Shanzhai (“Bandit”) Mobile Phone Companies: The Guerrilla Warfare of Product development and Supply Chain Management.By: John Rediehs, Malini Seelan, Rama Paidi 6 1 . 2 Case Analysis Page.Table of Contents Introduction Page. 2 Suggestion/Implementations Page. 5 References Page. 4 Conclusion Page. Shanzhai companies tend to bend the rules or flat out ignore them in a pursuit to maximize profit. Case Analysis Shanzhai companies are uniquely Chinese. Currently. the Chinese market was prime for growth. Their innovative and unique business model has led to strong competition for global brands in China and other developing nations. A market that has long been dominated by the corporate players like Nokia. After become economically viable and successful in 2 . With this ability to cut costs and offer similar products based off the corporate brands at a lower price. Due to the geographic and socioeconomic situations in China many groups are left out of the market or cannot afford the Global brand phones. By highlighting several interesting and unique Shanzhai business strategies. we hope to gain the insight to apply these strategies elsewhere in the business world. Samsung. In translation Shanzhai companies operate with surprising efficiency and at extremely low costs. Shanzhai companies’ emergence in the Chinese market has been a very competitive force in the developing telecommunications industry in China. experimentation. marketing.Introduction Shanzhai (“Bandit Cell Phone”) is shaping the entire thought process of development. Shanzhai companies as they are referred to in this case study have gained a steady market share in the recent years on the big corporate players. Shanzhai mobile phone manufacturers went after the ignored markets. Initially Shanzhai companies starts out as copycats. and optimal output. Shanzhai companies arose out of the culture to revolutionize the Chinese cell phone market. they are a blended subculture of shameless counterfeiting. Many of these larger corporations have the ability to learn from the practices of the Shanzhai mobile phone companies. ruthless competition and social beliefs. By understanding their domestic market and their contract manufacturing history with the big players in the market. and technology in the largest cell phone market in the world. In this paper we will be analyzing several steps in the Shanzhai manufacturing process and business model. and Sony now face a tenacious domestic threat defined by a grassroots culture spreading within China. They also are able to offer a far cheaper phone than similar products of the global brands with the same or virtually the same abilities. offering very low prices and fast response to user demands to grow their base. Shanzhai companies fill this void offering niche market phones that are produced for the needs and wants of that particular market. the Chinese market has over 900 Million mobile phones users with over a billion individuals for market growth. The production of Shanzhai phone was usually outsourced to small assembly workshops which could be setup in a residential apartment. A common modus operandi involves targeting lower-end mass segments in order to build scale and market share via large-volume sales. The manufactures only had to source components such as camera.000). was blue tooth ready.$40. Interface for camera etc. Not only was the business model unique but also were the phones and their manufacturing process.the market they build their core competency. Their market research was simple and they relied on the input from distributors and local sources. Companies like MediaTek introduced turnkey solutions such as the chipset (SOC. pricing. and then begin developing value added services or differentiated products to solidify or expand their customer base. If the manufacturers needed extra functions they paid an extra fee to access the software drivers for those functions. The time taken for a Shanzhai company from conceptual design to mass production was as short as 45 days. or by building cohesive ecosystems with industry partners. The chip provided functions for basic communication. The Traditional companies like Nokia and Samsung invested heavily in Research and development and it required a broad range of expertise including electrical. then raising entry barriers by developing further advantages in areas such as cost control. Scaling up quickly while simultaneously creating barriers to entry and developing strategic core competences. battery and exterior housing. They outsourced the design to local design houses and did not perform quality inspections.System on Chip) provided integrated functions into one chip which was previously provided by multiple chips. and supply chain stickiness. They often bypassed the required government approvals. Shanzhai proponents acquire key know-how. software and the structure.000 . especially in R&D and new product design. In general they took about 8 days to analyze and copy a new model (from a branded company) including the circuit board. software engineers and industrial engineers. 