Collection No 1

Insights China

Shanzhai’s Role in Innovation Strategy

The term “Shanzhai” refers to a part of China’s informal industry that is known for fast product cycles as well as its tendency to seek inspiration in, or simply copy, successful products. Needless to say, we see many of our international and Chinese clients intimidated by the speed of Shanzhai and bewildered by the apparent ruthlessness with which they imitate, alter, and remix features, designs, and even entire products. Shanzhai manufacturers can design, build, and take mobile phones to market in as little as 40 days, while “legitimate” manufacturers take longer to merely secure and approve their budgets for similar initiatives.

I find myself as fascinated and intrigued by this part of China’s industry today as I was when I first arrived, and have come to understand that we are looking at a multifaceted, deeply rooted phenomenon that can teach us a lesson or two on how to build products and, ultimately, companies. As with many things in China, it is impossible to claim absolute truth here, because as soon as someone writes or says something negative about Shanzhai, evidence to the contrary seems to emerge almost instantly, reminding us of China’s incredible diversity and accelerated change. What I do want to offer, however, is a different perspective for looking at the Shanzhai industry, in economic, historical, and cultural contexts.

Shanzhai manufacturers—the truly customer-centric businesses of China

Many circumstances have contributed to the rise of Shanzhai companies in China. Contrary to what I’d originally expected when I first arrived in Shanghai, these circumstances are not only cultural, but political in nature. In this context, it seems worthwhile to remind ourselves that the term Shanzhai translates to “pirate or outlaw stronghold.”

A common belief is that the Shanzhai phenomenon would be less pronounced if the government didn’t create barriers and regulations that target both local and international companies trying to establish their products on the Chinese market. Shanzhai manufacturers operate without a business license and usually launch their products uncertified. And because Shanzhai products do not go through the week-long approval and certification processes that their licensed counterparts do, they have an extraordinarily short time to market.

By not committing to established industry alliances and regulations, Shanzhai manufacturers can afford to focus on the actual customer to meet the demands the “regular” players leave unmet. The most telling example of this is Multi SIM mobile phones. Fearing product cannibalization, local and international mobile network operators first tried to avoid, and then sanctioned heavily, Multi SIM phones. Shanzhai companies happily built these devices, which addressed the needs of Chinese and Southeast Asian consumers looking for an effective solution for managing costs.

Shanzhai marks a temporary stage in, but not the final state of, a company’s evolution

I have a friend who grew up in Shanghai and has dedicated most of her life to being a Kung fu expert. She told me that she would have never reached her level of success (she’s won many international competitions and awards) without practicing the endless repetition of each movement and form of her body until it was perfect. What struck me about this part of her education was how, to her, all the endless monotonous repetition she has to perform don’t actually feel repetitive. She explained that every new execution of a move reveals a new facet, a new sensation, or sometimes a new dimension that she wasn’t able to experience before. It is only after she has fully mastered a particular form that she allows herself to play with it—to get creative and add to it that which makes her unique as a world-class martial artist.

The philosophy that informs many of the conversations I have with our clients and impacts many of their decisions is simply before one can get creative (i.e., innovate), the nuts and bolts of the trade must be fully internalized. Not long ago, when presented with a new and very different design concept, one of our aspiring Chinese clients told us that they don’t believe it’s the follower’s role to define new trends and features, but rather the industry leader who gets to decide where a product category will be going. It’s important to note that quite a few Chinese Tier 1 and 2 OEMs have evolved from Shanzhai and are now successful legitimate businesses.

Based on conversations with, and observations from, our Chinese clients, I wonder if the Shanzhai industry doesn’t actually serve a greater purpose within the Chinese economy. It might very well be a hotbed of young businesses that are learning, growing, and experimenting “in confined water” so to speak—sanctioned only by the customers they serve. Does this mean the Shanzhai model should be looked at not so much as an end state, but as an interim condition in a company’s evolution?

