CNBC's The China Connection newsletter: Betting on Shenzhen over Silicon Valley

Hi, this is Evelyn, writing to you from Beijing. Welcome to the latest edition of The China Connection — a snapshot of what I'm seeing and hearing from local businesses.

U.S. buyers pop up in conversation with Chinese firms far more than geopolitics suggests. What's the thread holding it all together?

MIT graduate Joshua Woodard is living a bold belief. He's so sure that Shenzhen's factories will sell tech to the world for the next decade that he left Apple to run supply chain management company The Sparrows in the coastal Chinese city.

"A lot of our clients come from the States," Woodard said. "We get to hear about all the excitement: new form factors for smartphones, new ways of interacting with AI."

"We're not really going to see India, Vietnam challenge anytime soon," he said. "Outside the geopolitical sphere, people want to build actual things. There is no other option outside China."

Thanks to supplier Foxconn, Apple built a significant manufacturing base in Shenzhen over two decades ago. Consumer electronics companies from DJI to Huawei are all based in the region, which is also home to electric car giant BYD.

"You have all the supply chain around you within probably a two-hour drive," said Even Realties CEO Will Wang, another former Apple employee who returned to Shenzhen to launch his smart-glasses startup.

"If we wanted to create a future around consumer electronics — if we wanted to really build possibly the next Apple — we need to be at the center of hardware, which is Shenzhen," he said on CNBC's "The China Connection."

Trade data reinforce how much Silicon Valley needs those hardware manufacturers.

China was the largest source of California's imports last year, the state's chamber of commerce said, despite a sharp year-on-year decline due to escalating U.S. tariffs. Taiwan and Mexico followed, with Vietnam in fourth place. Around 36% of California's imports were computer and electronic products, the top category.

Meanwhile, Shenzhen, the second-largest Chinese city by overall exports, accounted for nearly 19% of China's advanced tech exports last year, according to CNBC calculations of official data accessed via Wind Information.

"Chinese vendors are becoming more important in niche technologies," said Lian Jye Su, a chief analyst at Omdia.

The hardware behind humanoid robotics is dominated by Chinese suppliers, he said. But Su noted that traditional robot makers still rely more on parts from Japan, Germany, Switzerland, South Korea and the U.S.

There's a lot at stake for innovation.

The Sparrows' Woodard said working in Shenzhen rather than in the U.S. reduces costs by about two-thirds, and cuts prototype time from weeks to days. He added that developers also benefit from working with suppliers who have made display panels, for example, for years and have deep industry expertise.

That enables startups to iterate and go to market quickly.

But not everyone's convinced. The counterargument to manufacturing in China is that it's more important to be closer to end users, on top of mitigating geopolitical and tariff risks.

"In particular in robotics, you want to start from what is the use case," said Fady Saad, Boston-based general partner of Cybernetix Ventures. He said the firm's portfolio includes 20 companies across North America and Europe.

While the businesses do use parts from China, he said, "we advised all our portfolio companies to have multiple supply chain plans."

U.S. robotics company Agility said 75% of its components are from America, and 1% from China. Figure and Boston Dynamics did not immediately respond to requests for comment.

But last month, Nvidia announced it is working with China's Unitree as part of a push into physical AI. And as AI evolves, investors expect that hardware will need transformative upgrades.

The result?

"Supply chain diversification away from China has been slowing down," said Annabelle Yu Long, founding and managing partner of BAI Capital in Beijing. "People are counting on China to provide the efficiency on innovation."

China warns about AI risks with Anthropic's Claude Code
A government cybersecurity threat platform warned of "back-door" security risks for certain versions of Claude Code, and recommended users uninstall or update the tool. Anthropic told CNBC the "backdoor" was an experiment earlier this year to protect against distillation. But the company's AI isn't officially allowed in China, and Alibaba is banning employees from using it.

CPI up 1%, PPI gains 4.1% in June year-on-year
While China's consumer price index missed analysts' expectations, factory-gate prices were hotter than forecast with the strongest year-on-year rise in four years. Beijing's efforts to tackle excessive competition combined with elevated oil prices helped PPI climb rapidly from last year's low base.

Chinese AI models are gaining ground with U.S. companies as OpenAI, Anthropic costs surge
The share of tokens used by U.S. companies on Chinese AI models via OpenRouter — a platform that enables developers to access a range of AI models — has stayed above 30% each week since early February, well above the 11% average of the prior 12 months.

China's rare missile test
The test with a dummy warhead into international waters was Beijing's first strategic missile test into the region since September 2024 and will likely push regional powers to deepen defense ties with each other, analysts said.

July 14: China trade data for June

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

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