The Chinese shanzhai phenomenon was featured recently in posts by Andrew “Bunnie” Huang and Tom Igoe.   To me it’s striking reminiscent of the flexible manufacturing networks of Emilia-Romagna and the Third Italy.

The literal meaning of shanzhai is “mountain fortress,” but it carries the connotation of a fortified area or stronghold outside the state’s control, or a place of refuge for bandits or rebels (much like the Cossack communities on the fringes of the Russian Empire, or Sherwood Forest). The 108 bandits of Song Jiang, one of the more notable shangzhai legends, also carry a  flavor something like “Robin Hood meets Che Guevara,” according to Huang.

Although shanzhai firms are commonly dismissed in the West as knockoff artists, Huang writes, they remind him of Jobs and Wozniak or Hewlett and Packard back when they worked out of garages

The contemporary shanzhai are rebellious, individualistic, underground, and self-empowered innovators. They are rebellious in the sense that the shanzhai are celebrated for their copycat products; they are the producers of the notorious knock-offs of the iPhone and so forth. They individualistic in the sense that they have a visceral dislike for the large companies; many of the shanzhai themselves used to be employees of large companies (both US and Asian) who departed because they were frustrated at the inefficiency of their former employers. They are underground in the sense that once a shanzhai “goes legit” and starts doing business through traditional retail channels, they are no longer considered to be in the fraternity of the shanzai. They are self-empowered in the sense that they are universally tiny operations, bootstrapped on minimal capital, and they run with the attitude of “if you can do it, then I can as well”.

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An estimate I heard places 300 shanzhai organizations operating in Shenzhen. These shanzai consist of shops ranging from just a couple folks to a few hundred employees; some just specialize in things like tooling, PCB design, PCB assembly, cell phone skinning, while others are a little bit broader in capability. The shanzai are efficient: one shop of under 250 employees churns out over 200,000 mobile phones per month with a high mix of products (runs as short as a few hundred units is possible); collectively an estimate I heard places shanzhai in the Shenzhen area producing around 20 million phones per month. That’s an economy approaching a billion dollars a month. Most of these phones sell into third-world and emerging markets: India, Africa, Russia, and southeast Asia; I imagine if this model were extended to the PC space the shanzhai would easily accomplish what the OLPC failed to do. Significantly, the shanzai are almost universally bootstrapped on minimal capital with almost no additional financing — I heard that typical startup costs are under a few hundred thousand for an operation that may eventually scale to over 50 million revenue per year within a couple years.

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Significantly, they do not just produce copycat phones. They make original design phones as well…. These original phones integrate wacky features like 7.1 stereo sound, dual SIM cards, a functional cigarette holder, a high-zoom lens, or a built-in UV LED for counterfeit money detection. Their ability to not just copy, but to innovate and riff off of designs is very significant. They are doing to hardware what the web did for rip/mix/burn or mashup compilations…. Interestingly, the shanzhai employ a concept called the “open BOM” — they share their bill of materials and other design materials with each other, and they share any improvements made; these rules are policed by community word-of-mouth, to the extent that if someone is found cheating they are ostracized by the shanzhai ecosystem.

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To give a flavor of how this is viewed in China, I heard a local comment about how great it was that the shanzhai could not only make an iPhone clone, they could improve it by giving the clone a user-replaceable battery. US law would come down on the side of this activity being illegal and infringing, but given the fecundity of mashup on the web, I can’t help but wonder out loud if mashup in hardware is all that bad….

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In a sense, I feel like the shanzhai are brethren of the classic western notion of hacker-entrepreneurs, but with a distinctly Chinese twist to them. My personal favorite shanzhai story is of the chap who owns a house that I’m extraordinarily envious of. His house has three floors: on the top, is his bedroom; on the middle floor is a complete SMT manufacturing line; on the bottom floor is a retail outlet, selling the products produced a floor above and designed two floors above. How cool would it be to have your very own SMT line right in your home! It would certainly be a disruptive change to the way I innovate to own infrastructure like that — not only would I save on production costs, reduce my prototyping time, and turn inventory aggressively (thereby reducing inventory capital requirements), I would be able to cut out the 20-50% minimum retail margin typically required by US retailers, assuming my retail store is in a high-traffic urban location.

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….I always had a theory that at some point, the amount of knowledge and the scale of the markets in the area would reach a critical mass where the Chinese would stop being simply workers or copiers, and would take control of their own destiny and become creators and ultimately innovation leaders. I think it has begun — these stories I’m hearing of the shanzhai and the mashup they produce are just the beginning of a hockey stick that has the potential to change the way business is done, perhaps not in the US, but certainly in that massive, untapped market often referred to as the “rest of the world”.

And like the flexible manufacturing networks in the Third Italy, Huang says, the density and economic diversity of the environment in which shanzhai enterprises function promotes flow and adaptability.

…[T]he retail shop on the bottom floor in these electronic market districts of China enables goods to actually flow; your neighbor is selling parts to you, the guy across the street sells your production tools, and the entire block is focused on electronics production, consumption or distribution in some way. The turnover of goods is high so that your SMT and design shop on the floors above can turn a profit.

