Ms. Yang, a Beijing office worker, shows off her new mobile phone to her co-workers. It boasts all the features of a typical handset — touch screen, camera, MP3 and video players — but it offers a lot more besides. Shake it, and its wallpaper changes automatically. Dial it, and lights on the sides flash in sync with the most popular ringtones. This phone is not a Nokia, a Motorola, or a Samsung. In fact, it has no brand name at all, and it costs just US$70 (480 yuan), less than a fifth the price of similar branded products. This is what is called a shan zhai model in China.
Originally used to refer to a bandit stronghold outside government control, the term shan zhai has today become shorthand in China for fake or pirated products (it can also refer to anything improvised or homemade). From mobile phones to digital cameras, wine to medicine, automobile rentals to movie DVDs, Chinese consumers encounter shan zhai in almost every corner of their daily lives. Nokir and Samsing Anycat phones, Pahetohic TVs, and Wetherm skin cream are just a few examples. Shan zhai was the subject of a heated debate at the National People’s Congress in Beijing in March 2009, with some members deriding most shan zhai goods as low-quality counterfeits and others advocating more tolerance given the benefits the products bring to Chinese society.
Perhaps the most impressive aspect of the shan zhai phenomenon is the sheer number of companies making these goods that have — often starting from scratch — evolved with astonishing speed to challenge incumbent players in mature industries. For example, mobile phone maker Tianyu, whose copycat handsets target trendy but value-conscious buyers, overtook number one domestic manufacturer Lenovo in only two years; now Tianyu is closing the gap on foreign giants such as Nokia, Samsung, and Motorola and moving aggressively into overseas markets. Similarly, BYD, a local battery and automotive manufacturer, started out making half-price imitations of Toyotas but has grown into one of China’s most successful automotive manufacturers and a global leader in car battery technology and dual-mode drivetrain systems. (See “The Best Years of the Auto Industry Are Still to Come,” by Ronald Haddock and John Jullens, s+b, Summer 2009.)
Many observers write off shan zhai firms as counterfeiters or pirates. And several of these companies do operate in breach of, or at least on the borderline of, China’s intellectual property laws. But those cheap copycat-type operators generally don’t last very long. The best shan zhai companies are evolving into legitimate businesses with their own intellectual property portfolios. They are worth studying — not because of the competitive threat they pose, but for their legitimate impact on business. They have established themselves not through thievery but through knockoffs and imitations, and have disrupted the status quo by inventing new and ingenious business strategies tailored to local markets.
The emergence of the shan zhai phenomenon has been driven primarily by the unique supply and demand characteristics of the Chinese market. On the demand side, the vast reach of China’s markets offers opportunities to target any number of customer segments, channels, and geographies. Shan zhai companies often focus on the less-developed markets, such as smaller cities and rural areas — a logical choice given that brand-name makers focus on urban customers and that more than 60 percent of China’s 1.3 billion people live in rural areas. Although individual incomes in these markets are lower, aggregate consumer purchasing power can nonetheless be significant. In particular, younger rural consumers tend to follow urban consumption trends.
Some shan zhai companies have benefited from slow or complacent responses by industry incumbents to market changes, and from a lack of understanding by multinationals of local market dynamics. In the car rental industry, for example, the only large profitable company in China is a former shan zhai enterprise. Called eHi Car Rental, it began by copying Hertz, which had entered China in 2002. Despite the company’s first-mover advantage and years of industry experience, Hertz’s Chinese operations were slow to develop, as were those of Avis, the number two international brand. The main problem was that both companies tried to apply their U.S. “self-drive” operating models to China, leaving the door open for eHi to develop its own, more locally suited approach. Realizing that the Hertz/Avis model did not match the needs of busy and often stressed local executives or work well in China’s heavy traffic and rapidly evolving road systems, eHi began offering chauffeured service — a choice that turned out to be both viable and profitable.