Did You Shanzhai Today? The Cathedral and the Bazaar in China.

1Dr. Virginia Cha,Chief, ResearchInstitute of Systems Science,National University of SingaporeOctober 7, 2011

Outline2 /40 Problem Definition Introduction of Shanzhai Analysis on the Cathedral and the Bazaar Enabling Factors Shanzhai and Innovation Evolution of Shanzhai (from 2005 to 2010) Implications For entrepreneurs For corporate innovators For economic/policy advisors Grateful acknowledgement of partial research funding from NUS University Innovation Fund

Benjamin’s Digital Naturalism3 /40 Source: Google Images

Picture of a capacitor lablled as 6800uF/50V and one with the innards exposed showing really it’s a 2200 uF/35V4

Enabling Factors – Shanzhai and the Bazaar 5 /40 1st Factor – Release of MTK Turnkey chipset (2005) created a platform for bazaar High R&D Cost Short Long R&D R&D Cycle Cycle The Advantage of Turn-Key The Turnkey platform shortened the R&D cycle from 9-12 months to < 3 months and lowered the technology costs for middle and small mobile Low R&D Cost phone manufacturers. MTK mobile phone manufacturers Vertically integrated mobile phone manufacturers

Enabling Factors – Shanzhai Mobile Phone and the Bazaar 6 /40 Provides the fuel to a faster churning supply chain ecosystem Quick R&D, Quick Design, Quick Manufacturing, Quick Shipment •A typical large-scale, vertically integrated, international phone Industry Chain of Shanzhai Phones in Shenzhen manufacturer (e.g. Samsung) releases Number of firms cooperating in Shanzhai ecosystem: around 50 new mobile phone products, averagely 4 new products per month. Shanzhai Phone 3000+ Manufacturers •In Shenzhen, the main “Bandit city” of Phone Components 3000 Shanzhai phones, there are on 5 new Manufacturers mobile phone launches every day. The Phone Mold number of new products in Shenzhen 200 Manufacturers exceeds 1000 annually. Industrial Design 100 •The Shanzhai manufacturers adopt an Logistics, trade and “open to point of promiscuity” attitude - related businesses Sharing of BoM •Release Early, Release Oftenhttp://findwhatworks.files.wordpress.com/2010/09/nytimes-technology-adoption-chart.gif

Ecosystem enabling Shanzhai7 /40 Photos taken by author/research assistants on trips to Huaqiangbei, Shenzhen, 2010-2011

Ecosystem enabling Shanzhai8 Photos taken by author/research assistants on trips to Huaqiangbei, Shenzhen, 2010-2011

Components9 /40 Photos taken by author/research assistants on trips to Huaqiangbei, Shenzhen, 2010-2011

Enabling Factors – Shanzhai and the Bazaar10 /40 2nd Factor – technology creating new forms of consumption Graphic from: http://findwhatworks.files.wordpress.com/2010/09 /nytimes-technology-adoption-chart.gif

Enabling Factors – Shanzhai and the Bazaar11 /40 3rd Factor – Cultural acceptance of Shanzhaiism Video Graphic from: http://micgadget.com/12077/an- in-depth-video-tour-of-shanzhai- industry-part-1/

Dominant Design, Platform Strategy, Complementary Assets Market Demand Value of Product + platform to customers 1 + Platform Release(s) 5 2 + + Availability Size of of installed applications 4 3 base + pageAdapted from from Establishing a Standard: Competitive Strategytechnological Standards in Winner-Take-All Industries, Charles W. L.W. L. Adapted Establishing a Standard: Competitive Strategy and and technological Standards in Winner-Take-All Industries, Charles Hill,The Academy Academy of Management Executive (May, 1997: figure 1). Hill, The of Management Executive (May, 1997: figure 1). 12

13 /40 Shanzhai as an innovation model

Shanzhai Ups and Downs14 /40  Some imitators transform to innovators and grow Logo images from Baidu vs Google, Tencent’s QQ vs MSN Chat BYD logo vs BMW logo  Those who just copy… simply fade away Logo images from Goojie and 360Quan Source: Baidu.com and Google Images

BYD’s Cost Innovation in Manufacturing 15 /40 • The F3 is an exact copy of Toyota, but costs 50% less to Picture images of manufacture Toyota Corolla • In Zhengzhou, F3 owners and BYD F3 can spend a few hundred yuan to have the exterior badge replaced with a Toyota logo • Strategy is to achieve quantum drops in cost by copying • Openly copies by reverse-engineering • Can you open new markets with cost innovation?Source: http://www.chinacartimes.com/2010/02/11/the‐%E2%80%98truth‐about‐byd‐replication‐cost‐cutting‐and‐car‐production/http://english.caing.com/englishNews.jsp?id=100117245&time=2010‐02‐10&cl=111&page=all Image source: Baidu.com and Google Images

WingTech 闻泰集团16 /40 Photos taken by Virginia Cha on visit to Wingtech factory, Jiaxing, China. Aug. 30, 2011

17 Photos taken by Virginia Cha on visit to Wingtech factory, Jiaxing, China. Aug. 30, 2011

Tianyu and Product Innovation18 /40  Android 2.2 smartphone  uses dual-core processor NVIDIA Tegra 2  512MB RAM and 8GB of internal memory  480 × 800 resolution 3.8-inch size touchscreen  5 Megapixel camera which can record 720p video  0.3 Megapixel front camera for video chat  supports GPS / A-GPS, Bluetooth and WiFi connectivity.  pre-loaded with applications for Sina Weibo, QQ, Kaixin, Youku  FM-tuner, microSD card slot, digital compass, accelerometer and ambient light sensors  100GB free of online storage cloud computing  Released in China in mid-April 2011 through China Unicom to about 3500 Chinese yuanPhoto source: Virginia Cha