Shanzhai products help project status, achievement, and upward social mobility

Today, China is simultaneously a developed, developing, and undeveloped market. Having grown up in a fairly small and homogenous country like Germany, I am always amazed by the socioeconomic diversity that can exist under the umbrella of a single nation. According to research by data guru Hans Rosling, differences in life expectancy and average income between China’s richest cities and poorest provinces show as much variation as between a highly developed metropolis like New York and developing countries like Ghana (take a look at his “200 Countries, 200 Years, 4 Minutes” video on YouTube). In a country with this much economic disparity, driven by the omnipresent “face culture” (an important driver for aspiring consumers that demonstrates upward social mobility), Shanzhai products have always played a role in projecting achievement. This is true not only in China, but also around the world. There seem to be as many fake products at the grand bazaar in Istanbul as there are in Shanghai’s fake market or New York’s Canal Street. And let’s not forget that one of the most important target customers of Shanzhai is actually Western tourists looking for believable fakes.

Interviews with Chinese consumers show the reasons for the iPhone’s popularity comes not only from its design and manufacturing quality, but its ability to serve as the lowest common denominator between the rich and the aspiring. While, in the West, Apple’s service ecosystem (iTunes, AppStore, MobileMe, etc.) is an effective way to retain customers, these services are lost on many of the Chinese, as the absence of effective DRM makes the idea of the iTunes store appear alien to them. Hence, we find more and more Chinese customers telling us that the iPhone “doesn’t do it for them” anymore and that they’re looking for the next thing that offers the badge-value they’re looking for. As the market (and salaries) grows, so does the Chinese’ desire for authenticity and identity. Particularly among the middle class, the appetite for Shanzhai goods is dropping as customers seek out more authentic (ideally made by Chinese) brands that can deliver quality and have a story to tell.

Shanzhai challenges the relationship between the inventor and the maker

In Beijing’s Forbidden City, visitors can enjoy various historical Chinese paintings. Ni Zan, who lived and worked in the 14th century, is an artist whose paintings are known and loved by many. Unlike art from the West, there are a multitude of seals and poems that live near the edge of his paintings—elements that have obviously been added by previous owners after the painting was “finished.” One can’t help but think that the idea of a piece of art ever being finished doesn’t seem to apply here.

In a way, Shanzhai is like an ancient form of Google Wave: an artifact invites conversations and a different interaction between the artist and current owner. At times this participation includes attempts to copy or iterate on the creative idea, and what is interesting is the widespread view that a copy can be better than the original. This really does imply a separation between the creative idea and its renditions, meaning that the initial expression of the idea (the original piece) might have to compete with other attempts to refine and play with it.

In China, the creators of “great copies” often receive as much praise as the inventors—implying that innovation and craftsmanship (the head and the hand) share similar appreciation. This notion is certainly different from the view we share in the West, where—at least since Renaissance times—craftsmanship usually sees less appreciation than innovation. One of the best examples to illustrate this difference in views (albeit from Japan, and not China) is the Ise Shrine in Japan. The shrine is a beautiful piece of art and craftsmanship that dates back more than 1,300 years, and was on UNESCO’s list of world cultural heritage. That is, until it became known that some of the shrine buildings are rebuilt every 20 years as a part of the Shinto belief of the death and renewal of nature—and as a way of passing building techniques from one generation to the next. This practice did not compute at all with the minds who decide what is worth protecting, hence the decision to remove the shrine from the UNESCO’s map.

In the business world, we usually find it unpalatable to consider an idea to not be owned by the entity that came up with it but rather that it is a shared thing that invites interpretation, iteration, conversation, and play. When we look at it in the context of music, however, it no longer seems so alien. For example, the relationship between Glen Gould and Beethoven, or Stan Getz and Carlos Jobim yielded greater, more beautiful results than each individual could have ever come up with themselves.

I appreciate that this thought seems incompatible with the way we handle intellectual property in the international business world—though many agree that current IP law practice feels increasingly absurd, inhibiting innovation rather than protecting it. The Shanzhai don’t worry so much.

