The future is "Shanzhai" - faking it for real

A recent article in the People's Daily Online reminded me of a recent experience in China. On numerous occasions I was offered a fake iphone.

Given the technical quality of this product it amazed me that such an item could be faked in the sense that it actually worked and how it could be done so cheaply. Whilst this shows up the profit margins that Apple must make on these products it also shows the skills that are inherent in Chinese firms. Even replication takes considerable effort.

It turns out that the market for fakes has a name - "Shanzhai". This article is interesting on many levels but does suggest that Western brands are fighting a losing battle in China.

I am still left a little confused. Take this quote from the article below:

Xiang said compared with real ones, there was still some way to go in terms of functions, quality and after-sale services, but these "Shanzhai" items were still worth buying.

"They were usable and cheap. They look exactly like real ones and make me cool. That's enough for me," Xiang said.

Now I understand the "coolness" bit but this suggests that a fake iphone will look like an iphone but not work like an iphone. However, at least some elements must work even if it is just the phone bit. It is not hard to see why demand would be so high it such a status driven country that is just discovering the joys of capitalism and conspicuous consumption.

The Hiphone maker is also refreshingly honest stating that he accepts that Apple might sue him. I expect by then the profits will have been safely stashed away and the company will disappear - IF Apple are ever able to find him. The costs are small and the gains are huge.

It looks like the word "Shanzhai" has gone mainstream.

More importantly, China is only going though the stage of development that was followed by Japan in the 1980s. Japan imitated and then realised it that it could do better than the West. China is merely following this well trodden path to development. The West innovates and provides the creative spark, the East copies, improves and takes the products mainstream at a cheaper price.

The only solution for the West is to keep running to stand still and maintain high levels of R&D spending as China is catching up very fast.

China Exclusive: Faking it for money or fun? [People's Daily Online]

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Products imitating famous brands have not been uncommon around China for a couple of years - and now they have a unified name, a brand if you like, "Shanzhai".

The Chinese word "Shanzhai", literally meaning small mountain village in the dialect of southeast China's Guangdong Province. It became a popular name for fakes when "Shanzhai Cellphones", churned out by small-scale manufacturers in southern China, quickly seized a considerable chunk of the mainland market over the past two years.

Now "Shanzhai" has been given with a broader meaning of fake, unprofessional or homemade, a slang for anything that steals ideas or styles from already well-known stuff.

Imitated electronics, including cellphones, MP3s and even laptops, are the most common "Shanzhai" products. Despite the possible infringement of intellectual property rights, they are much liked by young people and those on lower incomes.

Xiang Lianfei, 25, a salesman in Shanghai, bought a fake Nokia N95, a fake iPod Nano and a fake Rado watch costing a modest 2,000 yuan, while the three genuine items would have cost him more than eight times that amount.

Xiang said compared with real ones, there was still some way to go in terms of functions, quality and after-sale services, but these "Shanzhai" items were still worth buying.

"They were usable and cheap. They look exactly like real ones and make me cool. That's enough for me," Xiang said.

And Apple Inc. might be shocked by the hot-sale copycat HiPhone, on the market while its genuine product iPhone has yet to go on sale on the mainland. Qixingjian, a HiPhone dealer running an online shop on Taobao.com, sold out 280 items within one month.

The company which manufactured HiPhone, with its brand slogan of "not iPhone, better than iPhone", had its own registered trade mark and a complete operating system.

"We know Apple may sue us, but it's driven by huge market demand. Our company needs to copy from famous brands to survive first, and we will improve our R&D and seek further development in the future," said Zhang Haizhen, vice-president of the company. Zhang chose to be identified by his own name without mentioning the name of his company.

The HiPhone company sold out about 5,000 HiPhones in the past three months, and according to Zhang, at least one million other fake iPhones had been put on sale in the mainland market, some of which were even rip-offs of HiPhones!

Zhang claimed his company was developing the technology of integrating two mobile network operators onto one cellphone.

"Imitation is the first stage for all mobile companies," he insisted, "but in the long run, it's only dog-eat-dog, that's why we are working on our home-made independent brand," he said.

