The Shanzhai phenomenon
Made up of the characters shan (山, “mountain”) + zhai (寨, “fortress”), shanzhai refers to Chinese imitation and pirated brands and goods, particularly electronics. Literally it means “mountain village” or “mountain fortress”, the term refers to the mountain stockades of regional warlords or bandits, far away from official control. Fascinating, isnʼt it?
Traditionally Shanzhai refers to businesses based on fake or pirated products. You may be thinking know about the tag “Made in China” and about all these fake or imitation products usually of inferior quality that you have seen and bought many times. Well, you may be right… or not. Shanzhai doesnʼt stop here and actually we think that the Shanzhai innovation phenomenon could be a way to create meaningful innovation.
Shanzhai also brings indigenous innovation product supported by a group of value chain suppliers that provide good-enough products by charging reasonable prices in a rapid time frame to fulfill the needs of target customers. [1]
The Shanzhai company and its collaboration network:
Although each Shanzhai company is different, they often have common characteristics, such as tendencies to do the following:
• Focus on the domestic market (at least initially)
• Target mostly mass consumers
• Strive for very short cycle time on product introduction
• Focus on cost (but often offer lower quality too)
• Tailor product features and functions specifically to local requirements
•Successful Shanzhai companies may begin as counterfeiters or pirates but often evolve into legitimate businesses with their own intellectual property (IP) portfolios. [2]
• They do it low cost.
Normally they evolve from an informal economy to a formal one. Shanzhai companies often target (in the first place) less developed areas and tier 3 and tier 4 cities (inland China, more than 60 percent of Chinaʼs 1.3 billion people live in rural areas [2]) across a number of dimensions, including customer segments, channels and geographies. [3]
Characteristics of their business modeling:
1. Expanding the market segment
2.Enhancing the value chain relationship: products to market.
3. Implementing a more competitive strategy.
The lower price-levels, regionalized features of Shanzhai products, in-depth understanding of local markets, higher responsiveness to evolving markets and changing consumer preferences helps the Shanzhai companies to gain market share and exploit growth potential. Further characteristics on the supply side are an increasingly well-developed ecosystem.
Ok, now that we understand the term Shanzhai and which type of companies there are.
How can we learn from it and create breakthrough innovation?
What comes after the Shanzhai phase:
Shanzhai phenomenon brings the key ingredients (deep local understanding, resilient business model and complex network of business enablers and partners with huge specialization) to create a fast moving company.
Agile you need to become to create new entrepreneurial and business dynamics (though research and development, innovative design…) in order to create traction (in your products, business and users).
After that, the once Shanzhai, now mature, global and successful company will be ready to build a strong brand and and innovative identity and continue to grow thanks to its flexible and risk taking biology.
The Shanzhai innovation framework by DOT S Coop (2014)
Further impact of the Shanzhai philosophy:
Shanzhai as an inspiration
– Shanzhai approach could be a key process to speed up new start ups in devolving countries and struggling economies (ie: Spain, Greece…) to create agile, fast growing, fast prototyping industrial & tech start ups.
– Shanzhai innovation could be key to create local collaboration networks creating more sustainable and more local businesses. This could increase the competitiveness in certain business areas, break oligarchies and create a new status quo in business.
– User all over the world will see more value in such a company and in such a value propositions: Supporters will emphasize advantages like more consumer benefits, grassroots innovation, more competition, more features, fair pricing. [3]
Innovation in China
– Our western eyes they donʼt understand (please, admit it…) China and its processes on the first sight (neither on a second or third, sorry to say…). We need to be ready to have a different view and change our mindset to understand how things work in China.
– From Chinese copycats to Global brands: Donʼt underestimate Shanzhai companies. Today, take the case of Tianyu for instance, it is now a mainstream player virtually unrecognizable from its Shanzhai beginnings, thanks largely to increased efforts in R&D and brand building [2].
– Chinese innovation might appear non existence on the outside, but they are some of the most perceptive individuals out there. Chinese companies are smart and theyʼve got good ways to keep an eye on the west, plus a BIG local market. They have the uncanny ability to piece together people’s needs, satisfy various niches at the same time, move fast, manufacture A LOT and still see the bigger picture.
– In China speed is critical, in China companies they donʼt innovate to position themselves better in the market, to differentiate their products a little bit from other… They innovate to survive. Shanzhai gives the possibility disrupt the status quo and create and implement new business strategies and new innovation funnels.
– This constant newness have forced media businesses to become creative in their offering.
A Shanzhai partner
– A Shanzhai business partner can help you to respond quickly to evolving markets or adapt to changing consumer preferences in places and in ways that you never imagine.
– Inadequate understanding of local market dynamics (for foreign companies) or a persistent reluctance to implement change (for large Chinese state-owned enterprises)
Your role as an innovator
– Get ready, forget about Copyright now Copy is right. Honor the past, imitate, move fast, move local, try many things, traction and evolve.
– Conventional innovation methodologies wonʼt work in China (Design Thinking? Really?) and wonʼt normally develop competitive advantage.
DOT in China
In DOT we look at projects from a global perspective, taking good care of the peculiarities of different societies and cultures. We believe this is the only way to create a more powerful and sustainable impact of our partnerships and projects. And of course we love to merge East and West.
Actually the last 3 year we have been lucky enought to visit Greater China in different occasions leading the Mondradon Team Academy (Mondragon University) LEINN (Entrepreneurial Leadership and Innovation degree) and MINN (International Master on Intrapreneurship and Open Innovation) programsʼ Learning Journeys in Shanghai.
At the same time we were able to exchange ideas and have long dialogues with amazing people like Liyun Li 李力耘 (UX researcher at Samsung), Oscar Ramos (CEO at Dad Asia), Will Chang (CoFounder and CEO at Ark Design), Jeremy Wai Chan (Founder and Chairman of Elkpark Recreational Management Ltd), Francisco Porras (Partner at China Bridge), Marcus Lui 雷永泰 (Principal Brand Strategist at Continuum Shanghai), Jason Huang (Founder & CEO, TANG Innovation) and Fan Lyu (User Experience Research Lead, TANG innovation).
The amazing team of ARK design with Iñigo Blanco (DOT S Coop) and Mondragon TeamAcademy LEINN young entrepeneurs: Eneko and Martin from Kibber Team.
We want to say a big xie xie, (thank you!) to all this lovely people to help us understand better China and its innovation and human centered design processes. See you soon!
China is going thought really exciting times, everyone is looking to them and somehow expecting their next big moves. We believe that China need to honor their past to create a new future, interpreting their ancient roots and knowledge and combine it with innovation tools and approaches from the West (And creating their own ones at the same time!). We are very convinced that DOT will play a role in this shift… Should we do it together?
Sources:
[1] The business model of a Shanzhai mobile phone firm in China (2011), Jin-Li Hu (National Chiao Tung University, Taiwan), Hsiang-Tzu Wan (National Chiao Tung University, Taiwan), Hang Zhu (Sun Yat-Sen University, China)
[2] Shan Zhai: A Chinese Phenomenon (2009): Edward Tse, Kevin Ma (2009), Yu Huang members of Booz & Company.
[3] Shanzhai – Dimensions of a Chinese Phenomenon, (2009): Philipp Boeing, Frankfurt School of Finance and Management – Bankakademie HfB
[4] China, copiando a los maestros (2010): Omar Salgado, Universidad Tecnológica de Monterrey and Cambridge University.
[5] Shan Zhai: How Imitation Fuels Innovation in China (2012): Mary Bergstrom, founder of The Bergstrom Group and author of All Eyes East: Lessons from the Front Lines of Marketing to Chinaʼs Youth (Palgrave Macmillan).