Shanzhai: the illegal Chinese version of open and distributed manufacturing

The Chinese experience already shows the productivity of open and distributed manufacturing, though their shared designs are often the result of reverse engineering:

“They do not just produce copycat phones. They make original design phones as well, as documented in this PDF (it is in Chinese, but the pictures are cool; the collage above is ganked from the PDF). 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. The Ferrari toy car meets mobile phone, or the watch mixed with a phone (complete with camera!) are good examples of mashup: they are not a copies of any single idea but they mix IP from multiple sources to create a new heterogeneous composition, such that the original source material is still distinctly recognizable in the final product. Also, like many web mashups, the final result might seem nonsensical to a mass-market (like the Ferrari phone) but extremely relevant to a select long-tail market. 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.

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. I feel there is definitely a bias in the US that “if it’s strange and it happens in China it must be bad”, which casts a long shadow over objective evaluation of new cultural phenomenon that could eventually be very relevant to the US.

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.

Those who read this blog have probably seen my posts about the markets in Shenzhen. 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”.”

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