China's Shanzhai Companies Moving On From Counterfeit Imitation To Collaborative Innovation

from the bunnie-was-right dept

Wed, May 28th 2014 12:31am — Glyn Moody

Techdirt has been keeping an eye on the world of "shanzhai" companies for a while now. The term originally meant those places in China that were outside government control, and so, by extension, it referred to Chinese outfits specializing in counterfeit goods. But shanzhai companies are moving on, as this fascinating piece in The Atlantic makes clear:

Shanzhai used to refer to knock-off retail, and later end-consumer electronics, such as mobile phones of major brands like Nokia, Motorola and Ericson, often specifically designed for non-Western markets in China, South East Asia, South America, the Middle East and Africa. The ecosystem grew rapidly and by 2010, it was producing 200 million phones annually and was responsible for a quarter of the global mobile phone market. Since then, the shanzhai ecology has moved beyond cloning and enabled a wealth of iterative innovations including dual-SIM for frequent travelers to avoid roaming charges, seven-speaker phones for workers to listen to music at construction sites, and custom-designed phones for migrant populations unable to afford the latest smartphone.

Alongside those areas, here's an example of what's happening in the currently-fashionable sector of smart watches: WPI [the Taiwanese electronic sourcing company World Peace Industrial] and other solution houses create gongban [standard circuit boards], which provide common electronic functions including Bluetooth connectivity to mobile phones, and sensors to measure the wearers' movement, as well as monitor heart rate and other vital bodily statistics. These gongban are designed to fit into a variety of gongmo [standard cases] that are ready to be branded on order. The flexibility to mix and match gongban and gongmo enable companies to quickly put together their own smart watches with customized functions and styles for various niche markets. Today, customers of WPI ship close to 100,000 smart watches per month.
That is, the shanzhai system is starting to adopt a highly-flexible approach that allows customized products to be designed and manufactured extremely quickly from sets of standardized parts. This has much in common with free software's modular developmental methodology, and next-generation shanzhai companies are also borrowing open source's business models: [WPI] develops 130 gongbans annually in areas ranging from smart phones, tablets, smart watches, smart homes, and industrial controls -- and distributes the designs for free. WPI then makes money by trading in the boards' components.
That is, WPI gives away the basic designs to encourage their uptake, and then makes money from supplying the large open ecosystem that it creates by doing so. As Andrew "bunnie" Huang predicted, China's shanzhai sector has moved on a long way from simply copying, and is now innovating in multiple ways that industries in other countries could usefully learn from.

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Filed Under: china, collaboration, copying, counterfeit, innovation, patents, shanzai

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Anon E. Mous (profile), 28 May 2014 @ 1:14am

"shanzhai" companies for a while now. The term originally meant those places in China that were outside government control, and so, by extension, it referred to Chinese outfits specializing in counterfeit goods"

There really isn't an industry the Chinese government doesn't know about, it's more the case that Corruption is so rampant that government officials get paid to look the other way while this takes place.

While I agree some of these "shanzhai" companies are going legit, there is still a large sector that will always produce counterfeit goods as there will always be a demand for them in certain countries with consumers.
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Graham, 28 May 2014 @ 1:35am

Well, its hardly the first time.
Its the same thing that happened in Japan after then 2nd world war. About 10-15 years of cheap knockoffs before they outdid the incumbents and forced them to raise their game. (My grandad used the term "Rice box" for an old Japanese radio).

During the 50's and 60's the impact on Western countries was slowed by the fact they were half a world away. The Chinese however seem to have an excellent international postal service which seems to mitigate that problem.

(Certainly anything i get from China is a Damn sight faster and better service than from the US, although perhaps that's because the Chinese aren't to lazy to spend 30 seconds to fill in customs forms)
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Anonymous Coward, 28 May 2014 @ 2:46am

Meanwhile, we have our heads buried so far up our litigious asses that we'll never see innovative revolution sweep the world and render us insignificant and obsolete, the broken relic of a bygone era.