In fact the description of a small factory/garage shop housed in the same building as workers’ housing and retail sounds exactly like similar enterprises in Bologna described by Charles Sabel and Michael Piore.

Another parallel with the Third Italy:  the success of shanzhai enterprises results not only from their technical innovativeness, according to Vassar professor Yu Zhou, but from “how they form supply chains and how rapidly they react to new trends.”

The Third Italy was made possible by the first cheap microprocessors in the 1970s, which enabled the design of affordable CNC machine tools scaled to the small shop.  Today’s micromanufacturing revolution is enabled by a further step in the same direction, with the cost of homebrew CNC tools scaled for the garage workshop rapidly falling into the triple digits.

One promising indication of how the new generation of small-scale technology will be integrated into flexible manufacturing, in the U.S., is the 100kGarages project.

With increasingly scalable production technology, the boundaries between the kind of networked small-scale enterprises of Emilia-Romagna, and the kinds of super-small shops using $500 cutting/routing tables and RepRaps, are exceedingly permeable.

The shangzhai enterprises of China, and the 100,000 garages in the United States, both seem like excellent candidates for taking 1980s-style flexible manufacturing to the next level.

The comments under Huang’s post also contain quite a few gold nuggets.  The presence of such a hardware mashup model in China, commenter Tor Pettersen says, is “[y]et another example of how IP laws are stunting innovation.”

Huang and a number of other commenters also remark on the effect of zoning laws, licensing, and suchlike, on artificially increasing the capital outlays required to engage in small-scale production, and putting artificial floors under overhead costs.

Of course as mushrooming networks replicate themselves below the state’s radar,  focus on local markets, and relocalize manufacturing on the foundations of repair and mass customization, such constraints on innovation are likely to become unenforceable.   When there’s a Fab Lab in every large neighborhood, serving the local market, the corporate-state nexus may find itself being eaten alive by the equivalent of a hundred thousand pirahna.  And with the old corporate dinosaurs trying to keep their supply chains from collapsing in the face of Peak Oil, and revenue-strapped governments reduced to providing the bare minimum public order functions, the corporate-state nexus may find itself, um, preoccupied elsewhere.

As I also commented at Huang’s post, the shanzhai model may be affected in China by considerable pressure to relocalization.  As  Peak Oil levies a prohibitive tariff on the “warehouses in container ships” economic model, we can probably expect China’s sweatshops and distributed manufacturers to reorient themselves to the domestic market and treat the old TNC headquarters as redundant nodes to be bypassed. At some point they’ll figure out that all the actual productive activity is outsourced to the distributed manufacturing network, and the corporation is just a bunch of useless eaters living off the rents from branding and IP. At that point, they may decide to just make the products themselves and ignore the patent and trademark “rights,” eliminate the brand name markup, and simultaneously cut prices and raise wages by several hundred percent.

This may be the answer to all the safety and quality problems currently afflicting Chinese goods imported into the U.S. Most of these problems result from all the game-theory implications of producing stuff for people who have no effective feedback mechanism or leverage. When you’re producing for your neighbors and they can take their business elsewhere and tell everyone else to do the same, reputational mechanisms are a lot more important.

Igoe also had some excellent comments on how the shanzhai model dovetails with the open hardware movement in the U.S.

There are some obvious parallels here to the open hardware community. Businesses like Spark Fun, Adafruit, Evil Mad Scientist, Arduino, Seeed Studio, and others thrive by taking existing tools and products, re-combining them and repackaging them in more usable ways. We borrow from each other and from others, we publish our files for public use, we improve upon each others’ work, and we police through licenses such as the General Public License, and continual discussion between competitors and partners. We also revise products constantly and make our businesses based on relatively small runs of products tailored to specific audiences.

The intersection of the open hardware and open manufacturing philosophies with the current model of flexible manufacturing networks will be enabled, Igoe argues, by the availability of

Cheap tools. Laser cutters, lathes, and milling machines that are affordable by an individual or a group.  This is increasingly coming true. The number of colleagues I know who have laser cutters and mills in their living rooms is increasing (and their asthma is worsening, no doubt). There are some notable holes in the open hardware world that exist partially because the tools aren’t there.  Cheap injection molding doesn’t exist yet, but injection molding services do, and they’re accessible via the net.  But when they’re next door (as in Shenzen), you’ve got a competitive advantage: your neighbor.

And the flexible manufacturing network, unlike the transnational corporate environment, is actively conducive to the sharing of knowledge and designs.

Open manufacturing information.  Manufacturers in this scenario thrive on adapting existing products and services. Call them knockoffs  or call them new hybrids, they both involve reverse engineering something and making it fit your market.  Reverse engineering takes time and money.  When you’re a mom & pop shop, that matters a lot more to you.  If you’ve got a friend or a vendor who’s willing to do it for you as a service, that helps. But if the plans for the product you’re adapting are freely available, that’s even better.  In a multinational world, open source manufacturing is anathema. Why would Nokia publish the plans for a phone when they could dominate the market by doing the localization themselves?  But in a world of networked small businesses, it spurs business.  You may not have the time or interest in adapting your product for another market, but someone else will, and if they’ve got access to your plans, they’ll be grateful, and will return the favor, formally or informally.