Shanzhai Case Study
The proliferation of Shanzhai mobile phones is not by accident and there are particular environmental factors in China that help drive the Shanzhai Phenomenon. The first factor is government regulation. Even though there are government regulations and taxes for the mobile companies, Shanzhai companies choose to ignore the NAL licenses as well as the 17 percent value added tax and income tax. Government’s failure to crack down on Shanzhai phone gives those companies opportunities to continue doing their illegal business. Second, low startup cost and labor attract people to enter into Shanzhai market. With MediaTek’s turnkey solution for mobile handsets, Shanzhai companies can easily create or design products. In addition, the cheap cost of this technology enables the companies to operate with low investment. Third, high customer demand is another factor that drives this phenomenon. Shanzhai companies target low-end markets where most of the people care about the price and the functionality of their mobile phones. Shanzhai mobile phones provide a diverse set of performance and respond quickly to meet customer needs. Last but not least, the nationalism associated with Shanzhai encourages domestic buyers to prefer Shanzhai mobile phones. Angela Wan, an international student from China stated, “China is a very collectivistic country. The patriotic appeals such as ‘Buy Shanzhai and show your love for our country’ will provoke Chinese people to buy Shanzhai mobile phone and support their domestic products.”
Shanzhai companies rely on their market strategy to produce trending products at extremely competitive prices. Initially, they focus on the domestic market when introducing new products. This allows them to test the market for the popularity of the product. Additionally, they cater towards very specific preferences, targeting niche markets that look for unique features and functions. Doing so, however, is not as effective without a short cycle time. By cutting time in areas such as R&D, design, testing, and licensing, they are able to respond quickly to market trends. In fact, time to mass production was as short as 45 days for some companies. Arguably the most attractive aspect of Shanzhai products is their low price, and this is achieved by outsourcing production and other functions, thereby reducing production costs. This strategy targets mass customers by eventually allowing for production of high-end electronics that compete against industry-leading products. Shanzhai companies are fearless, unscathed by failure and always learning from it. Their capacity to experiment and replicate success in a speedy manner sets them apart from the competition.
When smart phone companies originally developed their technologies, they focused their sales channels on bulk sales to corporations for their employees. Today they are getting a hint from the Shanzhai competitors and are working to provide solutions in a cheaper local market. They have also realized to reach this niche market that they need to create a simpler and more agile supply chain. They do this by reacting to the market and offering new technologies and special features in a shorter period of time to their customers. Finally they have realized that to save money on their final product, they need to outsource a majority of the parts to stay competitive from a cost perspective.
In order for the mainstream companies to compete with these agile companies, they must adapt their business strategies and supply chains to be more responsive. If it takes 6-12 months to develop a product for a large manufacturer and only 1-3 months for Shanzhai companies, the Shanzhai have a distinct advantage. This is especially important considering the mobile phone market where the life cycle of a phone is no more than 24 months and new breakthroughs are made 2-3 times per year. Mainstream companies can also consider localizing portions of their business to help drive sales in these niche markets.
Shanzhai companies are fulfilling needs that major companies cannot adequately
Satisfy. These include quick time to market and innovative products at a minimal cost. The rise of Shanzhai products on the open market can only help to drive down the cost of these overpriced products being put out by the major companies. It also can serve as a benchmark for the larger companies on how to become more efficient. Additionally focusing on their core competencies and outsourcing the rest helps to create an improved product at minimal cost.
Shanzhai companies need to redevelop their business strategy in order to become mainstream. A typical Shanzhai company will target neglected markets, outsource their operations, and collaborate with local suppliers based on more of a mutual relationship. However, restructuring the company’s approach in operations once they begin growing will allow a Shanzhai company to thrive and expand in a mainstream market. Also, Shanzhai companies are known to be good at replicating the look of products, but lack an understanding of the technology going into the product (Zhai 5). Building an expertise in software technology will allow Shanzhai companies to be successful in a mainstream market as well as keep up with their competitors. In order to distribute through more channels Shanzhai companies need to become compliant with legal requirements, increasing their potential to compete in a mainstream market.
Finally, there are also many negatives that go along with Shanzhai products such as bypassing government regulations with licensing and quality standards. Their exclusion of IMEI numbers raises many concerns that terrorist can use their hardware without being traced. Also, the poor quality, as seen in radiation warnings and phones explosions, does not help with consumer confidence.
Zhai, Ivan. "Two brothers, one quirky idea and a splash heard around the world." South China Morning Post. 18 Sep 2010: 5. Web. 5 Sep. 2012. <http://www.lexisnexis.com.ezproxy1.lib.asu.edu/lnacui2api/results/docview/docview.do?docLi nkInd=true&risb=21_T15456124508&format=GNBFI&sort=BOOLEAN&startDocNo=1&resultsUrl Key=29_T15456124512&cisb=22_T15456124511&treeMax=true&treeWidth=0&csi=11314&doc No=4>.