China's Very Own Cola

As I was doing some routine blog readings, I came across this blog post about Future Cola, one of the successful Shan Zhai businesses that I mentioned in my recent article. I think it would be interesting to elaborate more on its rise.

Although it copied the packaging of Coca-Cola, Future Cola actually researched substantially on what flavor was tailored for the Chinese palate. Eventually, it came up with the taste, which it claimed to represent a healthy way to cool off the Chinese youngsters and clean out their fiery livers. With a strategy similar to BaWang’s, Future Cola targeted at overlooked consumers in lower-tier cities and rural areas. Taking advantage of Shan Zhai to achieve low production costs, Future Cola rapidly imported state-of-the-art equipment and localized production facilities. Furthermore, it leveraged the resources of its parent company, Wahaha Group, in order to establish a vast distribution network in target markets. More important, it launched an aggressive but very focused marketing campaign to build a brand image as “the Chinese people’s own cola.” Once mocked as a cheap copycat of Coca-Cola, Future Cola has now grown into the third-largest player in China’s carbonated soft drinks market after Coca-Cola and Pepsi, with a competitive edge in less developed markets. To expand its market presence further, Future Cola is even planning to challenge the two beverage giants by entering the first-tier markets.

This is just one of many stories about venturous and innovative Shan Zhai businesses.

The era of Shan Zhai seems to be on its way.

Chinese Democracy in Becoming a Star

While many people nowadays may still see China as a community nation where the Party takes total control of its people, I recently found democracy in this Chinese television show called Super Girl.

Considered as the Shan Zhai version of American Idol, Super Girl is an open competition any female contestant regardless of her age, origin, appearance, or the way she sings. But unlike the U.S. show, Super Girl judges are selected from different backgrounds in the society – some of them are even picked from the audience. And the most astounding part is that in the final stages the winners are not chosen by judges at all; instead they are elected by viewers from all over the country by telephone and text messages.

It has turned out that such fearless form of democracy has culturally conquered China. The 2005 season finale was one of the most popular shows in Chinese broadcast history, drawing over 400 million viewers, more than the China Central Television New Year's Gala – the usual number one show every year – earlier that year. Think about it. The number is even bigger than that of the U.S. population! Further, roughly over 600 million votes on average were casted in every season, making this show one of the most democratic phenomena in contemporary Chinese history.

Super Girl has evidently created incredible commercial success and unprecedented social impacts. Though there remain some opposing voices, particularly from the government, that accuse the show of polluting the Chinese culture with foreign ideologies and promoting a low culture to the youth, they have to realize that globalization, which today continues to assimilates various cultures, is inevitable and unstoppable. To put this way, Chinese people watching Super Girl is roughly the same idea as Westerners learning Chinese after all.

Probably they might change their mind after watching Jane Zhang’s spectacular performance in The Oprah Winfrey Show.

Everybody's "Facebook" in China

Nowadays the Facebook fever exists almost everywhere around the world, but not necessarily in China – RenRen (Everybody in English, and formerly called Xiaonei), the Shan Zhai version of Facebook, turns out to beat Facebook as China’s largest social networking sites with over 70 million users.

There are two major reasons, which also shed light on how the Shan Zhai phenomenon (see my recent article) nurtures successful Chinese businesses.

The primary reason is a rather embarrassing one. In fact, it is generally not possible to access Facebook in China because the Chinese government has simply blocked the world’s largest social networking website from its people in attempts to “control” information (well, nothing is impossible…). Thanks to Shan Zhai, in this case the government’s unintended efforts to “relax” the online social networking sector, RenRen benefits tremendously from keeping its greatest rival out of the competition.

Another reason is that RenRen, which has the qualities of a successful Shan Zhai business, actually does a better job than Facebook. As a social networking website, RenRen acts faster on developing more features that fill the needs of local users. It has introduced an instant messaging platform – of course, it is in Chinese – long before Facebook did. It has also provided users with different themed online forums – a very popular form of communication in China – where they can share more culturally relevant materials. It has also been way ahead on running a website that is fully comprehensible to all Chinese users, while Facebook still receives complaints nowadays regarding translation errors. For these reasons, most Chinese users are generally willing to stick with RenRen (see various user experiences).

