Shanzhai: Open innovation as an invitation to start new brands

The term ‘shanzhai’ is still often used pejoratively to refer to Chinese copycat electronic devices, based on copied designs and knock-off brand names. But its literal meaning is “mountain village”, and it refers to bandits who opposed corrupt rulers and hid in the countryside—much like Robin Hood in English folklore. The Robin Hood spirit is inspiring legitimate, and often innovative, products as the socially progressive maker movement meets with hard-nosed manufacturing.

It’s true that such amusing brand names as “Nakia” and “Anycoll" grew out of the shanzhai movement. But it’s also true that much of the counterfeiting is only skin deep; the look of the phone might be the same, but all internal structures and electronics are the independent development of the copiers.

The shanzhai mobile-phone ecosystem saw amazing growth from 2005 through 2009 as it created and produced feature phones for developing communities in China, Southeast Asia, Africa, the Middle East, South America and India, where US$30 phones don't fit the market plan for major brands like Motorola, Nokia or Samsung.

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The business has grown rapidly, and as early as 2010 shanzhai phones already accounted for about 20 per cent of China’s mobile-phone shipments, according to a Financial Times article of the same year. On the back of this, new companies like MediaTek have become a dominating force, supplying hundreds of millions of chipsets to the market annually.

Eric Schmidt and Jared Cohen recently noted the shanzhai phenomenon in their new book The New Digital Age. Mindful that innovation is like electricity itself and will seek the path of least resistance, they wrote:

The developing world will not be left out of the advances in gadgetry and other high-tech machinery. Even if the prices for sophisticated smart phones and robots to perform household tasks like vacuuming remain high, illicit markets like China’s expansive ‘shanzhai’ network for knock-off consumer electronics will produce and distribute imitations that bridge the gap. And technologies that emerged in first-world contexts will find renewed purpose in developing countries.

The ecosystem has also caught the attention of tech giants like Intel, which invests heavily with free engineering help for companies developing low-cost goods with Intel processors and specially developed chips for the swathe of tablets emerging from China with prices falling below US$50 (compare that to an iPad that starts at $299). Intel also created the CTE (China Technology Ecosystem) to serve developers, and hosts an annual Intel Developer Forum in Shenzhen. An article in The Wall Street Journal, ‘Intel's answer to iPad: cheap tablets’, describes the drastic changes the chip maker has gone through to integrate itself with China’s new infantry of nimble tech firms.

Low-cost labour in China is part of the story behind Shanzhai’s rapid growth. However, cost savings alone do not explain the whole ecosystem. John Seely Brown and John Hagel of Harvard wrote in their McKinsey Quarterly article, ‘Innovation blowback: disruptive management practices from Asia’, about Chongqing’s motorcycle industry and how the casual social relationship and free flow of information has contributed to competitiveness.

The same practice has been enhanced in Shenzhen with the emergence of gongban (public board) and gongmo (public case) parts, which enables the rapid advancement of mobile phone and tablet production in Shenzhen. In the article, ‘Shanzhai: China’s collaborative electronics-design ecosystem’, my co-authors and I described gongban as production-ready electronics boards that are available for all sorts of devices, ranging from cell phones, tablets and watches to industrial applications. Gongmo are the complementary casings that various gongban fit into. The system enables people building new devices to leverage the collection of shared intellectual property as a base and thereby concentrate effort on value creation, instead of reinventing the wheel on shared parts. This open ecosystem has started to attract attention within the DIY and maker movement as well as with entrepreneurs who are developing smart hardware or devices for the 'internet of things'. Shanzhai has made Shenzhen a hotbed for global hardware startups and accelerators.

Haxlr8r is one of the leading hardware accelerators based in Shenzhen and works within the supply chain and factory clusters in the city. Its backers believe “there is some serious brilliance hidden in the cheap solar lamp or fake iPhone. Tap some of that genius and apply it towards other objectives”.

The brands that emerge from this fast-moving environment have the potential to be resilient global competitors. Xiaomi is one example of a brand that has jumped from the pipeline of underground production to mainstream marketing. Already becoming the largest mobile supplier in China, the company has set its sights abroad and has entered the India market, with reports saying that it has aims on Russia, Brazil and Mexico. A new website, mi.com, also shows a more international stance with versions in English as well as sites developed just for the Philippines and Indonesia.

And it’s not only small startups taking advantage of the shanzhai movement. Major engineering service providers like PCH International, with its corporate headquarters in Cork, Ireland, and operational headquarters in Shenzhen, are also getting in on the game. The company recently launched an accelerator programme called Highway1 in San Francisco. The four-month programme gives entrepreneurs up to US$20,000 in seed capital and includes a two-week session in Shenzhen to teach US developers about the Pearl River Delta’s vast consumer-electronics supply chain, which PHC calls “the main hub of China's manufacturing industry”.

In an interview with The Wall Street Journal the company’s founder and CEO, Liam Casey, said “The shanzhai culture is really important. It has this disruptive culture of wanting to be different, of wanting to be fast, wanting to show what’s possible.”

Another example of taking a shanzhai business model to scale is Wiko. It’s a three-year-old and rapidly growing smartphone brand, targeting the mid-range market in France (from US$100 to US$300). It has grabbed 18 per cent of the smartphone market in the country, shipping over 2 million units annually. The idea of Wiko started with a group of French designers who saw weakness in the mid-range and decided to enter the market. Instead of designing a new phone from scratch, the group visited Shenzhen and found suitable phone components to build on.

Everything about the brand’s marketing plays to a French audience. But everything about R&D comes directly out of Shenzhen. The fact that its parent company is Tinno Mobile Technology has become an open secret. The parent sells phones in markets around the world under different names catering to local tastes, but assembles the products in China using screens, chips and other parts available in the shanzhai ecosystem.

Other firms that produce parts for this supply chain, such as Global-Tech Advanced Innovations, a Hong Kong-based holding company that produces semiconductors, cameras and other components for phones and tablets, have become large enough operations to be publicly traded.

Western mainstream media has largely caught on to the developments. The Economist, for example, has published several articles on how shanzhai will be relevant to innovation—in China for sure, but on a scale that has potential to change how new hardware is created for the world.

As smart hardware gets hot and wider media attention brings more venture capital to chase deals, Shenzhen could become the next Silicon Valley, with shanzhai innovation fuelling a new ecosystem where the founding and growing of new tech brands transitions from a Robin Hood mentality to one more befitting a King.