Shan zhai companies take full advantage of China’s imposing manufacturing capacity and capabilities. Most shan zhai mobile phones are developed in Shenzhen, where more than 30,000 companies now collaborate across the entire mobile phone value chain: designing products, sourcing, assembly, production, testing, packaging, distribution, and after-sales services.
Although many shan zhai businesses are short-lived, some become very successful. The winners often share three traits: First, they have the ability to break into a market and establish a significant position rapidly. They do this by developing an in-depth understanding of local needs, then moving quickly to capture emerging opportunities overlooked or underserved by incumbents; creating a responsive and resilient business model, often featuring rapid launches of new products and services that fit well with market trends; establishing flexible, low-cost, resilient, and localized operations, and innovative sales strategies that maximize reach to target customers; and scaling quickly while also creating barriers to entry. A common modus operandi involves targeting lower-end mass segments in order to build scale and market share, and then developing advantages in cost control, pricing, and supply chains.
Second, winning companies have sufficient skills to continually improve core capabilities, level of performance, and reputation. After starting out as copycats, successful shan zhai companies acquire their own distinctive expertise, especially in R&D and new product design, and then begin developing value-added services or differentiated products to solidify or expand their customer base. The salient quality of many of these companies is not their “me-too-ism,” but their willingness to take chances and learn from their experiences. If an idea doesn’t work, they abandon it and try something else. The best shan zhai practitioners use their ability to experiment, replicate success, and move rapidly up the learning curve to outcompete many slower-moving foreign and state-owned competitors. To upgrade their brand image, some shan zhai firms actually move away from their beginnings and emerge as industry trendsetters, leading a new wave of product or technology development.
The third common trait is a focus on investing for the future. The very best shan zhai companies are constantly looking for the next “blue sky” opportunity — one that can offer new growth before their current markets come to the end of their life cycle.
Tianyu’s evolution illustrates these three traits. The company’s first move was to target lower-end customers by leveraging the all-in-one chip set produced by Taiwan-based MediaTek to offer an inexpensive handset with trendsetting features. Launching more than 100 tailored models within a year, Tianyu created a wide spectrum of product choices for its retail partners, with which it shared profits and ultimately its customers. But although that approach grew market share quickly, Tianyu didn’t stop there. The company has now started investing in 3G products, aiming at the next phase of China’s telecom development with its already popular K-Touch product line. Today, Tianyu is virtually unrecognizable as a company with shan zhai roots, having leveraged increased efforts in R&D and brand building to become a mainstream player in the biggest Chinese markets.
Multinational companies that are uncertain about how to respond to the threat from shan zhai businesses would do well to follow these three strategies:
- Do not underestimate low-cost competitors. With the right business model and strategy, some shan zhai companies can and do evolve into major-league players.
- Drive change instead of being driven by change. Companies need to be “constructive destructors” and game changers. Do not just react to market change; change the market.
- Get out of your comfort zone. Learn from the shan zhai companies. Like them, become a fearless experimenter — you will find opportunities that would otherwise never occur to you.