Photographer: Greg Baker/AFP via Getty Images

China's Creative Destruction: Shut Steel Mills to Startup Cafes

  • Near old Shougang steel mill, new software park is planned
  • Premier Li's `hope and challenges' coexist in Beijing

In Shijingshan in Beijing’s west, a few elderly people shuffle past run-down grocery stores, mahjong parlors and a boarded-up barber shop with posters of styles popular a decade ago below the chimneys of what used to be the capital’s largest steelmaker.

A couple of suburbs to the north, in Zhongguancun, young entrepreneurs in T-shirts work on on-line tourism, robots or smart guitar projects in startup cafes modeled after similar hives in Silicon Valley, hoping to lure an angel investor.

Zhongguancun in Beijing

Photographer: ChinaFotoPress via Getty Images

This is Beijing’s post-industrial economy, where the wheels of creative destruction are turning out winners in new industries and losers in fading ones. It’s a schism that’s somewhat masked in gross domestic product data that shows a steady grind toward slower growth. Economists expect a 6.7 percent rate in the first quarter from the same period last year, the weakest pace since the start of 2009.

"Hope and challenges coexist" is how Premier Li Keqiang phrased it when speaking of the fracturing in growth across China’s 31 provinces and municipalities in remarks to reporters at the nation’s annual legislative gathering in March. Analysts at Fidelity International call it a tale of two Chinas, where the north struggles as the south fares better, and resource-based industries stumble as innovation and consumption flourish.  

At the two extremes of the divide are the old heavy industries like steel and the new high-tech startups. In between are the services, retail and high-tech manufacturers that China is counting on to make up for the millions of lost jobs in the rust-belts.

Shougang started to move its manufacturing facilities to nearby Hebei province in 2005 and in 2010 the last mill at Shijingshan shut down.

"Everybody wanted a job here," says 80-year-old Ma Wanzhen, who has lived for six decades in the neighborhood. She, her husband and their three sons all worked for Shougang Group, before the steel company moved its mills out of the city. The next generation -- her two grandchildren -- work in services, one as a teacher, the other as a property manager.

A worker ready to demolish the Shougang Capital plant in Beijing

Photographer: Greg Baker/AFP via Getty Images

Industrial decay here is striking at Shijingshan, with crumbling facilities and idle smokestacks an echo of the area’s former prominence. Even the local temple atop a hill overlooking the wasteland is closed.

Start-Up Frenzy

It’s a different world at InnoWay, a 220-meter strip of cafes and start-ups in Zhongguancun. More than 40 incubators, angel-investment firms, startup cafes and training agencies cluster there. Posters seeking a "technical partner," "iOS Ninja," or "100,000 yuan for a solution of Microsoft API" are stuck on the walls of Garage Cafe, a five-year-old gathering spot for investors and entrepreneurs.

"All kinds of resources are mustered here, so it’s incredibly efficient," says Zeng Yaotian, who started a tourism-related website a year ago. After two months of searching for an investor in the southern city of Guangzhou last year came up blank, he snared a seeder in just five days at InnoWay.

Premier Li, championing mass innovation and entrepreneurship, visited last May, sitting in on a training session for startups. He sipped a coffee at 3W cafe, where portraits of Steve Jobs, Jack Ma and Bill Gates look down on would-be innovators and a mural illustrates the Nasdaq’s trading history.

Twenty-four-year-old Feng Yi returned to Beijing to start his own company in a basement office late last year after a year working at Google Inc. in Silicon Valley, undeterred by China’s slowdown.

"The U.S. was in an economic crisis when the first iPhone came out," Feng said, on the office floor he shares with other startups focused on smart hardware. "There aren’t many technology-driven companies in China, and we have a lot of advantages."

The computer-science graduate is developing a dialog system between humans and machines and currently has three full-time workers. He plans to hire 10 to 20 in a year.

Two Chinas

Yet the narrative of two Chinas -- one public, the other private -- isn’t so simple.

It was two state-owned companies, one in technology the other in real estate, that set up the InnoWay cluster, according to Zhou Yuping, a marketing manager of the joint-venture that manages the street.

A government-sponsored one-stop-shop offers services to start ups: one counter offering free legal advice, another assisting with intellectual property registration, and others helping with human resources, tax, business registration, and government grants. For those who haven’t lucked out with funds from the government or an angel investor, there’s a Bank of Beijing branch offering loans of up of 5 million yuan ($774,000) for those who can provide some collateral.

It’s not all rosy in the new economy. At Zhongguancun, expensive rents give startups little breathing space once they’ve outgrown the incubator work spaces of InnoWay. Meantime, the vast malls selling computer equipment and gadgets are being hollowed out by the surge toward on-line purchases, ironically led in part by one of the area’s former shopkeepers, Richard Liu, founder of Inc. -- China’s equivalent to Amazon.

And in the old economy, not everything is grim. Recent export struggles had as much to do with weak global demand as the nation’s economic rebalancing, and China’s competitiveness remains sharp. Should a pickup in March shipments be sustained, the tailwinds would give China a significant boost.

In Shijingshan, the Zhongguancun Shijingshan Science Park is being built, where the focus will be on promoting companies in Internet gaming, film and digital media. Challenge meets hope.

— With assistance by Xiaoqing Pi

Before it's here, it's on the Bloomberg Terminal.