not able to create innovative products and services

A lot of countries and companies labeled China and the region as copycats because of the fact that the factories in the PRD were mainly active in manufacturing products that has been designed, branded or packaged to look exactly like that of a well-established competitor, and often is a cheap imitation (South China Morning Post, 2017). 

The common perception of the PRD became that they were not able to create innovative products and services. This is a very characteristic point in the development of the PRD because in this stage the region was developed into an important economic center within China but was still at the margin of the world’s economy. The region stayed in this stage for a long time and is still struggling with the step towards becoming a global center in which the region is focusing on high-tech product innovation, finishing and marketing leading to a high surplus (Wallerstein, 2004).

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Interesting developments and transitions in the Pearl River Delta

The uninterrupted economic growth of the PRD since the 80’s keeps on going and resulted in major changes in the area. A couple of those changes has large effects on the PRD's attempts to transform from a semi-periphery into a center. 

The Chinese government, the governments of the SAR’s and several stakeholders are investing heavily on large-scale infrastructure projects in order to integrate the region to improve efficiency. The aim is not only to increase the connection between the eleven cities within the PRD and the export channels, but also to improve the connection of the PRD and the mainland of China. 

The current infrastructure is already better than that of many other developing countries

The latest five-year plan calls for the creation of a "one-hour transport circle" to link the main cities in the PRD, this plan reveals the importance of the infrastructure and the ambition of the PRD (Fuller, 2017). The investments in the infrastructure have to increase the accessible pool of consumers and workers, stimulate the accumulation of knowledge and human capital and reduce the transportation costs (Geoshen, 2018). The results of the investments are beginning to bear fruit, because export as a share of Guangdong’s industrial output is increasing rapidly.

China can count on the participation of the SAR’s in their new integration plans, since the economic growth of Hong Kong is stagnating and Macau is simply too small and populous to expand, so both are forced to cooperate with other cities and invest in infrastructure (Thomas Chan, 2017).

The current infrastructure is already better than that of many other developing countries, but due to the coastlines and rivers  difficult to reach some corners of the region. An iconic example of such an infrastructure project is the brand-new Hong Kong – Zhuhai – Macao bridge, which opened in 2018. The bridge is 55 kilometers long and shorten a four-hour journey from Hong Kong to Macao to a comfortable 40-minute drive. The estimated cost of the project is $7.56 billion (CNN, 2018). 

The economist Richard Baldwin argues in his book 'The Great Convergence, that most of the time in the industrial era the firm-specific know-how and knowledge sharing culture remained in the factories and people of the western world (Baldwin, 2017). This knowledge gap is resulting in an emerging divergence between the human capital of the West and the rest of the world.

fter 1980 Western multinationals started to build factories in foreign countries, such as China, as already mentioned above in order to benefit of cheap labor, but the knowledge remained in the West. China could barely take advantage of new knowledge. Even today, the PRD is still struggling with the tenacious knowledge gap between them and the western world. In order to solve this problem, the Chinese government and factories in the PRD are investing billions in research and development in order to narrow the knowledge gap in technology (Wong, 2016). But still, the PRD are lagging far behind the Western countries when it comes to knowledge about technology. 

Due to the unstoppable economic growth of the PRD, the wages of the population are heavily increasing. The nominal GDP per capita in the PRD is estimated on $20,000 (CNN, 2018). This means that, if the PRD was a country, it would be one of the richest nations of the world. China as a whole is ranked much lower, which reveals the huge gap between the PRD and China.

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Companies used to come to the PRD for cheap labor, but as the region has developed itself into a wealthy region, that has changed. As a result of the increased salaries, factories are forced to find alternatives to save money. As a result of the fact that labor is getting more expensive, the mission for the companies and factories in China, and especially the PRD, is to upgrade the manufacturing process through automation in order to save money. It is simple, to eliminate jobs, the factories have to look for cheaper solutions, like robots or smart manufacturing machines.