Will Shanzhai prove the Western approach to innovation to be outdated?

Before joining frog, I worked on a concept design team for a mobile carrier in Europe. Always looking for better ways to get to new ideas, we approached a recent new project differently: Rather than working with just a single agency, we went with three different shops we had previously enjoyed working with. The brief was rather open and the selected partners were different enough to produce a good variety of concepts—or so we hoped.

What struck us was that at their core, the concepts that came back weren’t nearly as diverse as we’d hoped. Instead, the agencies all just seemed to feed on one or two shared ideas. Was this the downside of the connected world? Does the increased connectivity between all of us introduce a tendency for our ideas to homogenize? Maybe. In his book What Technology Wants, Kevin Kelly argued that markets and industries present an evolutionary environment for our ideas as much as nature does to the evolution of our bodies and minds. In his view, technologies and customer expectations co-evolve in a dialectic fashion, making certain “innovations” more or less likely at a given point in time, increasingly accelerated by the connected world. It appears that the Shanzhai industry as a whole shows some of the characteristics of such an innovation network. While their counterparts in the West are busy protecting their ideas and avoiding the reality that common knowledge and capabilities travel, Shanzhai companies embrace this phenomenon as a fact. Shanzhai can be looked at as a fast-iterating network, in which everyone involved is hyper-aware of and responsive to each others’ progress and achievements.

What does this leave us with?

If ideas really do travel faster and are less inhibited in the connected world, what does this leave us with when we need to help our clients differentiate? Without a doubt, innovation has become harder, so perhaps we need to renegotiate what we consider “innovation” going forward.

In a funny way, Shanzhai companies present both the threat and the answer to this question: In order to survive in today’s markets, is discovering and differentiating relevant ideas more important than being able to bring the ideas to market quickly and with quality? To deliver fast, we need to change the way we imagine and then produce products. Instead of dividing innovation and execution, we need to unite them. Like craftspeople, designers seek inspiration not only in design research and strategic insights, but in the material we use to build things. By material, I mean the actual matter, like the network, the space we’re designing for, and the silicon we work with. By tinkering with these components, we discover and refine ideas faster and with much more fun than if we did it on paper or with traditional design tools.

When I was a student, I ran my own small business designing and building custom furniture for friends and friends of friends. Looking back on that work, there’s one thing that a lot of the pieces have in common: They looked quite different from what I thought they’d look like when I started working on them. The reason for this might have been my inability to plan properly, but I prefer looking at these works differently. Lacking formal education in engineering, I found that by simply going about building a new piece, I was able to learn from the material itself what would and wouldn’t work for me. I often ended up with something that I thought was better (and admittedly different) from what I had originally imagined.

My lack of education back then reminds me of the intimidating ambiguity and complexity that comes with many of our projects at frog today. I often find it impossible to know exactly what a product will look like before it is built. So the answer is obvious: To design it you have to actually build (or at least prototype) it. This way we can build faster with more transparency and better quality.

The complexity of today’s design and manufacturing challenges present another opportunity for differentiation. Fewer and fewer products, services, or experiences can be delivered by a single company. Instead, our clients increasingly find themselves in need of acquiring new capabilities or building new partnerships. It is my view that it is your culture, your people, and your ability to connect as an organization that determines success and time to market. To be successful in the connected world, you need to build businesses that are open, adaptive, and easy to deal with. You must find and nurture people who aren’t protective of their ideas or obsessed with their egos, but instead are excited to give and take from a network of people of who love what they make as a source of inspiration and shared innovation.

Rainer Wessler

As Vice President, Creative, Rainer leads a multi-disciplinary team of creatives in the Asia Pacific region from frog's studio in Shanghai, where he has been based since 2009. He partners with frog’s local and global clients to help them embrace change and transform their businesses to drive growth.

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The West misreads China's shanzhai as innovation. Copying flourishes when legal protection is weak. http://goo.gl/qLAaEZ
Anthony Alfidi, 2016-02-01 17:28:36

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