Red China's Rebels Against Brand-Name Capitalism

Bunnie Huang has an interesting post about the shanzhai of China, a sprawling network of tiny operations run by hacker-entrepreneurs. They're notorious in the West for making name-brand knockoffs, but Huang argues that their copying serves as a base from which much genuine innovation takes place:

An estimate I heard places 300 shanzhai organizations operating in Shenzhen. These shanzai consist of shops ranging from just a couple folks to a few hundred employees; some just specialize in things like tooling, PCB design, PCB assembly, cell phone skinning, while others are a little bit broader in capability. The shanzai are efficient: one shop of under 250 employees churns out over 200,000 mobile phones per month with a high mix of products (runs as short as a few hundred units is possible); collectively an estimate I heard places shanzhai in the Shenzhen area producing around 20 million phones per month. That's an economy approaching a billion dollars a month. Most of these phones sell into third-world and emerging markets: India, Africa, Russia, and southeast Asia; I imagine if this model were extended to the PC space the shanzhai would easily accomplish what the OLPC failed to do. Significantly, the shanzai are almost universally bootstrapped on minimal capital with almost no additional financing — I heard that typical startup costs are under a few hundred thousand for an operation that may eventually scale to over 50 million revenue per year within a couple years.

Significantly, they do not just produce copycat phones. They make original design phones as well....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.

If you'd like to see something like that take off in the United States, be forewarned: In addition to the risk of intellectual property suits, America's shanzhai might get in trouble with the local zoning authorities.

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.

[Via Kevin Carson.]

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  • affenkopf||

    Remind me which country is the free one again and which the dictatorship?

  • ||

    I imagine if this model were extended to the PC space the shanzhai would easily accomplish what the OLPC failed to do.

    Aren't netbooks doing that anyway? And isn't the PC OEM market pretty damn cut-throat as it is?

  • ||

    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.

    Americans must be protected (at all costs!) from living like third-world entrepreneurs!
    Think about teh Proppity Valoooz!

  • Harpoon||

    Reminds me of the Tinkers in Vernor Vinge's The Peace War.

  • ||

    That's not a Gucci bag, that's a Gooky bag.

  • ||

    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.

    Good point. Zoning has the perverse effect of creating larger barriers to entry for people without startup capital. If you have to pay rent on a separate building across town, then you double the necessary funding.

    My grandparents ran a general store, and lived in an apartment above it. Turning the ground floot of a house into a shop is an inexpensive (almost free) way to expand a home business of any kind.

    Of course, the left has always hated the "petit bourgeois", so why am I not surprised their policies have had a negative effect on them?

  • ||

    Hazel,
    It's not really a left or right thing. Since lefties tend to like cities with mixed use zoning. It's more of a bipartisan suburban NIMBYism.

  • ||

    Zoning has the perverse effect of creating larger barriers to entry for people without startup capital.

    I would contend they are also a great hindrance for people WITH startup capital - zoning laws are designed to limit competition among the established and politically well-connected businesses.

    Many City Planners will swear in front of Lenin's bust that Zoning Laws are meant to provide a more "rational" environment for city dwellers - I don't buy it. Government, just starting with the way it finances itself, CANNOT act with the people's best interests in mind. That notion is as absurd as thinking parasites think of how best to serve their hosts.

  • T||

    It's not really a left or right thing. Since lefties tend to like cities with mixed use zoning. It's more of a bipartisan suburban NIMBYism.

    And usually enforced, in this day and age, by private covenant. The county wouldn't have shit to say to me if I wanted to turn my garage into a machine shop. My POA, on the other hand, would go into an apoplectic fit.

  • twv||

    Remember LIBERTY magazine? It started out edited and "designed" and put together in the top story of a three-story house in Port Townsend, Washington. This was almost certainly illegal. But the neighbors didn't complain, so the city never got involved.

    In the country, in the U.S., people still do the kind of thing mentioned above. It's probably hard to get away with on the East Coast, or in Oregon, but in rural Idaho and Washington states, anyway, there are many businesses on the bottom floors of houses, or in garages. For the most part, no one bats an eye.

  • Austin||

    They are doing for hardware what the web did for... mashup compilations? That's the best example he could think of?

  • @||

    hacker-entrepreneurs. They're notorious in the West for making name-brand knockoffs

    I was expecting a lot of anti-property, anti-capitalist, anti-patent and copyright vitriol in the comments. Where are the usual apologists? This place is going soft.

  • ||

    Well, @, the article is about things aren't straight knock-offs. You can see some real creativity and ingenuity going on there.

  • Paul||

    Leave it to the Chinese to be better at capitalism than we are. America... it was fun while it lasted.

  • ||

    And it wouldn't be an H&R post if there's not a gratuitous slap at intellectual property at the end. The devices they're knocking off wouldn't have existed in the first place without patent laws.

  • ||

    Hazel,
    It's not really a left or right thing. Since lefties tend to like cities with mixed use zoning. It's more of a bipartisan suburban NIMBYism.


    Today's lefties like mixed use zoning, largely as a reaction against the sterile suburban environment produced by zoning, which they erroneously interpret as a product of modern capitalism.

    But the original socialist left pioneered the concept as a means of imposing central planning on urban development. Like Brazilia and St. Petersburg, they were enamoured of the idea that you could rationally plan the construction of an entire city, and thought it would be more "efficient" the the messy, disorganized, convoluted cities of yore.

    Today, I don't find a lot of progressives who will go to the mat to defend city planning, but there are a few holdovers. Generally elderly commited partisans who fought lots of battles over it in the past century. The younger lefties usually have no idea that it was their elders who came up with the idea and fought to impose it.

  • Geotpf||

    I'm strongly against most zoning (and am a lefty), although as a recent first time home owner I can see why lots of people don't want a (insert any loud/smelly/messy/dirty business here) to move in next door to their house.

  • Kevin Carson||

    Hazel Meade:

    "Zoning has the perverse effect of creating larger barriers to entry for people without startup capital. If you have to pay rent on a separate building across town, then you double the necessary funding."

    Exactly. And licensing and "safety" codes have a similar effect (e.g. prohibiting a commercial microbakery using an ordinary kitchen oven, and instead mandating capital outlays on industrial-sized appliances that can only be amortized by large batch production).

    And in cases where the physical capital costs of production approach zero, and human capital is the primary source of value, IP laws reinforce corporate boundaries and prevent the human capital from voting with its feet.

    The whole system is geared to impose mandatory minimum startup costs, mandatory minimum levels of overhead, and inflated commodity prices that consist mainly of IP rents. The overall effect is like shit in a body bloated with constipation.

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