Currently, the level of automation in Chinese companies and factories remains low compared with its competitors, but companies in the PRD are investing large sums of money in automated factories and innovative methods to make the manufacturing process more efficient. The province of Guangdong for example, spent more than 900 billion to boost the manufacture and adoption of robotics in the province because they urgently need to increase the productivity.

In the past, Chinese factory bosses never paid attention about efficiency, effectivity or quality of processes. They would rather throw more personnel at a certain task than invest in a solution in such as simple automation, but this mindset is changing fast. Today, a large number of factory owners uncritically replace humans with robotics hardware in order to increase the productivity. The factories are forced to innovate.  

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The Pearl River Delta: a region of copycats or as a center of innovation?

China and especially the PRD are still struggling with their negative image of being copycats and not able to create innovate products and services, but they have proven that this perception needs thorough re-examination. In the past decade, the PRD has shown that it is too simplistic to label the region as a region of copycats only. 

In the past century, there were more countries with the similar struggle as China. For a long time, Japan and the Republic of Korea were struggling with common perceptions that they were just simple imitators and not able to build up an innovative economy and develop new products. But over the years the countries turned out to be very innovative.

Innovative companies like Samsung, LG and Hyundai are established and based in The Republic of Korea and companies like Xenoma and Dropbox are all Japanese. Japan is also a leading country in the robotics industry.Those countries proved that it is possible to move from a copycat phase towards an innovative phase, shifting from a semi-periphery into a center (Wallerstein, 2004). 

“Shenzhen? Shenzhen is nothing but a manufacturing center, not a place to do research & development”

The PRD is outpacing the rest of China and a lot of other Western countries in their economic growth rates and investments in innovation (Fuller, 2017). For years the region has been investing huge amounts of their GDP’s into research and development in order to stimulate this process and this is bearing fruits (The Economist, 2017) because the entire PRD region is currently transforming into an advanced manufacturing ecosystem with clusters of factories working symbiotically to turn the area into a one-stop show for many hi-tech and innovation projects (South China Morning Post , 2017).

New start-ups and entrepreneurs are increasingly interested in changing the region into an advanced and innovative manufacturing cluster with internal competition.In terms of Wallerstein’s orld-system analysis, the PRD is currently shifting from a semi-periphery towards a global center. With a focus on high-tech product innovation, finishing and marketing leading to a high surplus (Wallerstein, 2004). The economy has shifted its focus from labor-intensive and high-energy manufacturing processes to high-tech sectors, like telecommunications, fin-tech and biomedicine (Fuller, 2017). Products have turned from being ‘made in China’ to ‘created in China’.

The best example to convince the world that the PRD is able to create innovate products and services, is the city of Shenzhen. The quote: “Shenzhen? Shenzhen is nothing but a manufacturing center, not a place to do R&D” as a result of an interview in the book The Run of the Red Queen (Breznitz, 2014), is a good representation of how the world thinks of the PRD.

But the PRD has not stood still in the development. After years of investments in research and development, Shenzhen recently became the capital of the world for hardware entrepreneurs and transformed itself into one of the most attracting places for innovative start-ups. Nowadays many entrepreneurs and firms active in the hardware industry, like Huawei and Tencent, which make their own hardware and software, are founded and based in the PRD. Even Apple is currently building a research and development center in Shenzhen, this shows the ambition of the region to become a knowledge center (The Economist, 2017).

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Pearl River Delta: copycats and innovators 

This article clearly shows that China, and especially the PRD, with cities as Shenzhen and Guangzhou, is indeed able to innovate. But it is quite hard to determine whether the PRD region is an innovative center or a center of copycats, because among the emerging number of innovative startups in the high-tech and automotive sector, there is still a large number of companies and factories that wield the business model of copying and imitating other products.

The answer to the question is it deserved that the PRD is still seen as the factory of the world or a center of copycats and not as an important center of innovation? is a clear no. Currently, the PRD is in the middle of a shift from a manufacturing semi-periphery towards a global center (Wallerstein, 2004). And in this transitional phase there is no clear side yet, as the innovators exist alongside the copycats.

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References

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