Lessons from the hardware capital of the world

A week is obviously not enough time to truly understand a market as massive and fascinating as China. Hell, it’s not really even enough time to adjust to the 12-hour time difference from New York. That said, each of the three visits I’ve taken to the country in the past two years has yielded some useful insights into my role as hardware editor here at TechCrunch.

Late last week, I got back from an eight-day trip to Shenzhen in the Guangdong Province of South China and nearby Hong Kong. In some respects, the cities are worlds apart, though a newly opened high-speed rail system has reduced the trip to 30 minutes. Customs issues aside, it’s the height of convenience. Though for political and cultural reasons I’ll not get into here, some have bemoaned the access it’s provided.

This particular visit was sort of a scouting trip. In November, TechCrunch will be hosting its first Hardware Battlefield event in a couple of years. Previous events had been held at CES for reasons of easy access to young startups. This time out, however, we’ve opted to go straight to the source.

The birthplace of hardware

Shenzhen is the birthplace of hardware. According to estimates, some 90% of the world’s electronics come from here.

Among the world’s fastest-growing cities, Shenzen currently boasts an official population of just under 13 million, though estimates put the number at closer to 20 million. The fairly massive discrepancy is the result of the part-time and short-term residents, commuters and migrants flooding into the city.

A number of people I spoke to characterized Shenzhen as both a young and transitory city. Census data puts the average age at just under 30 years, with ages 15 to 59 making up more than 88% of the total population.

It’s primarily the booming tech economy that attracts them. Huawei, Tencent, ZTE, Oppo/OnePlus and DJI all have headquarters in the city. Many of the industry’s most important manufacturing plants are in the city or nearby.

In 1980, Shenzhen was designated as China’s first “special economic zone,” with business and trade laws operating outside the standard jurisdiction of its home country. Prior to this, the city was home to roughly 310,000 residents. Since then, it’s become arguably the most important tech hub in the world.

Along with those massive multinational corporations, Shenzen is also a great place to launch a startup. Proximity to the markets of Huaqiangbei is still important. While it’s true that most business is done online these days, iterating and prototyping can be lengthy and complex processes. Setting up shop so close to the supply chain can ultimately save untold days and weeks.

I was blown away when I made my first visit to the markets last fall after years of hearing tales. The spaces are something between an indoor mall and flea market, with each room jam-packed with tables roughly grouped by category.

It’s booth after booth, on floor after floor, in massive building after massive building, devoted to electronics. Some are ready for retail, but most are either components or wholesale. If you do attempt to buy something for yourself (a traveling companion had eyes on some light strips), the person behind the counter will likely attempt to upsell you to a wholesale order.

Any component you could imagine

After last year’s trip, a founder of wearable metronome startup Soundbrenner related a funny story about visiting the markets for the first time. Having been accepted into Brinc, a Hong Kong-based hardware accelerator, the team took a trip to Huaqiangbei to find components for their product.

A lot has been written about the ways in which the smartphone wars have utterly transformed hardware. So many components are cheaper, smaller and more accessible thanks to the arms race between companies like Samsung and Apple. Even so, finding a haptic engine powerful enough to be felt on the wrist was proving impossible.

As the team was losing hope of finding what it was looking for, it ran into a woman pushing around a shopping cart filled with every kind of haptic motor. There among them was precisely the component the team needed.

Any component you could ever need is there among the stalls, even those you didn’t know existed. You just need to know where to look.

And in the off chance it isn’t there, there’s definitely someone who can get 10,000 of them for you on backorder.

A visit to HAX’s location in the midst of the markets this year highlighted some other things I hadn’t previously considered on my 2018 trip.

Garrett Winther, a partner at the hardware accelerator, told me that it didn’t keep a 3D printer in-house alongside other pieces of machining equipment. It was a surprising admission. After all, not only is guiding hardware startups through the development process an essential part of HAX’s mission, it has also invested in 3D printing companies — including, perhaps most notably, Formlabs.

Ultimately, however, Winther explained, Huaqiangbei wins out. Included in the ecosystem that has cropped up around the markets and factories are services that will create prototypes from CAD files in a day or hours. The people running the machine are for more knowledgeable and experienced with the equipment than your average hardware startup founder.

The trade war’s ground zero

The topic of trade is very much on everyone’s mind — though not everyone is eager to discuss it.

Large companies are reeling from ever-escalating trade tensions between the U.S. and China. Tariffs were enough of a concern for Apple to lead Tim Cook to take a meeting with Trump in order to plead his case. Clearly, those meetings weren’t enough, as Trump levied a very public threat against the company on Friday.

Ultimately, that instability appears to be as much of a concern as the actions themselves. But as much of a concern as those fees are for the Apples of the world, they could prove to have a profound effect on startups with much less wiggle room when it comes to product pricing. Startups and those in the industry I spoke with told me that pricing and supply decisions are far more day-to-day in the face of an all-out trade war between superpowers.

There’s understandably even more than the standard amount of wariness and hand-wringing as young companies consider their go-to-market strategies, both with regards to what markets they’ll sell the products in and from whom they’ll source their components. It was clear from the outset that these tensions were going to have a profound impact on tech, but ultimately there isn’t an aspect of the industry this hasn’t or won’t touch, and, in many ways, the markets of Shenzhen are very much ground zero for all of these.

The past decade has been an exciting one for hardware. For a while, at least, the common wisdom about hardware being hard was touted out a little less frequently, as a confluence of factors lowered the barrier of entry considerably.

There was the aforementioned smartphone battle that made components far more accessible for a range of different fields. Rapid prototyping, scalable manufacturing and crowdfunding have all played a role as well. It’s true that in the last few years some of that sheen has worn off. Many have cooled on the space.

To many, hardware presents a sort of tangible reward one can’t get with software, which is so often theoretical and abstract. Derek Kwik, managing partner at BraveSoldier Ventures, told me about the satisfaction of being able to hold a product in your hand after all that build-up. It’s something software can’t really afford.

I appeared onstage at an event in Hong Kong in the days ahead of my Shenzhen visit to discuss the benefits of investing in hardware versus software. Both panelists were plenty bullish about the category. I think SOSV/HAX partner Cyril Ebersweiler put it well when he described the balance, telling me:

We make it clear to the CEO or the entrepreneur in residence that’s starting a company that you can’t just be hardware. It’s not that way anymore. In fact, we get worried when we don’t see parallel software development going on with the hardware. It’s sometimes quite daunting to do some of these very difficult hardware projects and products. You still have to be able to implement the software platform with that.

In other words, software is nothing without hardware and hardware is nothing without software. The trick is finding a way to own both. But you knew that already. With advances in robotics, healthcare, mobile autonomy, sustainability and consumer products, it continues to be an incredibly exciting time to be following hardware, and nowhere is that more clear than Shenzhen.