Bet on Shenzhen over Silicon Valley

Hello, I’m Evelyn. I am writing to you from Beijing. Welcome to the latest edition of The China Connection. This is a snapshot of what I’ve seen and heard from local businesses.

U.S. buyers show up in conversations with Chinese companies far more often than geopolitics would suggest. What is the thread that ties everything together?

MIT graduate Joshua Woodard lives by his bold beliefs. He believes that for the next 10 years after he leaves, the Shenzhen factory will be selling technology to the world. apple He runs The Sparrows, a supply chain management company based in a coastal city in China.

“Many of our customers are from the United States,” Woodard said. “You’ll hear about all the excitement: new form factors for smartphones, new ways to interact with AI, and more.”

“I don’t think you’ll see India and Vietnam challenge it any time soon,” he said. “Outside the geopolitical realm, people want to build real things. China is the only option.”

thanks to the supplier foxconnApple built a major manufacturing base in Shenzhen over 20 years ago. Consumer electronics companies from DJI to Huawei are all based in the area, and it’s also home to electric vehicle giant BYD.

“Within probably a two-hour drive, you have all the supply chains around you,” said Will Wang, CEO of Even Realties, another former Apple employee who returned to Shenzhen to launch a smart glasses startup.

“If you really want to create a future around consumer electronics, maybe the next Apple, you need to be in Shenzhen, the hardware capital,” he told CNBC’s “The China Connection.”

Trade data confirms how badly Silicon Valley needs these hardware makers.

According to the state Chamber of Commerce, China was California’s largest source of imports last year, despite a significant drop from the previous year due to increased U.S. tariffs. Taiwan and Mexico followed, followed by Vietnam in fourth place. Approximately 36% of California’s imports were computer and electronic products, the top category.

Meanwhile, Shenzhen, China’s second-largest city by overall export value, accounted for almost 19% of China’s advanced technology exports last year, according to CNBC calculations of official data accessed through Wind Information.

“Chinese vendors are becoming increasingly important in niche technologies,” said Lian Jie Hsu, principal analyst at Omdia.

He said the hardware behind humanoid robots is dominated by Chinese suppliers. However, Su pointed out that traditional robot manufacturers still rely on parts from Japan, Germany, Switzerland, South Korea and the United States.

There are many dangers to innovation.

Sparrows’ Woodard said working in Shenzhen rather than the U.S. cut costs by about two-thirds and cut prototyping time from weeks to days. He added that developers can also benefit from working with suppliers that have been manufacturing display panels for many years and have deep industry expertise, for example.

This allows startups to iterate and get to market quickly.

But not everyone is convinced. The argument against manufacturing in China is that in addition to mitigating geopolitical and tariff risks, being closer to the end user is more important.

“Especially in robotics, you want to start with what the use case is,” says Fadi Saad, general partner at Boston-based Cybernetix Ventures. He said the company’s portfolio includes 20 companies in North America and Europe.

Although companies use components from China, “we have advised all portfolio companies to have multiple supply chain plans,” he said.

US robotics company Agility said 75% of its parts are made in the US and 1% in China. Figure and Boston Dynamics did not respond to requests for comment.

But last month, Nvidia announced it would be working with China’s Unitree as part of its physical AI efforts. And as AI evolves, investors expect that hardware will require innovative upgrades.

result?

“The diversification of supply chains away from China is slowing,” said Annabel Yulong, founder and managing partner of BAI Capital in Beijing. “People expect China to innovate more efficiently.”

China warns of AI risks with Anthropic’s Claude code
The government’s Cybersecurity Threat Platform warned of “backdoor” security risks in certain versions of Claude’s code and recommended that users uninstall or update the tool. Anthropic told CNBC that the “backdoor” was an experiment to protect against distillation earlier this year. However, the company’s AI is not officially licensed in China, and Alibaba prohibits its employees from using it.

June CPI increased by 1% compared to the same month last year, PPI increased by 4.1%
Although China’s consumer price index was lower than analysts expected, factory prices exceeded expectations, marking the largest year-on-year increase in four years. PPI has risen sharply from last year’s lows due to the Chinese government’s efforts to combat excessive competition and soaring oil prices.

OpenAI, Chinese AI models are rising in U.S. companies as human costs soar
The share of tokens used by US companies in Chinese AI models through OpenRouter, a platform that gives developers access to a variety of AI models, has remained above 30% weekly since early February, well above the 11% average over the past 12 months.

China’s unusual missile test
Analysts said the high seas test with a dummy warhead was the first strategic missile test in the region by Beijing since September 2024, and is likely to lead to regional powers deepening their mutual defense ties.

July 14: China trade statistics for June

July 15: China Q2 GDP and June retail sales, industrial production and investment data

July 17-20: Chinese President Xi Jinping speaks at the World AI Conference (WAIC) in Shanghai