When Shan Zhai Succeeded

After the Internet, the latest phenomenon that sweeps the world is probably the iPhone. Because of its sleek design and continually surprising functionality, the iPhone has now become an everyday necessity for more and more consumers around the globe.

Last summer, my friend from mainland China showed off his new cell phone to me. It was an iPhone at first glance. As soon as I was about to jokingly call him a slave of conformity, I realized that the gadget on my palm was actually not an iPhone. It had a multi-touch sensing screen and one single button that appeared just like an iPhone. It carried different advanced features that functioned just like an iPhone: phone, camera, MP3, video recording, internet, GPS and many other eye-opening applications. It adopted an interface as well as an operating system that processed just like an iPhone. It was just like an iPhone. But there was something more about that gizmo – it had an extendable TV antenna for television streaming. I later learned that my friend’s phone was called a TiPhone, a Shan Zhai version of an iPhone. And that, besides the TiPhone, there were also the HiPhone, the SciPhone, and the iOrgane, which has an orange as the logo instead.

This is merely one of countless stories about the Shan Zhai phenomenon that prevails throughout modern China.

Originally used to refer to bandit strongholds beyond government control, the term Shan Zhai (山寨) nowadays commonly describes private businesses based on counterfeit products. In accordance with the term’s seemingly negative connotation, Malcolm Moore further ridiculed Shan Zhai as an expression for anything modified into something “flashier” – yes, nothing else good but “flashier”; and yes, by “flashier” he did not literally mean “better-looking.” He also criticized that while the Shan Zhai phenomenon represented a way for underprivileged people to express what they wanted, most Shan Zhai products contained neither creativity nor utility. In other words, what Moore implies is that many Chinese people attempt to “re-create” and “refine” the quality western products, yet they often end up failing to produce something viable. To many Westerners, perhaps Shan Zhai is just a Chinese name for cheap, inferior copycat products.

But in reality Shan Zhai is not equivalent to complete failure at all. Proponents of Shan Zhai (see here and here) argue that the term is gaining positive significance, particularly when the phenomenon has been proven a commercial success in the technology sector. Based on the latest researches conducted by Gartner and the Chinese government, Shan Zhai cell phones potentially accounted for up to one-tenth of the global cell phone sales in 2007. Even the leaders in Beijing debated about Shan Zhai in this year's National People’s Congress. Such impressive socioeconomic impacts, in return, challenge skeptics with the fact that Shan Zhai is rather a significant driver of the economy that is not to be trifled with.

Still, there is something more about Shan Zhai. It is not only a technological trend. In China, one can encounter Shan Zhai in virtually every aspect of daily life – from electronics to automobiles, websites to television shows, food to medicine, and the list goes on forever. It is not a newly born and transitory phenomenon either. Since the economic reform in 1978, Shan Zhai businesses, which lack governmental support and capital resources enjoyed by state-owned enterprises and foreign companies respectively, have resolved to constantly imitate and improve their rivals’ strategies in order to stay in competition. It is, after all, not a phenomenon that can be found elsewhere. Thanks again to the economic reform, the Chinese government has continuously relaxed the regulatory environment in various industries, and thus contributed to a country with the greatest productivity and also the fastest economic growth in the world. Only in China, the omnipresence of business opportunities, the deep-rooted culture on innovation and venture, as well as the world’s largest market potential constitute today’s Shan Zhai phenomenon.

Most intriguingly, the best of Shan Zhai businesses take advantage of this very phenomenon to evolve rapidly, and eventually become one of the key local industry players that are capable of competing with or even, in some cases, taking over other established foreign competitors. Just to mention a few, Future Cola, the Shan Zhai version of Coca-Cola, competes with Coca-Cola and Pepsi as the third-biggest carbonated beverage manufacturer; Baidu, the Shan Zhai version of Google, outruns Google, Yahoo and Bing as the largest search engine; Taobao, the Shan Zhai version of Ebay, has even kicked Ebay out of the Chinese market as the number one online auction destination.

Believe it or not, some of the best Shan Zhai businesses also profit from the same Chinese phenomenon to catapult themselves into the global competition in a harder-better-faster-stronger manner.

Take BYD as an example.

Beginning a rechargeable battery manufacturer that emulated patents of Sony and Sanyo in 1995, BYD later managed to reduce the production costs significantly by using Shan Zhai: replacing most of the expensive machines with many cheap labors – one of China’s richest productivity resources. Within five years, such innovative business model helped BYD break into the traditionally Japanese-dominated battery industry as one of the world’s leading battery makers. This is not the end of the story yet. Seeing the lifting of regulatory barriers in the local auto industry as a not-to-be-missed opportunity, BYD engaged in the car business in 2003 by imitating models of Toyota and Porsche. On top of leveraging its expertise in car battery design to produce cheap-but-quality vehicles at remarkably low costs, BYD continues to invest heavily in developing its proprietary technology. As a result, this former Shan Zhai company has made two surprising strides ahead of all its competitors – it has already refined the technology of electric hybrid cars and started selling them in China this year, and it is aiming to introduce the first electric automobiles ever to the world in 2010.

Although it has even attracted Warren Buffett’s US$232 million investment and subsequently turned its CEO Wang Chuan-Fu into the richest man in China, BYD’s success is no miracle at all. Rather, it provides insights about some characteristics that most successful Shan Zhai businesses share. First, they choose only the top players in their respective industries to learn from. To stay in business, these Shan Zhai businesses would initially study the best market leaders inside out, and then replicate their know-how at their risks. Second, they are willing to taking risks for the sake of innovation. To differentiate themselves, these Shan Zhai businesses would examine closely for improvements on the business models that they imitate. When they reach a certain scale, they would focus on developing new edges that represent and further their businesses. Third, they are fast and flexible in making every business decision. To stay ahead of their rivals, these Shan Zhai businesses would act and react quickly in their trial-and-error process. When they fail, they would experiment on something else immediately. When they succeed, they would move right on to create more competitive advantages.

Above all, the best Shan Zhai businesses fully utilize the vast resources and opportunities that Shan Zhai offers. Without the world’s largest consumer population that presents numerous business opportunities, these Shan Zhai businesses would never have stayed in business in the first place. Without also the world’s biggest labor force that provides competitive capital costs, they would never have realized their innovative ventures. Without the unique regulatory environment and the world’s biggest market that nurture these Shan Zhai businesses, they would never have been as successful as they are now. In short, the best Shan Zhai businesses are ambitious, willing to learn, innovative, venturous and nimble, and they always want to accomplish something more. Even though they may start out as counterfeiters, they manage to evolve into legitimate and lucrative businesses with their own trademarked quality products. Thanks very much to Shan Zhai!

The Shan Zhai phenomenon is not a joke anymore. Instead, it has become one of the most formidable phenomena nowadays that everyone should study, especially if they want to do business in China. Shan Zhai is probably contagious too (see Mystery Google and a related article). Whether Shan Zhai would one day become the next sweeping phenomenon after the iPhone remains questionable, but I am sure whose turn it is now to have a laugh about this western-made Shan Zhai website – and yes, use their own definition.