Shanzhai

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Description

From the Wikipedia:

"Shanzhai (simplified Chinese: 山寨; pinyin: shānzhài) (alternative spelling shanzai or even shan zhai) refers to Chinese imitation and pirated brands and goods, particularly electronics. Literally "mountain village" or "mountain stronghold", the term refers to the mountain stockades of warlords or thieves, far away from official control. "Shanzhai" can also be stretched to refer to people who are lookalikes, low-quality or improved goods, as well as things done in parody." (http://en.wikipedia.org/wiki/Shanzhai)


Karthik Iyer:

“Shanzhai” or the copycat culture is an integral part of the Chinese society; the society is predominantly Confucian and the Confucian tradition promotes individuals sharing what they create with the society to promote greater harmony. Hence anything from shoes to cell phones are copied and sold openly in markets across the country." (http://digitalcommons.kennesaw.edu/cgi/viewcontent.cgi?article=1006&context=jekem)


Characteristics

Conditions for Situated Production

Tom Igoe:

"Situated production wouldn’t be possible without the following:

Cheap tools. Laser cutters, lathes, and milling machines that are affordable by an individual or a group. This is increasingly coming true. The number of colleagues I know who have laser cutters and mills in their living rooms is increasing (and their asthma is worsening, no doubt). There are some notable holes in the open hardware world that exist partially because the tools aren’t there. Cheap injection molding doesn’t exist yet, but injection molding services do, and they’re accessible via the net. But when they’re next door (as in Shenzen), you’ve got a competitive advantage: your neighbor.

Internet sales, publicity, and distribution. Justin Hall’s observation that “on the Internet, everyone will be famous to fifteen people” is central to the success of a company like the ones mentioned here, because localization isn’t always geographic. Sometimes the people with whom you share interests and needs are more like you than the ones who live next door. Being able to find your fifteen people is crucial to situated manufacturing.

Cheap short run supplies. A small business catering to a localized audience doesn’t need a million pieces from its vendor. If there’s not a reasonable price break at 1,000 pieces, or at 10,000 pieces, you’re not going to use that part, unless you can pool resources with your competitor and buy in a lot.

Cheap fast shipping. None of this is possible in a world without Fedex, UPS, and DHL, of course.

Open manufacturing information. Manufacturers in this scenario thrive on adapting existing products and services. Call them knockoffs or call them new hybrids, they both involve reverse engineering something and making it fit your market. Reverse engineering takes time and money. When you’re a mom & pop shop, that matters a lot more to you. If you’ve got a friend or a vendor who’s willing to do it for you as a service, that helps. But if the plans for the product you’re adapting are freely available, that’s even better. In a multinational world, open source manufacturing is anathema. Why would Nokia publish the plans for a phone when they could dominate the market by doing the localization themselves? But in a world of networked small businesses, it spurs business. You may not have the time or interest in adapting your product for another market, but someone else will, and if they’ve got access to your plans, they’ll be grateful, and will return the favor, formally or informally.: (http://www.tigoe.net/blog/category/environment/295/)

The Shanzai Rules

Lyn Jeffery:

1) Design nothing from scratch; rather, build on the best of what others have already done.

2) Innovate the production process for speed and small-scale cost savings.

3) Share as much information as you can to make it easy for others to add value to your process.

4) Don’t make it until you’ve already got a buyer.

5) Act responsibly within the supply chain.


Bunnie Huang on the Shanzhai Rules (response)

1) Buy low, sell high -- and time counts as money. No holds barred.

2) Confucius' silver rule, do not do unto others what you would not have them do onto you; or, "what goes around comes around". (this is the equivalent of #5 and the loose moral thread that binds the ethic of the community).

3) Don't make what you can buy for less. (your #1)

4) "A bird in hand is worth two in the bush"; or perhaps "cash flow is king". There is little faith in the future value of IP or inventory. If sharing my specs with you means I close a deal faster, I will share it with you. Waiting a day to sign an NDA means a day longer I sit on my inventory (see my rule #1). This covers your rules #4 and #3.