The politicians, big businesses and IP & patent trolls will scream foul until they're blue in the face claiming the moral high ground below the rising tide.
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Ninja (profile), 28 May 2014 @ 3:03am

Oh where have we seen such behavior before?

Japan? HOLLYWOOD? Europe? Goddamn everywhere?

Then why are we trying to impose strict IP policies everywhere again? I wonder if China will be the next to jump into the IP wagon.
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Whatever, 28 May 2014 @ 3:17am

however
If you actually got your hand on many of these devices you would realize that they are still made to the low standards of a knock off, and not to the high standards of a brand product.

A perfect example is in the smart phone world. There are tons of phones available in China, many of them appear to be high end with the best screens, up to date operating systems, even things like dual sim / dual standby and other interesting features.

However, in the real world, while these devices do work, they do not work well. Generally, they suffer from being made without concern for anything beyond basic functionality. Little or no time is spent on actually testing and improving the design, or in fact finding out if the product works well. So you get quad core smart phones that can't play basic games, because the chip and software driving the display don't get along well with the rest of the phone. You get poor signal levels, poor reception, and drop outs where other phones work fine.

I have used many a Chinese phone (including the infamous Shenzhen Iphones that ran android), and they all had the same issues.

fast development, cheap price, and quality - you can never get all three together in the same place.
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Anonymous Coward, 28 May 2014 @ 4:40am

Re: Well, its hardly the first time.
"Certainly anything i get from China is a Damn sight faster and better service than from the US"

Everything I get sent from China takes at least 2 weeks to arrive, from the US I can get stuff next day if I want to.
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Anonymous Coward, 28 May 2014 @ 6:09am

Re:
"I wonder if China will be the next to jump into the IP wagon?"

I wonder where you have been? China has been touting their patent system as driving innovation, with far more patent applications than any other country in the world. China has some of the most draconian IP laws in the world, including criminal penalties for some IP law violations that are civil matters in much of the world. "The next to jump into the IP wagon?" They have been in that wagon for years.
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Anonymous Coward, 28 May 2014 @ 6:11am

Re: however
Exactly what I have found. I have been trying some of the supposedly "upscale" products from China. My general experience is that it is still the stuff of "dollar" stores. This stuff is typically cheaply made and is meant to be disposable, meaning you use it for a while and then toss it.
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Michael, 28 May 2014 @ 9:02am

Re: however
It's funny you say that - because it is EXACTLY how innovation works. Android, for instance, was mocked initially for it's lack of polish, bugs, incompatibility, etc.

It seems pretty likely that these products could overtake the market secretly while the current market leaders dismiss them.
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Anonymous Coward, 28 May 2014 @ 11:15am

Re: Re: however
The difference between "likely" and "will" is huge, and often insurmountable. The innovation superhighway is littered with the debris of thousands of companies that were "innovative," but never made the transition from one position (low cost, "innovative" supplier) to another (market-leading innovative supplier).

If you are saying they have a chance to overtake the market, I agree. Japanese companies did so in a very measured, strategic way. South Korean companies then did to Japan what Japan did to the rest of the world. However, not every Japanese or Korean company was successful, and hundreds never made the transition to global competitor. Likely such will be the same in China, which has an even more diversified market than South Korea or Japan ever had, and likely hundreds of companies will fail along the way; likely far more will fail than succeed.
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Ninja (profile), 29 May 2014 @ 2:38am

Re: Re:
This may be the case but the enforcement is really lax at best. I may be wrong indeed but have you seen Chinese companies fighting each other in Chinese courts over IP?
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Anonymous Coward, 29 May 2014 @ 7:38am

Re: Re: Re:
The simple answer to your question is yes.

http://www.dlapiper.com/en/us/insights/publications/2012/09/chinas-patent-litigation-landscape-s hifts/

I wish I had newer data to see where the number of litigations in China stands in comparison to the US. It appears that in 2010, the number of patent lawsuits in China exceeded those in the US.
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