Mike Lin and his father’s factory occupies a single floor in a modest concrete block in Longgang, a northeastern district in Shenzhen. Inside, factory workers solder components to printed circuit boards and assemble electronics by hand.

“[My dad’s] clients are mostly electronics companies that sell long-term consumer products,” says Mr. Lin. “I am mostly working with makers.”

The 28-year old is the COO of Vast Elecsource, a manufacturing company that caters to hardware startups and hobbyists, a demographic commonly referred to as ‘makers’. It’s separate from his father’s business but leverages the same factory, which can produce small batches of products ranging from hundreds of units to thousands. Compare that with manufacturing giants like Foxconn and Flextronics, whose facilities are designed to output hundreds of thousands of units per day.

“You have to understand that big factories are highly efficient,” says Mr. Lin. “Their machines are automatic. At every step, you have to adjust the settings.”

“This gives small factories like us an opportunity,” he says.

Small factories like Vast Elecsource play an important role in Shenzhen’s multi-tier manufacturing ecosystem, which includes mammoth facilities with on-site dormitories as well as tiny prototyping workshops. It’s the difference between boutique and wholesale.

In just a few days, a large factory can pump out millions of units of the same design. Smaller factories, on the other hand, are more flexible and can offer clients custom solutions and tolerate smaller batch quantities. This makes them a good fit for startups, an increasingly relevant source of revenue as manufacturing costs rise.

“Big factories are moving to Huizhou [and] Dongguan,” says Mr. Lin, referring to two neighboring cities in the Guangdong province. “It’s too expensive to operate in Shenzhen nowadays.”

Factory workers at Mr. Lin and his father’s factory

Factory workers at Mr. Lin and his father’s factory

Over the past decade, Shenzhen has gradually shifted away from manufacturing as real estate prices and labor costs increase. According to the National Bureau of Statistics, yearly wages for Chinese workers in the manufacturing sector rose 66% from about $4,650 USD in 2010 to about $7,727 USD in 2014. Many large manufacturers, such as TCL Corporation and Foxconn, have started investing in facilities in Vietnam and India, respectively.

Vast Elecsource isn’t planning to move. Despite rising costs, the factory is sticking close to its clients, most of which are located in Shenzhen. Other small-scale manufacturers are also staying in the city, as one of their key competitive advantages is being able to meet regularly with clients and engage in face-to-face discussions on product design.

“We didn’t move to Dongguan because our clients aren’t really there,” says Jian Yu, a business development manager at 1942 Tech (壹玖肆贰科技, our translation),  a small printed circuit board assembly company in Bao An, a western district of Shenzhen.

“Because most of our clients do R&D, […] they don’t necessarily understand manufacturing,” he says. “They want our suggestions.”

Like Vast Elecsource, 1942 Tech also works with hardware startups. Currently, the company manufactures five thousand units or less per client, says Mr. Yu. In some cases, the factory will even produce as few as one or two prototypes for a single customer. At a larger facility, an order that small would cost a fortune.

“[Big factories] don’t really pay attention to you that much,” says Benjamin Joffe, a general partner at HAX, a hardware accelerator in Shenzhen. “You need to find factories where you can actually talk to the owner to make sure you have their attention.”

Regular factory visits are crucial for startups that are creating unique, non-standard products, says Mr. Joffe. For example, one of HAX’s startups is Revols, which sells custom-fit earphones molded to the shape of your ear. Another is Kniterate, which is developing a “3D printer for knitwear.” Products like that require close collaboration with factories and frequent visits.

“You need to test it with your own hands,” says Mr. Joffe.

A 1942 Tech factory worker inspects a PCB

A 1942 Tech factory worker inspects a PCB

The demand for smaller, more accessible factories is prevalent enough that more and more factory-startup matchmaking services are emerging, like those offered by Seeed Studio and Higgs Hub. Finding the right manufacturing partners can be difficult for hardware startups, especially those targeting the global market. The language barrier between international startups and local manufacturers can be a challenge, as well as finding manufacturers with an international mindset.

“A lot of factories probably want to go fast and skip everything,” says Simon Zhang, the head of hardware R&D at Brinc, a hardware accelerator based in Hong Kong. “And it’s true, they’re fast. But there’s a sacrifice; the quality. If you want to go to the global market, you cannot sacrifice your quality.”

However, that might change as younger generations inherit or co-run their parents’ factories, like Mr. Lin. According to Mr. Zhang, some of Brinc’s factory partners are run by factory owners in their late-20’s or early 30’s.

“It’s heritage, so they have owner capabilities,” says Mr. Zhang. “[They’re] very open minded, very Western facing, so that’s also very important. […] It’s all about mentality.”

Still, some factories face more practical barriers to working with hardware startups. Often, when visiting factories for Brinc startups, Mr. Zhang finds older facilities with outdated machinery that can’t produce the latest, compact designs of IoT hardware. 

These factories could get squeezed out as larger facilities become increasingly automated, cutting the need for and cost of human labor. In May, for example, Foxconn claimed it replaced 60,00 workers with robots at a factory in Kunshan. For big manufacturers, investing in ‘dark factories’ where robots churn out products night and day makes sense for large orders that take days to complete.

Nevertheless, by working with more startups, smaller factories are doubling down on what they do best – delivering small batches for a diverse product portfolio. In particular, they can tap into the long tail market of IoT, where sensors and connected devices are often designed to fit very specific contexts and needs.

According to research firm IDC, worldwide IoT spending is projected to reach $1.7 trillion USD in 2020, an enormous market with almost a third of it attributed to sensors and devices. Bespoke hardware products, such as smart insoles or headphones tailored to your hearing, might never hit the mainstream market, but enough of them could form a viable business for small factories in Shenzhen.

Image credit: 1942 Tech

Originally published in TechNode, August 2016