As a business, RenRen adopts a flexible business model that allows it to grow faster with substantial and stable profitability. Both RenRen and Facebook announced around the same time that they had turned profitable, but consider how long they have been in business – Facebook has been founded since February 2004, and RenRen since December 2005. A possible explanation to RenRen’s rapid growth is that RenRen started out rather as a for-profit website when it was launched. While RenRen offers free basic services like Facebook, it also provides paid upgrade services for those who want to customize their profiles. Moreover, RenRen leverages its largest user base and thus manages to rent out webpage space to multinational enterprises that want to penetrate the Chinese market, such as Coca-Cola, Wrigley and Proctor & Gamble, for mass advertising. Because of Shan Zhai, RenRen is able to harvest remarkable profits without having to manipulate user information as Facebook did.

Since Facebook may not overcome these Chinese difficulties in the near and medium term, RenRen shall continue to succeed as everybody’s “Facebook” in China.

The Overlord of Shan Zhai

This year’s most popular Shan Zhai business (see my recent article about the Shan Zhai phenomenon) has to be BaWang International. Back in July, the Chinese herbal shampoo manufacturer caught the world’s attention by pricing its initial public offering at the top end of an indicative range after the retail portion of its offering was 446 times subscribed. What’s more, BaWang’s share price rose as much as 34 percent on its market debut in Hong Kong when the overall market dropped.

In response to the astonishing results, Neil Hume doubted that it was just a bubble as he believed that was how the Hong Kong market works – when something is hot, everyone simply wants a piece of it.

But after further looking into the company, the business of BaWang seemed to me a real deal.

Since its entrance into the Chinese shampoo market in 2005, BaWang (Overlord in English) has rapidly become the fourth largest player, competing against other consumer products giants, such as Proctor & Gamble, Unilever and C-Bons. Also according to the company’s prospectus, BaWang’s 2008 sales revenues amounted to RMB1.4 billion (approximately USD205 million), which was 45 times what it made only 5 years ago. What’s even more amazing, BaWang carries zero liabilities throughout its business – this is a very positive indicator to investors in today’s debt-aversive market.

The future looks bright for the Overlord too. Chinese consumers nowadays have begun to be health conscious, and thus willing to consume more natural and healthy products like BaWang’s herbal shampoo products. Euromonitor anticipated that retail sales of Chinese herbal shampoo grow at a CAGR of 14.7 percent from 2007 to 2012 as well. In other words, BaWang’s reign may continue gloriously.

BaWang’s success also provides some more insights about the characteristics of successful Shan Zhai businesses.

First, many top Shan Zhai businesses, like BaWang, initially engage in mass distribution in lower-tier markets where they can quickly grow their businesses. Originally as a Shan Zhai manufacturer of Olive’s Beer Shampoo, which was the bestselling shampoo at that time, BaWang selected second-tier and third-tier cities in northeastern China as its target markets in order to avoid direct competition with the market leaders. It also took advantage of the underrated consumption power of those less developed markets, which actually contained about 60 percent of the country’s population. Even though BaWang sold their products for as cheap as 3 yuan (approximately 44 cents), the low production costs and the massive aggregate demand – thanks to Shan Zhai – were able to earn BaWang handsome profits.

Second, when successful Shan Zhai businesses achieve a certain scale and presence, they will rebrand themselves so that they can secure a unique segment of the market. As for BaWang, the former Shan Zhai shampoo maker repositioned itself as a family-run Chinese herbal shampoo company in 2005, pushing its business to the top-end market – now BaWang’s products are even more expensive than those of Vidal Sassoon in China. Furthermore, BaWang has been investing heavily in mass advertising throughout China for the past few years to amplify its presence. As a result, most people in China are very familiar, or perhaps annoyed, with BaWang’s entertaining commercials featuring its proud spokesperson Jackie Chan.

BaWang’s historic IPO is not necessarily a stock bubble that came out of the blue; it rather tells yet another story about the rise of a successful Shan Zhai business.

And we can tell that the Shan Zhai phenomenon keeps working its magic.

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.