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Entries in shanzhai (1)


From the shards of the shanzhai, the rise of China handsets

Good times for China’s handset sector: the latest is that four of the top five brands in Asia-Pacific markets are Chinese.

But the counterpoint to the emergence of players such as Huawei, Lenovo and Coolpad is the demise of the pirate, or shanzhai market.

The shanzhai era now looks like a classic transition period in an emerging economy. A tiny number of shanzhai players are growing into genuine brands. The vast majority are gone or fast disappearing.

A report by Sohu IT recently found that of an estimated 6,000 or so vendors at the market peak seven years ago, only a few hundred are left.

What’s most interesting is the reasons cited - such as declining price of mid-range phones, greater enforcement of copyright laws and changing consumer tastes. In various ways these all connect back to the growing success of the genuine brands.

What appears to have sparked the almost total collapse of the market was a credit squeeze in the supply chain early this year.

Shanzhai handsets emerged in the mid-2000s. By making use of the extensive electronics supply chain in Guangdong, shanzhai firms could make fake versions of brand name phones for as little 100 yuan.

When Sohu IT reporters paid a visit to Huaqiang North Rd, or 'Electronics St', in Shenzhen, they found just the shards of the shanzhai trade.

Of the five once-thriving retail malls, only one remains, Mingtong Digital City, now barely covering a single floor. Where it once charged 100,000 yuan a month in rent, stallholders today pay just 3000 yuan.

According to Sohu, the crisis began at the start of the year, when sales fell off a cliff and returns began piling up, creating a cash crunch in the supply chain. 

These firms weren't flush to start with. Typically, a shanzhai business could start up with just 600,000 yuan ($9,800). It had to pay cash for the Mediatek chipset, the camera lens and the display, but everything else came on credit. Now the battery, mould and packaging firms all require upfront payment.

The result, according to a manager of one store, is that as many as 800 bosses of knockoff firms are doing a runner each month.

The biggest factor is probably price. Shanzhai phones are caught in a pincer. On the one side, mid-range Samsung phones have come down in price and are now available for 2000 yuan or so. From the other side, local brands like Huawei and ZTE are cutting their own prices.

Another is the limitations of the shanzhai firms themselves – the shoddy quality and limited warranties, the inability build a brand or establish an online presence.

Then there's the increased vigilance of brand owners and authorities, both in China and abroad.

Consumer tastes are changing, too. Shanzhai sales in third tier Chinese cities, which were the biggest source of domestic demand, have plunged and these markets are now dominated by emerging Chinese brands like Gionee.

Of course, the arrival of the smartphone, and in particular Android, has been disruptive simply because of the degree of difficulty in developing them compared to feature phones.

Finally, there’s the safety issue. Apart from being unable to supply SAR measurement, there’s the sheer physical danger of shanzhai equipment.