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Still, the word's popularity is overwhelming. Not only is the word used in commercial TV programs and dramas and about ordinary people whose appearance looks like certain celebrities, but also many grassroots parodies made by ordinary people have been nicknamed "Shanzhai."

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But still some disagreed. Zhou Xinning, an Internet commentator, said "Shanzhai" products had had a great impact on some industries and the government should pay special attention to the new phenomenon.

"We have 'Shanzhai' things everywhere, especially on the Internet. A flood of 'Shanzhai' was like junk. Policy guidance is in need," Zhou said.

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"'Shanzhai' companies should always keep in mind that independent innovation is crucial for long-term development. 'Shanzhai' creation by common people is the new form of our mainstream's sub-culture," Xia said.

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How to Win the China Piracy Battle

From the inbox:

This is an interesting article from Shaun Rein at Business Week:

How to Win the China Piracy Battle

As Shaun correctly identifies, economics plays a crucial role in the demand for and the supply of pirated goods. Where I would take issue is that even if counterfeiting was removed entirely as of tomorrow it would make only a small dent in the US trade deficit and not as has been written "a long way to reducing the deficit".

The bottom line is that China is still developing and at this stage of development with per capita incomes still so low piracy is inevitable. As China gets richer demand for authentic goods will increase and the problem will solve itself. Meanwhile Western multinational need to take a pragmatic approach and consider their pricing policies. Creating brand loyalty now will pay off in future years. Indeed, the owners of fake Rolex watching will be constantly dreaming of the day they can afford a real one.

A Matter of Economics

First, multinationals should try to stop the piracy by taking a business approach rather than a legal or moral one. They must become less moralistic about intellectual property theft by the Chinese. While they do have the legal high ground, their current posturing does little to stop the pirates or generate revenue from legitimate sales.

The problem is more a matter of economics than of a morally corrupt Chinese populace. As the disposable incomes of Chinese consumers continue to grow, brand loyalty gains currency, and domestic Chinese companies begin to lose revenue to pirates, intellectual property problems will be solved in much the same way as they were in Taiwan and Korea. Smart multinationals will make sure they are in a strong position to reap the benefits in China.

One positive sign is that Chinese are in many ways no different from other consumers. Millions are entering the ranks of the middle class, and they want to look the part of the urban aristocrat. If they cannot afford genuine items they turn to touts on the street hawking fake Louis Vuitton, Tiffany (TIF), Montblanc (CFR.VX), Rolex, and Polo (RL) items. But as Chinese consumers become increasingly sophisticated, the situation is changing. Now consumers can value the difference between a real Giorgio Armani tie and a fake one.

Website Pirates Crackdown

China moves to quell concerns over pircay.

China shuts 205 Web sites in crackdown on piracy

BEIJING - China, often criticised by the West for failing to tackle rampant illegal downloading of music and films, said on Thursday it had closed 205 Web sites in a crackdown on Internet piracy.

Officials said that between the end of September and January they had investigated 436 cases, including about 130 at the request of overseas industry associations, and ordered 361 offenders to stop their infringements.

"Piracy of intellectual property on the Internet has seriously harmed the interests of copyright owners, leading to a large number of disputes -- and thus disrupting the orderliness of the Internet," Yan Xiaohong, deputy director of the National Copyright Administration, told a news conference.

Yan said that in the latest action, authorities had imposed fines totaling 705,000 yuan ($91,000), confiscated 71 servers and transferred six cases to courts for prosecution. One of those had led to a conviction, he said.

Prominent cases included sites that offered downloads of software, textbooks, music and television shows. In one case, all the Internet cafes in Changchun, in the country's northeast, were found to be linked into a database of pirated films.

Official figures show China now has about 843,000 Web sites and 140 million Internet users, making it the world's second largest Internet market.

Yan declined to estimate how many of those sites contained pirated material, but called for understanding from China's trade partners that it was working in earnest to address the issue.

"With the Internet developing so quickly, I'm afraid that in China, as elsewhere, it's going to take some time before we can effectively manage it," he said.