Shanzhai Mobile

Chinese Name: 郑硕

Student Number: 15210690686

Cohort: IMBA 2

Case Title: Shanzhai Mobile Phone Companies

1. What are the environmental factors that help drive the Shanzhai phenomenon?

Political & Legal:

• Chinese government slowly eased the regulations in the mobile phone industry. As a result, Shanzhai handset makers could legitimately produce handsets and have the chance to openly expand their business.
• Despite complaints by legitimate handset makers, and serious tax evasion issues, the Chinese court system’s weakness or reluctance to deal with technological or intellectual property rights issues, provides a fertile soil for Shanzhai companies.

Economic:

• China has large numbers of lower-income consumers and rural population, which are the main targeted customers of Shanzhai companies. Despite the low income, they want to follow urban trends, providing huge customer base to Shanzhai companies.

Social:

• Shanzhai has a long history in China, dating back to a classic fourteenth century story, “Water Margins” or “Outlaws of the Marsh,”. Chinese culture delivers flexibility and inventiveness for its people.
• Trust is valued in Chinese society of high context nature. The link in the Shanzhai supply chain is based on trust without formal network. Even without branding, manufacturers’ reputations with wholesalers are often at stake.
• Value is important to Chinese customers as opposed to simply brand.

Technological:

• Chine has a solid manufacturing capacity and very developed value chain system. Chinese producers have rapidly become a major force in the international mobile handset business, many producing phones for global brands. And Chinese are good at analyzing and copying a new product.
• MediaTek offers superior technical support to handset manufacturers with limited product development expertise.

1. What characteristics are critical to the success of Shanzhai handset companies?

1. How have these characteristics been used by leading edge mainstream companies?
2. What can mainstream companies do to mitigate the impact of Shanzhais?

See Exhibit 1.

Particularly, mainstream companies should never underestimate low-cost competitors. Mainstream companies should learn from the Shanzhai players and become a fearless experimenter. It is critical to keep an open and humble mind.

1. What must companies like Shanzhais do to become mainstream?

Shanzhais have already face some challenges: claims on quality and security issues; fierce competition and low profitability. Some foreign countries have already banned Shanzhai mobile phones from China. To become mainstream, Shanzhai should keep its strength like innovation and market orientation. At the same time, Shanzhais should learn the best practices of successful companies.

• Quality and security improvement. Shanzhais should obtain NAL licenses, follow laws and use reliable manufacturers, and have stricter quality control standards and testing. Also, they should improve after sales service like warranty.
• Launch high-end products. Shanzhais should focus more on R&D and introduce high-end models to distance themselves from other typical Shanzhais and thus gradually establish reputation, increase customer loyalty, and become mainstream.
• Build up the brand. With improved quality, Shanzhais could start to promote the brand by commercials as such.
• Form strategic alliance. Shanzhais could also improve their credibility by striking licensing deals with major brand owners, and work closely with Chinese service providers such as China Mobile.

1. What are positive and negative contributions of Shanzhai companies to the industry and the larger economy?

Shanzhai companies have both positive and negative contributions to the industry and the larger economy. The positive contributions include more effective competition, better customer satisfaction, increasing innovation and efficiency. The negative contributions include quality & security issues, infringement on intellectual property rights, rule breaking & tax evasion, and the potential destruction to the larger economies. See the detailed analysis in Exhibit 2.

Exhibit 1