Shanzhai and Innovation19 /40 Shanzhai players can evolve to become sources of innovation. Source: Baidu.com and Google Images

More cases20 /40 Renren is the first SNS in NYSE IPO weibo.com is the largest Microblog site in China with > 200M accounts. Internet café in China was flooded with computer virus. youku.com raised $203m in NYSE IPO 2010. Source: Baidu.com and Google Images

21 /40

Agilent and RIGOL 22 /40 Picture of Picture of an Agilent a Robol Oscilloscope Oscilloscope (DSO1014A Oscilloscope) (DS1000A Oscilloscope) Agilent (Big Firm) RIGOL (Small Company) 1939 Founded 1998 WORKSHOP Established 1999 Spun off from Hewlett-Packard Company, high end strategy 2000 Founded, low –end strategy 2001-2008 Economical downturn and Development of DS1000A frugal strategy in the 3rd quarter Tech [3] 2008, low –end strategy [1] 2009 Similar features as DS1000A from RIGOL [2]Photo source: Agilent and Rigol company websites.

23 /40 Photo taken by Virginia Cha, Huaqiangbei, Sept 14, 2011

24 Photo taken by Virginia Cha, Huaqiangbei, Sept 14, 2011

25 Photo taken by Virginia Cha, Huaqiangbei, Sept 14, 2011

Fast Learning /40 Picture of Picture of 2 months an older generation a newer generation of shanzhai phone 4 of shanzhai phone 4 Traditional removable back cover Irremovable back cover and the And the internal SIM card slot for Eternal SIM Card slot Shanzhai iPhone 4 (Oct-2010) for Shanzhai iPhone 4 (Dec-2010)Learning through feedback collection (from research of traders in Mintong Plaza,Huaqiangbei, Jan 2011) Customer Trader Manufacturer• How fast was the feedback collecting process in Shenzhen? 7 Days 1D < 3 Day customer trader manufacturers

Shanzhai 2.0: Recent Developments 27 /40 iPod Touch Apple Peel Released July 2010 – a device ‘skin’ for iPod Touch. It acts like a phone without a screen. -Inside contains -complete set of GSM communication module -Antenna -SIM card slot -Additional battery Creates an iPhone at ½Photo source: Virginia Cha price

The Apple Peel Survey 28 /40 How do you know Apple Peel What do you think of its basic functions? 9.43% 3.77% Internet 50.00% 45.28% 5.66% Newspaper 40.00% 33.96% Friends 30.00% Others 20.00% 11.32% 7.55% 10.00% 1.89% 0.00% 81.13% Very satisfied (1) Somewhat satisfied (4) Neither satisfied nor dissatisfied (24) Somewhat dissatisfied (18) How do you seek technical Very dissatisfied (6) support? 60 53 50 Do you think of Apple Peel as Will Shanzhai achieve 40 32 a Shanzhai product? sustainability? 30 100.00% 20 18 62.26% 20 7 50.00% 37.74% 10 10 0 0.00% 0 Online forum Instant Phone Face to face Messenger Yes (33) No (20) Yes No C Peel users Apple Peel 520 users potential customers total effective response 16 9 28 53 invitation sent 100 100 About 600 About 800 response ratio 16.00% 9.00% 4.67% 6.62%Survey posted on various leading Apple Peel vendors (e.g. coming, yosion) bbs, April 2011

Shanzhai 2.0 (2010)29 /40  Moving away from copying hardware (such as creating a fake iPhone, Air Phone)  Looking towards building upon existing popular electronics and creating products around them ala Apple skin model. Photo images of various newer Chinese products that plug into iphone including cameras, printer, power extenders Photo source: Mili, apple, dx-power company websites.

30 /40Photo source: Virginia Cha

31Photo source: Virginia Cha

So, what does this all mean?32 /40

The story so far…33 /40  The Cathedral and The Bazaar  Open-system like innovation model enabled by platform availability, market demand, and willing users  Manufacturers/traders/buyers engaged in a very rapid feedback cycle Enables fast external learning  Vibrant and large ecosystem in support of bazaar  IP enforcement still fluid Enables low risk experimentation

Implications – for entrepreneurs 34 /40  Opportunities enabled by Bazaar  Visit bazaars to get ideas  Learn how to get to assembling of prototypes rapidly with low cost  Figure out how to release early, release often Photos taken by author/research assistants on trips to Huaqiangbei, Shenzhen, 2010-2011

Implications – for corporate innovators35 /40  Get to fast external learning from the bazaar  You have the requisite R&D intensity  You may be constrained in experimenting  You need to participate in bazaars  Look towards ‘trouble reports’ as a source of ideas  You need to have a vibrant and rapid feedback loop to identify gaps and opportunities  Rethink the role of your distributor network – they can be part of your virtual R&D team

Implications – for policy/economic advisors36 /40  Look for opportunities to create bazaars for hyper innovation activities  Look for ways to reduce risk and lower the cost of experimentation

4F’s of Shanzhai Innovation37 /40 Rapid Experimentation Low cost Quick Response Modular components Speed Affordable Fast Frugal Fit Fad Localization Trend setting Targeted features Early adoptor Customized Status seeking

Did you shanzhai today?38 /40 Drawing courtesy of Priscilla Wong

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Did You Shanzhai Today? The Cathedral and the Bazaar in China.

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Did You Shanzhai Today? The Cathedral and the Bazaar in China. Presentation Transcript