3 . They developed a prototype based on extensive market research which they tested and refined several times before finalizing the end product. The Shanzhai companies had a simple conceptual design process. had Touch screen support. The development time was about 4-6 months. Mass production of the cell phones can be setup in about 22 days. Shanzhai mobile phone makers could now quickly and easily develop new models. The main circuit board and the software design together with the purchase of accessories took about another 10 days. They also applied to certification and approval of the international telecommunications standards and for the NAL (Network access license) which usually costs about ($30. mechanical. 4 . the lack of after-sales support has contributed to making faulty mobile phones the number one customer complaint in China. some Shanzhai companies can and do evolve into major-league players. which are often unfamiliar with China’s sometimes unusual operating environment. The possibility of high radiation levels led the Chinese Ministry of Industry and Information Technology to issue a warning against Shanzhai phones in March 2009. Quite apart from the physical risks. This is especially true for foreign companies. Exploding batteries can cause injury or even death. Recommendation/Suggested Implementation Two particularities of Shanzhai phones have raised customer and government wariness.000-$50. After understanding the competitive advantages in manufacturing and design we must get a full look of the challenges that face Shanzhai companies in the present and the future. With the right business model and strategy. Shanzhai firms tend to shun IMEI because the testing costs $20. India and Taiwan banned the use of such phones in 2009. While China has tolerated the sale of IMEI-less phones. One is low quality and attendant physical safety issues. Key takeaways include these: • Underestimate low-cost competitors at your peril. At the same time.commercial office depending on the scale of operation. This number prevents stolen phones from accessing the network and also allows security services to track mobile phones.000 and takes six months. Shanzhai companies can offer instructive insights and viable business model to operate in local markets.000 per violation. in-particular how existing strategies can be adapted to work more efficiently in a Chinese context. Shanzhai manufacturers have also bypassed the mainstream obligation of equipping phones with a unique International Mobile Equipment Identity (IMIE) number. Small assembly plants may have fewer workers as small as 10 people and the team may produce more than thousand phones every day. with the Taiwanese instituting a fine of $9. Conclusion Now that we get a full overview of the Shanzhai companies we begin to see that Shanzhai companies’ modus operandi usually involves such careful study and adaptation of an existing business model that they are perceived to be taking something belonging to an incumbent whether they are acting in breach of its IP rights or not. understand their tastes and preferences. Companies that are able to work successfully in China must first develop a clear understanding of its complex markets. Do not just react to market change. On one hand. change the market. The key is to keep an open and humble mind.• Always drive change instead of being driven by change. On the other hand. appreciate the diversity of the local customer base. and create distinctive products that meet local needs will benefit from the Shanzhai mind-set when serving China’s emerging breed of consumers. Shanzhai companies can be formidable competitors. and come to terms with relatively poor IP rights protection. Companies need to be “constructive destructors” and game changers. 5 . Those who can come to terms with the subtleties of China’s multi-tier customer segments. they could become potential business partners or even acquisition candidates. Learn from the Shanzhai players and become a fearless experimenter. • Get out of your comfort zone. com/shanzhai-saturday-inside-a-putian-shoe-factory/ http://www.nytimes.com/?p=452 http://www.ac.com/english2010/indepth/2011-03/11/c_13772769_3.chinatechnews.html http://www.pdf http://www.nasscom.htm 6 .com/doc/15919031/Fei-Jiang-Chinese-Shanzhai-Culture-Studies http://www.cam.eng.in/upload/engineering_services09/presentations/EngineeringandProd uctInnovationinChineseMarket_EdTse.com/article/SB10001424052748704025304575284532900123368.booz.com/media/file/Shan_Zhai_A_Chinese_Phenomenon_en.wsj.chinahearsay.shanghaifinancialnews.uk/working/briefings/09_1_shanzai.pdf http://www.com/2010/06/28/12261-egypt-will-ban-chinese-shanzaimobile-phones http://www.scribd.References links: http://www.xinhuanet.com/2009/04/28/technology/28cell.ifm.pdf http://news.html http://online.