Innovation in China: The Art of Shanzhai

Much can be said about China’s infamous copy-and-paste culture; large amounts of fake watches, phones, cars and thousands of other knockoffs are being sold on the streets every day. As a result, many foreign companies fear having their products copied when entering the Chinese market, but are they really being copied or are they being improved upon? And if that is the case, what can we learn from them?

This article provides an insight into the sophisticated world of Shanzhai and explains what you can learn from their way of doing business.

What is Shanzhai?

Shanzhai (山寨) stands for ‘mountain fortress’ and was once a term used to describe a cluster of companies developing counterfeit mobile phones. However, nowadays Shanzhai products are found in almost every product category, from mobile phones and computers to cars and toys.

Starting from 2005, Shanzhai has evolved into much more than simply cheap knock-off products. Once a term to suggest a low-priced or inferior product, it is now a phenomenon showing Chinese cleverness and ingenuity.

In the early days, Shanzhai companies brought us brands such as ‘Nakia’ and ‘Anycoll’ and were known for their low-quality products. However, Shanzhai products are now filling a gap that major brands do not want to fill. Especially in the mobile phone sector Shanzhai has grown rapidly and Shanzhai phones now account for approximately 25% of the global mobile phones shipment. Most of the growth came from developing countries in South-East Asia, Africa, India, the Middle East and South-America, where $10 phones were preferred over the higher-priced well-known brands.

Shanzhai companies have a speed of production that is unparalleled and generally have very low margins. However, the rate at which they are selling makes more than up for their low margins and some Shanzhai companies are now competing with large established brands worldwide.

Why Shanzhai is pushing innovation

China has been the source of many inventions in the past thousand years, however in the past decades the country has become more known for its counterfeit goods.

Although it cannot be denied that many copied goods are being made and sold in China every day, the country is transitioning from the world’s factory to focusing more on developing its own domestic market whilst stimulating innovation in order to become more competitive in the global market. This, in turn, has pushed local companies to focus even more on developing products specifically for the domestic market. Or should we say tailor existing products to local market requirements?

Shanzhai companies are part of large and highly coordinated networks that are taking products and services from abroad and alter them relentlessly to cater to local market conditions and by doing so, are making them better. Specific new features are being added that are in demand with local consumers e.g. phones with ultraviolet lights to detect fake bank notes and more heavily secured online payment systems to protect consumers. Just think of Taobao and its escrow-payment system.

More developed Shanzhai companies are now even competing in the global market.  The Chinese company Xiaomi is a good example of an evolved Shanzhai company; it offers high-tech and high-quality mobile phones to consumers at a price that is on average 50% lower than most foreign brand phones. Xiaomi recently even managed to attract a former executive of Google to help position Xiaomi in the international market.

BYD, a local automotive company, started with developing low-cost imitations of best-selling Toyotas and is now one of China’s most successful automotive manufacturers.

Another interesting example is Future Cola; a Wahaha Group brand, that started producing cola that was specifically tailored for the Chinese palate. Instead of targeting the larger cities as their competitor Coca-Cola did, they focused on selling to China’s overlooked rural areas where they sold their cola for a significantly lower price. In 2006, Future Cola became the third-largest player in China’s carbonated soft drinks market.

Silvia Lindtner, a research scientist at the ISTC-Social at the University of California, Irvine and a post-doctoral fellow at Fudan University, Shanghai, had this to say about Shanzhai at the 2013 SXSW event:

“China is often portrayed as an enormous factory that pumps out products invented elsewhere. But as global “maker culture” is transitioning from a hobby into a profession, China is playing a significant role in changes to industrial production and hardware innovation. It might surprise you; China’s image contrasts with contemporary maker culture, celebrated for its creativity and roots in 1960s U.S. counterculture. But China’s rapid growth in open source hardware and maker communities challenges our assumptions. They show an alternative version of innovation, built on a home-grown version of open source that has developed in China’s small-scale factories over the last 20 years. Makers in China show that this history of open manufacturing will change not only what we understand by making, but also where we locate innovation. As China’s DIY makers are coming together with manufacturers, they are spurring a shift in industrial production, from “made in China” to “made with China.”

Shanzhai products are not simply copies, they are improved and localized versions of the original product, adapted to local market requirements and developed at a very low cost.

What Shanzhai companies can teach you

Shanzhai companies are unique in the way they do business and much can be learned from their approach. Although we strongly recommend you not to mirror their business model and infringe on others’ IP rights, it is beneficial to learn about your competitors approach to business.

Many of the successful Shanzhai companies share similar traits, such as (a) a high speed of production, (b) a relentless focus on adapting/developing products to fit local market requirements, (c) a strong web of manufacturing and distributor networks throughout the country, and (d) a willingness to experiment and take risks.

Shanzhai companies’ business models are built to adapt to the market in a fast and efficient manner. They are close to their consumers and rapidly add new features and remove unnecessary features based on customer feedback. Instead of building products from scratch, they innovate on a small scale based on direct customer feedback.

Moreover, they share resources and information with their network in order to benefit from each other’s knowledge, leverage economies-of-scale when purchasing parts and consequently compete more effectively with established brands.

Foreign companies competing in the Chinese market can learn a lot from Shanzhai companies, some of the most important lessons are (a) employ an agile approach to business and encourage incremental product innovations in order to achieve a better product-market fit, (b) stay close to your customers and constantly seek feedback, and (c) share knowledge and resources with your partners in order to serve your customers better.

As I wrote earlier, we do not support the way Shanzhai companies do business and also strongly oppose infringement of intellectual property. However, I do recommend to study them as they study you.

Duco van Breemen

Duco van Breemen

Duco is project & marketing manager at Launch Factory 88. He has lived in China since 2008 and has worked with both state-owned and private Chinese and foreign enterprises.
Duco van Breemen