As Small Factories Shut in Huge Numbers, Is China’s Shanzhai Industry Dying?

Want a fake Nokia N9 that has a rip-off iPhone (or also HTC Sense) UI? Then some random shanzhai manufacturer has just what you desire. (Image source: Micgadget)

China’s ramshackle cottage industry of low-grade phone and gadget makers – known as shanzhai in Chinese – looks to be on the verge of extinction with one report saying that the southern city of Shenzhen has gone from hosting thousands to just twenty such shady manufacturers in the past year. It comes as consumers in the country become more aware of branding and quality, and also due to crackdowns on shoddy or pirated goods and other illegal activities in which some of these shanzhai manufacturers engage.

It’s hard to define precisely what these cottage industry factories do. Some are genuine OEMs or parts makers that create things like phones as a sort of side-line, perhaps using their own cast-off parts. Others are opportunists that copy a popular phone to make a quick buck. A few used blatantly ripped off names, such as NOKLA; although most just made up a random logo with no thought to long-term branding. According to Techweb, which today writes on the demise of these shady gadget makers, a shanzhai manufacturer could copy a phone and get it ready for production in just two weeks – in contrast to the year or more that it takes established manufacturers.

Shanzhai manufacturers were always superb at giving consumers what they wanted, and so they contributed as much – or more – to the fall from grace of Nokia in China as, say, Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG). That’s because whereas China’s wealthier citizens bought smartphones, a lot of its poorer and rural folks made do with shanzhai ‘feature phones’ that gave them what they needed: dual or triple SIM support so as to juggle the cheapest calling plans; TV antennae; dozens of colours or snap-on accessories; pick and choose a fake UI skin that aped iOS, Symbian, or Android. It was grassroots innovation – so long as you didn’t expect your new phone to last for years. The fly-by-night gadget makers gave all those features, and more, for prices that way undercut Nokia (HEL:NOK1V; NYSE:NOK) and other feature phones.

The End is Nigh

But all that seems about to unravel, and it will be to the benefit of makers of cheaper devices, such as ZTE (HKG:0763; SHE:000063), Huawei, and perhaps Nokia as well.

The Techweb report says that a lot of factories in and around Shenzhen are going under, leaving thousands out of work, and collectively owing a lot of money to employees and investors. There appears to be four main reasons for this:

• A clampdown on illegal activities and piracy – With so many shanzhai manufacturers breaking numerous laws – from copyright infringement to tax evasion, the forging of IMEI numbers to the smuggling of parts or phones – increased police pressure is putting a lot of them out of business.

• Cleaning up Shenzhen ahead of the Universiade – A lot of the afore-mentioned clampdowns were actually clean-up campaigns related to the Universiade games which took place in Shenzhen in August of last year. Major events like these often cause a police sweep of normally overlooked illegalities.

• Consumers worry about quality – With a number of high-profile food safety concerns in China, consumers are perhaps thinking about their gadgets as well. After all, if a shanzhai phone explodes and rips your ear off, you’re unlikely to find the manufacturer let alone be able to win compensation.

• Better cheap phones from established brands – And, lastly, there are now cheap handsets with more diverse features from a number of well-known brands. They’ve finally realised they they need to listen to consumers more, and give them some useful features such as dual SIM slots.

We’ve already seen decreasing demand for these cheapo phones in China, but as long as there’s some measure of demand, some entrepreneur will choose to make a profit from it. And so we don’t think shanzhai is dead yet – perhaps it’s just about to depart Shenzhen and move inland.

[Source: Techweb – article in Chinese; image from Micgadget]