Thursday, March 5, 2009

ShanZhai 山寨: a Counterculture or an Ultimate Free-Market?

A good friend of mine sent me some articles and online discussions of ShanZhai 山寨, the latest and hottest word and phenomenon in China. The word is so viral that it has been the most searched on the net, has become a part of daily conversations of many, and is being used as a noun, adjective and verb, e.g., “Have you ShanZhai(ed) today?” The usage of it appears to be evolving and has been broadened to mean anything from a knock-off to a creative local brand name that challenge the dominant players of the market. It is the latter that drew so much attention as ShanZhai is becoming a powerful symbol of “Everything is Possible”, a promising parallel of the American success stories.

A little digression: ShanZhai, literally means a “mountain fortress” is not new, nor unique to China.The word is likely to be as old as there were organized bandits and outlaws who built lairs and fortresses in the mountains or hard-to-reach areas. Remember e.g., the legend of Robin Hood in Sherwood Forest of the Nottingham? Those who are familiar with Chinese classics would immediately recall the famous 14th century novel Outlaws of the Marsh 水滸. In this one of the most popular Chinese classics, 108 (105 men and 3 women) colorful characters, good and bad, came together and bonded in LiangShan Marsh梁山泊 (in today’s ShanDong 山東 province, south of Beijing) under various circumstances, escaping from the (corrupted) authority. Interestingly, as the stories were passed down, compiled and edited over generations, there are several popular versions of which the exact authorship is not certain. In today’s term, one could call this classic itself, a ShanZhai novel.

There is no question that the original context and connotations of the word ShanZhai has not been positive (especially if you take views of the authority) although there could be some redeeming aspects of it with e.g. Robin Hood’s like deeds. Fast forward to our modern day industrialized societies, responding to demands, ShanZhai factories have sprung up from time to time for decades in regions like Hong Kong whenever business opportunities arose. They were never sustaining forces nor a significant part of main stream economy however and they drew little government priority and attention.

As China opened its doors and began to trade and prosper, business opportunities and demands have risen exponentially first for manufacturing and exports with its vast resources. The next obvious and logical step was the sharply increasing domestic demands for consumer products and services as wealth accumulates. With more than 1 billion consumers, ShanZhai economy in China has been expanding for quite some time as the nation transitions to and experiments with the new free-market and evolving legislative and legal systems.

At one end of spectrum, some consumer products are simply illegal knock-offs.Then there are imitation and copycats that may have their own products and processes but saved on marketing and advertising by blatantly infringing on established names and/or logos (e.g. SQny, Tids, Ponosanic).If this is all what ShanZhai is about in today’s and tomorrow’s China, there is no need to waste our breadth to discuss it; history suggests these types of ShanZhai will fade away as productivity continues to increase, and suppliers and consumers continue to upgrade.

The inspiration and promise of new ShanZhai economy came from cell phone handset market. It was not an accident since cellular wireless systems and services have evolved rapidly.In a short 3 decades, starting from the first generation services with analog technology, we are witnessing now a reach of half of the world populations with several technologies, including the recent 3G wideband digital services while 4G all-IP broadband is brewing in the wing. Some simple statistics: number of cellular service subscriptions is about 3 billion worldwide and there are now about 1.2 billion of handsets sold annually worldwide. China market alone is growing at a rate of about 100 million units a year with about 600 million subscriptions, all under one government and culture. By some estimates, there were more than 150 million ShanZhai handsets (including local name brands and no-name brands) sold in China in 2008 not including those exported to places like India, Africa, and Eastern Europe. Such fast growing demands including developing and emerging markets, and existence of standardized interfaces between handsets and base stations have certainly made the classical “follower” business strategy and ShanZhai possible.

The second crucial factor: low cost suppliers and know-how are keys to a prosperous and growing ShanZhai business. Indeed, ShanZhai cell phone handset vendors have been focused on mid and low end 2G and 2.5G phones with rich applications and features. As China manufactures about half of the handsets sold worldwide (about 80% for exports), the low cost manufacturing know-how and infrastructures including supply chain are well-established.

The breakthrough came when MediaTek (MTK) 聯發科, a fabless IC design company in Taiwan, developed its own cell phone handset chips and single chip solutions few years ago, completed with software platforms and technical supports. MTK is now a global company with more than $2B annual revenues and its chips are inside over 90% of the Chinese brand handsets, including large names (like Lenovo and K-Touch) and ShanZhai ones as well. It is a disruptive force that challenges more than the time-to-market interval and market shares of established cell phone vendors. MTK is now the 3rd largest handset chipset vendor of the world after Nokia and Samsung who have the vertically integrated business model.

Last but not the least is the deregulation and change of China’s regulatory policy. The flood gate was opened when in Oct 2007 the State Council abolished the approval procedures for manufacturing projects of mobile information facilities and terminals. It is now legal in China and possible for you and I to raise a million U.S. dollar of capital, hire engineers, set up production lines and recruit assembly workers to put out volumes of cell phone handsets through private distribution channels in no time, literally. Quality assurance and post-sale services are another story as the targeted mid to low end customers often settle for amazing bargain price and instant gratification while taking a chance on quality and service – the ultimate throwaway consumerism.

This recent development in consumer electronics such as the cellular handsets and other subcultures do invite many serious questions. As China becomes more and more free with its unleashed energy, entrepreneurship, and creativity, concrete and significant policy issues need to be addressed.For example, what is the appropriate balance and how much government intervention and regulation should there be? What is the proper balance between intellectual property protection/rewards vs. advancement of public interest? Larry Lessig, a Stanford Law Professor and free culture movement leader has made many insightful observations of U.S. development.In his keynote at the Open Source Convention 2002, Prof Lessig noted the self-serving and pendulum nature of the process: 1)Creativity and innovation always builds on the past, 2)The past always tries to control the innovation builds on it, 3)Free societies enable the future by limiting the past. Concerned with U.S. being less and less a free society, he urged refrain (by the authority/power). China has a unique opportunity to make wise choices before the system becomes sticky.

In sum, ShanZhai economy is a very interesting approximation of an instance of Free Market Economy, if it can be sustained and serves a meaningful role in the system. To do so, leaders of China have to think hard the vision for its social, political, and economic structures of the future. Shall the future be more like a capitalist mixed economy practiced in countries such as U.S.? Or shall it be something new and uniquely Chinese? How can one harness and elevate the creativity of ShanZhai?

Before one gets carried away too far with the idea of ShanZhai, one should note that there is a built-in trap of such a notion. The essence and differentiating characteristics of ShanZhai is anti-establishment and anti-authority (that is why some find it confusing when trying to identify it with particular legal framework or moral standard). If there is no dominant player and authority, there is no ShanZhai! Unhealthy ShanZhai(s) with no imagination of their own will be filter out by the market. Some of the stronger, ethical, creative, and visionary ShanZhai(s) will become shinning castles on the hill; thus the establishment and targets of future ShanZhai. Just keep in mind that that Chinese had an old saying : 成者為王, 敗者為寇. That is, if you are successful, you will be a king; and if you fail, you will be an outlaw.

Talk to you soon!

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