“Cool & Cheap” Destructive Innovation

In the Chinese handset market a disruptive innovation revolution is taking place. China’s domestic mobile phone manufacturers are having a hard time to stay alive and also big multinational brands struggle to keep their market share (Nokia saw their sales in China decrease last year). Established handset manufacturers are anxiously looking for new business models. What’s going on, what is changing the largest handset market in the world?

Go Shanzhai!
It is the rise of the Shanzhaiji (山寨机), the so called “Bandit Cell Phones”. In 2008 alone over 250 million Shanzhaiji handsets where produced. The handsets are mainly targeted for China’s rural markets and are extremely cheap feature-to-feature compared to established brands (starting at $40). Moreover the style and designs are constantly evolving and changing.

From Copycat to Culture
As Scully Meng, Journalist & Editorial Assistant at Chinadialogue, described it at Mobile Monday Beijing #28, Chinese youth are “seeking for fun to get away from the stressful, high speed, unstable monotonous urban lifestyle.” As a result there is a great need for entertainment and eye catching gadgets that make you stand out from the others. Though Shanzhai started out at as “creatively imitating the famous”, nowadays, according to Scully, the copycats have evolved into a phenomenon that is “at the edge of Chinese creative culture”.

Many Chinese feel that creative minds have been slowed down by international copyright regulations. They are tired of the Western companies that are constantly charging for royalties and asking for money. You can imagine that also the Chinese government is not very unhappy with the rise of the Shanzhiji culture as they have the objective of building up a local industry.

“MTK Inside”
Karl Weaver, Principal at Newport Technologies, describes the rise of Shanzhaiji as “part of the non-mainstream culture”. According to Karl, Shanzhaiji manufacturers have a wild ambition to innovate and endlessly cater the needs of customers. The spirit of Shanzhai includes the willingness to satisfy all the different market segments. They are able to constantly adapt, innovate and tweak their offering as the turnaround time is only 3 months for a handset (instead of the 9 months that established brands need).

So how do  Shanzhaiji manufacturers manage to produce handsets with so many features with such a short turnaround time? The revolution is heavily supported by the Taiwanese Mediatek which has a 90% share of Mainland China’s mobile chip set market. According to Karl “the MTK system-on-a chip is creating a disruptive innovation revolution, rewriting the rules in a 1.2 billion a year handset industry.”

Final Thoughts
While most attendees agreed with the speakers that Shanzhaiji culture is a good example of Chinese innovation, during the concluding buffet and drinks I collected some interesting critical remarks:

• “This is no real innovation; it is just creating fun stuff, look at all the examples; why is a Buddha phone innovative? It is just humorous, that’s all!”
• “No wonder that they can offer their handsets for so little, they hardly have any R&D costs: it’s stealing. Nobody in the audience had the guts to ask about this, including myself!”
• “I don’t see a Shanzhaiji app platform being developed any time soon.  The phenomenon itself has shown that handsets are becoming a commodity, and that the real money does not come from the handset innovation anymore. When you look at the iPhone, it’s reasonable innovative but it is their business model where the real (profitable) innovation is taking place.”

Below the presentations of the two speakers and the short introduction to the Mobile Monday Beijing #28 session.