5) "there is no propriety, only results", or, perhaps "If it fits your foot, it's a shoe." (aka the thereifixedit.failblog.org mentality) An equivalent of #2 down below, except phrased in their mindset. They aren't in the innovation business for innovation's sake -- they are in it to drive costs down (my rules #1 and #3). It also explains why there is a no-holds barred culture around reverse engineering.

6) The only intangible property worth anything are personal relationships ("guanxi") (corollary of my #2 and reinforces your #5); also, the most valuable thing one may have is good guanxi. See http://en.wikipedia.org/wiki/Guanxi

A corollary of #6 is that "If I can't embody it in a physical vessel, it has no value". This explains why IP licensing in China is so awkward because they think of everything in terms of a bill of materials; every item must be inventoried and counted. Yet strangely, IP takes up a line item but has no space on the shelf in the factory, which seems like you're just paying someone for nothing. So why pay it (http://www.iftf.org/node/3943)

Example

"The use of "shanzhai" became popular with the outstanding sale performance of "shanzhai" cell phones. According to Gartner’s data, 1.15 billion cell phones were sold worldwide in 2007, and according to data provided by the Chinese government, 150 million "Shanzhai" cell phones were sold in the same year, thus making up more than one tenth of the global sales.

The market for "shanzhai" cell phones is not only in China, but also in the surrounding developing countries in Asia, and Third World countries in Africa and Latin America. The outstanding sales performance of "shanzhai" cell phones is usually attributed to their low price, multifunctional performance and imitations of trendy cell phone design. Although "shanzhai" companies do not use branding as a marketing strategy, they are known for their flexibility of design to meet specific market needs. For example, during Barack Obama’s 2008 U.S. presidential election campaign, "shanzhai" cell phone companies started selling "Obama" cell phones in Kenya, with the slogan "yes we can" and Obama’s name on the back of the cell phone. They also designed "Bird Nest" and "Fuwa" (福娃) cell phones in light of the Beijing Olympic Games.

Before the booming "shanzhai" cell phone industries, since the early 2000s, imitation electronic products like DVD players and MP3 players were already manufactured in the Pearl River Delta ("珠三角") area. Many "shanzhai" cell phone companies accumulated their capital in that process. After understanding that many buyers like lookalike phones, but didn't need blaring fake logos, many manufacturers adopted a practice of not using fraudulent logos, instead opting for a generically designed logo. So while an overseas buyer can easily find a lookalike phone, some sellers only sell those without the fake logo.

"Shanzhai" cellphones can be sold at very low prices compared to normal cellphones. On average, the imitations sell at retailers at about $US100-$US150, while production costs are about $US20.

"Shanzhai" cell phone factories are able to manufacture at a very low cost for two reasons. First, they do not buy cell phone manufacture licenses from the Chinese government, thus saving all the related costs. Second, the Taiwanese company Mediatek has developed a complete chain of core technology support for cell phones to sell at a much lower cost than the traditional suppliers of large cell phone companies like Nokia and Motorola.

Although there many fake garments, watches, bags, and shoes in China, they are not called "shanzhai" products, perhaps because these fake products came into existence earlier than fake cellphones and the newer use of the term "shanzhai". "Shanzhai" cell phones may stand out as the most successful and most often discussed "shanzhai" products, because cell phones strongly symbolize wealth in china, but they are much more affordable than other symbolic signs of wealth like cars and apartments.

