David Li on the merger of open hardware with Chinese Shanzai manufacturing

The following is quoted from a long conversation at the Institute for the Future:

David Li:

“The shanzhai sharing have become more business-like in form of readily available designs, boards, molding and others. Also, design houses working with Shanzhai vendors all offer open BOM options. “Open parts”are public available cases, panel, boards, battery and etc that are manufactured by multiple companies with open design. Anyone can acquire these on open market and modular from different supplier can work together. The kind of publicly available cases and boards I see in Shenzhen are becoming very sophisticated fast. The drive to do public available parts may be partly due to lack of IP protection (if it’s going to be copied, it may just well be open and shared) and part due to cost saving. But the ecosystem emergent from these practices is almost like the vision laid out by open manufacturing. After all, it’s about sharing and exchange of how to build and collaborate on the manufacturing. While we’re still trying to figure out how open source hardware may work, they get a system in place already. The simple parts are getting complicated fast because new ones are not designed from scratch but build on top of the previous products.

There are shanzhai which makes grey market goods that are not exactly legal by the law. Not much statistics are collected about them until recent years, as they are shipping hundreds of millions of handsets to China, India, south east Asia and Africa. Most of these vendors are not licensed by the government to produce ICT products. Analog to US would be the economic statistics collected on illegal immigrants.

The celebration of hackers is not quite there yet but this is more cultural…. One of the reasons I started the Xinshanzhai talks are to stir up the debate and to show a side of Chinese innovation that are simply ridiculed and dismissed. It was kind of funny to have IDEO standing on stage at a recent talk, talking about how incredible Shanzhai is, and have a full room of Chinese young designers in Shanghai in disgust. It’s a big culture bridge to cross between Shanghai/Beijing and Shenzhen/Guangzhou.

The shanzhai vendors are moving fast to the trend. They used to produce knock-offs after original vendors had the products on the market. In the past year, I have seen a lot of them act on the latest TechCrunch rumor, especially those related to Apple. It was kind of funny that there are several large size iPhone (7″ and 10”) being produced by the Shanzhai on the rumor that iPad would look like a large iPhone. 🙂 …They see a market niche, move fast to secure design and open BOM and go to manufacture and sales…It happens with large numbers of the assemblies trying to fill every niche they can think of.

One thing I am thinking is hackerspace pointing to an alternative path of evolution for China’s economic development. Manufacturing doesn’t have to “upgrade” to a service economy to increase value. Micro manufacture is another path.

I think open source hardware in the West is a more symbolic anti-consumerism movement. Combining that community with the shanzhai will have global impact. It will vastly accelerate the spread of technologies to developing worlds…We are at an interesting point where several of these forces are coming together: an efficient (cut throat) supply chain that’s getting ready for micro manufacture and a global movement of hackerspace and the march of millions of amateurs…. Shanzhai and Open Source Hardware are twins separated at birth and if we can join them, it will create some very interesting opportunities.

I am totally agree with Bunnie’s earlier blog post where he concluded that that this system will reach critical mass. I expect to see this in the next two years with tablets. While everyone’s focus is on the “iPad killer,” the price points of tablets are creating a large under served market in BRIC and other developing countries. For example, while Samsung is trying to clear whether the 2 millions of Galaxy are sell-in or sell-out, Gome already shipped over 5 millions of Fly Touch. The current 3rd generations are expected to ship over 10 millions in 2011. Everyone I talked to in Shenzhen this time are getting business from Russia, India, Brazil and other South America countries.

The tablets will ride on the uber Moore’s Law and the hardware will soon overshoot the point which Clayton Christensen calls the “diminishing returns in innovation.” Machines will get to “fast” enough soon enough. As the trend develops, the high-end will likely to be dominated by iOS with mid and lower ranged dominated by these currently unknown Chinese brands (they already have 3 out of top 5 selling tablets on Amazon). Brands other than Apple will lose out big time on this one.

Cell phones play a major role as tool of communication in the recently upraise in Middle East but while Twitter and Facebook are hailed as the tools, few have bother to look at what kind of cell phones are used by the protestors. More likely then not, they are Chinese Shanzhai phones.

If ones are looking to bring social change via technologies to China, Shanzhai is more effective then Twitter/Facebook. The typical Twitter/Facebook users in China are well-off. Some unofficial survey shows Chinese Twitter users have average 12,000/month income, which puts them comfortably in top 5% of the population and part of the elites in the status quo. They want political voice because of their wellbeing financially, but they are not going to do anything that would risk their comfortable lifestyle. On the other hand, the Shanzhai users are the mass and social changes will only occur if they are on board.”

Lyn Jeffery and Bunnie Huang also discuss the implicit rules of Shanzai cooperation:

1) Design nothing from scratch; rather, build on the best of what others have already done.

2) Innovate the production process for speed and small-scale cost savings.

3) Share as much information as you can to make it easy for others to add value to your process.

4) Don’t make it until you’ve already got a buyer.

5) Act responsibly within the supply chain.

Bunnie Huang on the Shanzhai Rules (response)

1) Buy low, sell high — and time counts as money. No holds barred.

2) Confucius’ silver rule, do not do unto others what you would not have them do onto you; or, “what goes around comes around”. (this is the equivalent of #5 and the loose moral thread that binds the ethic of the community).

3) Don’t make what you can buy for less. (your #1)

4) “A bird in hand is worth two in the bush”; or perhaps “cash flow is king”. There is little faith in the future value of IP or inventory. If sharing my specs with you means I close a deal faster, I will share it with you. Waiting a day to sign an NDA means a day longer I sit on my inventory (see my rule #1). This covers your rules #4 and #3.

5) “there is no propriety, only results”, or, perhaps “If it fits your foot, it’s a shoe.” (aka the thereifixedit.failblog.org mentality) An equivalent of #2 down below, except phrased in their mindset. They aren’t in the innovation business for innovation’s sake — they are in it to drive costs down (my rules #1 and #3). It also explains why there is a no-holds barred culture around reverse engineering.

6) The only intangible property worth anything are personal relationships (“guanxi”) (corollary of my #2 and reinforces your #5); also, the most valuable thing one may have is good guanxi. See http://en.wikipedia.org/wiki/Guanxi

A corollary of #6 is that “If I can’t embody it in a physical vessel, it has no value”. This explains why IP licensing in China is so awkward because they think of everything in terms of a bill of materials; every item must be inventoried and counted. Yet strangely, IP takes up a line item but has no space on the shelf in the factory, which seems like you’re just paying someone for nothing. So why pay it?”

Leave A Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.