Quite a few shanzhai cell phone companies tried to exploit the market by making shanzhai Netbooks, but these gained little market acceptance and sales." (http://en.wikipedia.org/wiki/Shanzhai)


Discussion

See Kevin Carson at http://blog.p2pfoundation.net/shanzhai-flexible-manufacturing-for-the-next-generation/2009/09/28

How Shanzai manufacturing is related to the minipreneurial Maker Revolution

Chris Anderson:

"The term shanzhai, which derives from the Chinese word for bandit, usually refers to the thriving business of making knockoffs of electronic products, or as Shanzai.com more generously puts it, “a vendor, who operates a business without observing the traditional rules or practices often resulting in innovative and unusual products or business models.” But those same vendors are increasingly driving the manufacturing side of the maker revolution by being fast and flexible enough to work with micro-entrepreneurs. The rise of shanzhai business practices “suggests a new approach to economic recovery as well, one based on small companies well networked with each other,” observes Tom Igoe, a core developer of the open source Arduino computing platform. “What happens when that approach hits the manufacturing world? We’re about to find out.” (http://www.wired.com/magazine/2010/01/ff_newrevolution/all/1)


Shanzai as Open Manufacturing using Open Innovation

See the report: Mitchell Tseng on Shanzai and Open Manufacturing, scan at http://mass-customization.blogs.com/files/tseng-2010-open-manufacturing.pdf

Commentary from Frank Piller:

"Before, the term open manufacturing often has been connected to the community of people that develop "open" manufacturing technologies like OS-based 3D-printing (Makerbot et al.) and "Open Hardware" (see http://www.openhardwaresummit.org -- I participated at this event but had not time to blog about this yet).

But Mitch is not talking about these initiatives that more or less build on the transfer of the principles of open source software idea to hardware. His approach towards open manufacturing is building more on Henry Chesbrough's understanding of open innovation as a broad collaboration of organizations.

Open manufacturing in Mitch Tseng's understanding builds on the idea that supply chain networks are getting more open and often are organized around a kind of platform that allows the exchange of resources and capacity between the participants. This allows new and smaller players to enter the market and produce new products (often for niche markets) faster and with high efficiency.

One example of open manufacturing in his understanding is the success of Shanzhai manufacturing in China. Originally, this is the name for the Chinese companies that design and market counterfeit electronic products. According to the Blog blogs.gxs.com,

- "The term dates back several hundred years to Chinese mountain bandits which operated outside the purview of the local government."

On the website Shanzhai.com these companies “operate a business without observing the traditional rules or practices, often resulting in innovative and unusual products or business models.”

Today, the Shanzhai represent approximately 20% of the mobile phones sold in China annually! And they go global. With exports, Shanzhai were estimated to represent 10% of worldwide phone sales in 2009. And not all Shanzhai phones depend upon stealing the designs and brands of foreign brands, as blogs.gxs.com writes:

- "Some manufacturers have become so successful that they are leveraging their own brand. For example, Tianyu, which is referred to as the King of the Shanzhai, markets its phones under its own label. Tianyu started off like much of the Shanzhai imitating global brands and evading government licensing requirements. However, the company became so successful that it has adopted a new business model in which it obtains licenses, pays taxes, and sells legitimately on the commercial market. Tianyu now enjoys 8% market share in China, more than Nokia, Samsung or Motorola!"

In his paper, Mitch Tseng describes very well how open collaboration enables these companies to compete with such an efficiency -- and his conclusion is that behind the success of Shanzhai is much more than counterfeiting and stealing Western designs: It is the openness of their manufacturing and design network.


I find this case remarking due to two characteristics:

  • First, the Shanzhai model shows a great way for robust processes for mass customization. Many of the models are highly individual pieces, created by a Shanzhai company to tap into a makret opportunity it realized. Production runs often are just a few hundred pieces, and often are starting with a special request by a customer or retailer.
  • Second, it is a great model of what openess can offer. I have to strongly emphasize that I AM NOT in favor of stealing the IP of other companies or pirating and counterfying products. But the model shows that in a world where existing knowledge can easily being combined to new creations, a lot of creativity resides."

(http://mass-customization.blogs.com/mass_customization_open_i/2010/10/from-open-innovation-to-open-manufacturing-m-tseng-on-shanzhai-cell-phones-in-china-a-model-of-open-.html)


Shanzai as Open Innovation Model to the World

David Li:

"Shanzhai: the Open Innovation Bandit


Shanzhai is a term referring to the counterfeit goods manufacturers in China. The term itself is degenerative and the mention of it in the media often come with redicure and dismissive attitudes. However, for those who are willing to see behind the skin deep counterfeit enclosures of these "shanzhai" products, there is a super efficient and organically emerged open innovation ecosystem to be discovered and studied that would serve as a model of open innovation we are trying to promote here.


The Shanzhai factories clustered in Shenzhen started out as counterfeiting cell phones from brands like Nokia and Samsung. However, in the recent years, the ecosystem has developed into a major industry of its own estimated to be shipping 300 millions cell phones a year which accounted for a quarter of global mobile phones productions. The main market for these shanzhai phones are China, India, South America, Middle-East, and Arfica. Recently G'Five, a 4 years old Chinese brand from Shanzhai overtook Samsung as #2 cellphone vendor in India and is expect to pass Nokia for the #1 spot in the next few years.

 The Shanzhai arcvhive this success by practicing open innovation and open source in their ecosystem. There are about 2000 design/solution houses in Shenzhen that service the assemblers, marketers and distributors. The ecosystem practice OpenBOM process in which the design houses will give assemblers the full specifications to the hardware design with complete bill of materials. There is no expectation of trade secret and once the OpenBOM is out of the door of the solutio house, it's expected to be distributed openly in the Shanzhai community for some other to innovate on top of. This OpenBOM process emerged from the pirate origin of the ecosystem in which IP wasn't protected and are treated as public assets. The rules of open source are forced on this ecosystem. 


One key obstacle of promoting open innovation in the developed countries is the outdated IP protection system that has already shown it's ugly side in the recent letigations tactics used by Microsoft to force companies like Samsung and HTC to pay license fee to Microsoft on every Android device they produce. Such system is not suitable to facilitate open innovation and definitely need a serious overhaul. Shanzhai in China can be a place to start such overhaul as an initial open innovation and open source ecosystem has already be formed here. Such radical disregard of IP protection has a great precedence as American Congress in the 18th century pass legistration to invalidate all European patents and copyrights in the New World to encourage the spread and innovations of technologies in the new republic.


The shanzhai ecosystem has already create a super efficient micro manufacture system with wealth of shared works for new innovators to take advantge of. It already shows raw open innovation works in practice with an ecosystem seriously challenge the established status quo, e.g. downfall of Nokia has as much to do with iPhone on the high end as Shanzhai on the low.


I think it's important to bring the Shanzhai in China into the global discussion of open innovation and how it could be part of the force to challenge status quo created by the outdated legal IP system." (http://ietherpad.com/GES-open-innovation)


Shanzai conversation at IFTF

"David Li:The shanzhai sharing have become more business-like in form of readily available designs, boards, molding and others. Also, design houses working with Shanzhai vendors all offer open BOM options. "Open parts" (公模,公板) are public available cases, panel, boards, battery and etc that are manufactured by multiple companies with open design. Anyone can acquire these on open market and modular from different supplier can work together. The kind of publicly available cases and boards I see in Shenzhen are becoming very sophisticated fast. The drive to do public available parts may be partly due to lack of IP protection (if it's going to be copied, it may just well be open and shared) and part due to cost saving. But the ecosystem emergent from these practices is almost like the vision laid out by open manufacturing. After all, it's about sharing and exchange of how to build and collaborate on the manufacturing. While we're still trying to figure out how open source hardware may work, they get a system in place already. The simple parts are getting complicated fast because new ones are not designed from scratch but build on top of the previous products.

There are shanzhai which makes grey market goods that are not exactly legal by the law. Not much statistics are collected about them until recent years, as they are shipping hundreds of millions of handsets to China, India, south east Asia and Africa. Most of these vendors are not licensed by the government to produce ICT products. Analog to US would be the economic statistics collected on illegal immigrants.

The celebration of hackers is not quite there yet but this is more cultural…. One of the reasons I started the Xinshanzhai talks are to stir up the debate and to show a side of Chinese innovation that are simply ridiculed and dismissed. It was kind of funny to have IDEO standing on stage at a recent talk, talking about how incredible Shanzhai is, and have a full room of Chinese young designers in Shanghai in disgust. It's a big culture bridge to cross between Shanghai/Beijing and Shenzhen/Guangzhou.

The shanzhai vendors are moving fast to the trend. They used to produce knock-offs after original vendors had the products on the market. In the past year, I have seen a lot of them act on the latest TechCrunch rumor, especially those related to Apple. It was kind of funny that there are several large size iPhone (7" and 10") being produced by the Shanzhai on the rumor that iPad would look like a large iPhone. :) …They see a market niche, move fast to secure design and open BOM and go to manufacture and sales…It happens with large numbers of the assemblies trying to fill every niche they can think of.


One thing I am thinking is hackerspace pointing to an alternative path of evolution for China's economic development. Manufacturing doesn't have to "upgrade" to a service economy to increase value. Micro manufacture is another path.

I think open source hardware in the West is a more symbolic anti-consumerism movement. Combining that community with the shanzhai will have global impact. It will vastly accelerate the spread of technologies to developing worlds…We are at an interesting point where several of these forces are coming together: an efficient (cut throat) supply chain that's getting ready for micro manufacture and a global movement of hackerspace and the march of millions of amateurs…. Shanzhai and Open Source Hardware are twins separated at birth and if we can join them, it will create some very interesting opportunities.


I am totally agree with Bunnie's earlier blog post where he concluded that that this system will reach critical mass. I expect to see this in the next two years with tablets. While everyone's focus is on the "iPad killer," the price points of tablets are creating a large under served market in BRIC and other developing countries. For example, while Samsung is trying to clear whether the 2 millions of Galaxy are sell-in or sell-out, Gome already shipped over 5 millions of Fly Touch. The current 3rd generations are expected to ship over 10 millions in 2011. Everyone I talked to in Shenzhen this time are getting business from Russia, India, Brazil and other South America countries.

The tablets will ride on the uber Moore’s Law and the hardware will soon overshoot the point which Clayton Christensen calls the "diminishing returns in innovation." Machines will get to "fast" enough soon enough. As the trend develops, the high-end will likely to be dominated by iOS with mid and lower ranged dominated by these currently unknown Chinese brands (they already have 3 out of top 5 selling tablets on Amazon). Brands other than Apple will lose out big time on this one.


Cell phones play a major role as tool of communication in the recently upraise in Middle East but while Twitter and Facebook are hailed as the tools, few have bother to look at what kind of cell phones are used by the protestors. More likely then not, they are Chinese Shanzhai phones.

If ones are looking to bring social change via technologies to China, Shanzhai is more effective then Twitter/Facebook. The typical Twitter/Facebook users in China are well-off. Some unofficial survey shows Chinese Twitter users have average 12,000/month income, which puts them comfortably in top 5% of the population and part of the elites in the status quo. They want political voice because of their wellbeing financially, but they are not going to do anything that would risk their comfortable lifestyle. On the other hand, the Shanzhai users are the mass and social changes will only occur if they are on board.


Eric Pan: Small design houses now survive from reputation and groups. Sharing is a must between small design houses, they group to exchange ideas, know what each other is working on. This is exactly like motor industry in Chongqing, it has several key benefits: avoid direct competition with in groups, standardize supply (or open BOM) to share supply chain, forward/outsource orders to more suitable player. The bottom line is UI, design houses would not share or ask each other, where differentiates their works remarkably." (http://www.iftf.org/node/3943)

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