5. Future development of shanzhaiji handset
5.1 Competition increase in shanzhaiji handset market
The Shanzhaiji handset business was lucrative before middle of 2007. Since then, the
competition among the Shanzhaiji handset developers has increased drastically due to license of handset production was phased out on Oct 2007 as a great incentive for new players that numerous players enter into the market. Furthermore, it is the MTK turkey solution leading to low threshold for new comers that the specifications of the Shanzhaiji handsets among the players’ products are almost similar except product appearance. Under such circumstance, the chaos in the Shanzhaiji handsets business has been increasing. As a Shanzhaiji handset product is competing in the low cost segment and fast provision, it has been impacting some Chinese domestic branded companies such as Ningbo Bird Corporation and Amoi who have deficits on handset businesses.35 Those Chinese domestic hand companies are losing profits due to emergency of the Shanzhaiji handset products. The entire Chinese handset market can be ruined if such competition continues. Lemon market effect could be seen that it refers to that good lemons are expelled out of market by bad lemons that in the end, the lemons in the market are all bad.36 In order to mitigate such situation, the timely regulation and guidance from Chinese government are critical to lead the Shanzhaiji handset businesses to be normalized.
The Chinese government’s role can be significant in assisting those Shanzhaiji handset developers to the regular basis as they operate in a legitimate way to compete with Chinese domestic companies on the same basis. Otherwise, combining those factors all together, the future of Shanzhaiji handsets can be bumpy.
35 佘小勇 (2009) 山寨机生存有道
36 舒华英、北京邮电大学经济管理学院教授
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5.2 Chinese Government policy to shanzhaiji handset market
The structure of shanzhaiji handset industry is complicated and complex that it is difficult to determine which business activity is licit or illicit. Currently, there is no official announcement in favor of shanzhaiji handset industry from Chinese government due to existence of shanzhaiji handset industry is a sensitive issue to Chinese government. Especially on intellectual property infringement, there are many shanzhaiji handsets looked like almost the same as some tier-one players’ products. Thus, Shenzhen city government has carried out many strikes on the shanzhaiji handset products infringing intellectual property in the huaqiangbei road business district in Shenzhen, Guangdong but it has not succeeded since 2005.37 On the other hand, the entire shanzhaiji handset industry does bring enormous economic effects contributing to the rapid regional development. Only striking the shanzhaiji handset business cannot solve the problems that it can lead to a significant impact on the entire shanzhaiji handset industry.
Even though this is no crystal clear official commitment from the Chinese government, in fact, the Chinese government has started to direct the transformation of the shanzhaiji handset industry to be regularized from some government policies. At first, in the Oct 2007, the license of handset production was phased out by Chinese government that all of the underground activities of the shanzhaiji handset can be rectified gradually under the
policies.38 In order to facilitate the shanzhaiji handset industry to be normalized, the China Academy of Telecommunication Research (CATR) / 工業和信息化部電信研究院 has established a lab named South Institute of CATR of MIIT / 工业和信息化部电信研究院南 方分院 or China Shenzhen Institute of Telecommunications / 深圳电信研究院 in the Shenzhen operating on AUG 1, 2008 by Shenzhen city government and CATR.39 The China
37 杜舟 (2008) 山寨机疯狂内幕调查
38 孙晓菲 (2008) “破解＂山寨機
39 工息部电信研究院南方分院(深圳电信研究院) http://cszit.com/About/index.aspx?ListID=020104
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Shenzhen Institute of Telecommunications is another window to the China
Telecommunication Technology Labs (CTTL) / 中國泰爾實驗室 in Beijing that both of them are affiliates of CATR for Type Approval (TA).
As Type Approval is closer to the shanzhaiji handset developers, it can be part of incentives to them to submit their products to be verified. There are more preferential policies
accompanying as followings. First, CATR increases the TA resources for handset developers.
Second, the GSM handset test cases are reduced 10 items as well as CDMA test cases are reduced 11 items. Third, the cost of TA is discounted around 33 percent from 30 thousand RMB. Fourth, the TA process is improved to provide the report within 8 days.40 Feb 2009, the Shenzhen city government announced to regulate and guide the “preliminary innovative product” (初级创新产品) which can be referred to the shanzhaiji handset products in order to pushing the shanzhaiji handset developers to transform and upgrade to develop brand recognition and capabilities of research and development.41
5.3 Transformation from OEM/ODM to OBM
Even through the shanzhaiji handset developers has the capabilities to deliver products in to handset market, they are still not qualified as regular handset developers. The shanzhaiji handset developers have no guarantees or warranties to end users who use their products. If the shanzhaiji handset products have problems, the only thing that the end users can do is to take it. Any players who provide the product or service have to meet the customers’ needs.
Otherwise, it may not last long for the shanzhaiji handset developers. To survive longer, the
40 新華社，助力山寨機“轉正＂，工信部促檢測費下調 33%，2008/08/14，
http://big5.xinhuanet.com/gate/big5/www.xj.xinhuanet.com/2008-08/14/content_14124501.htm\
41 深圳市人民政府工作报告(2009) http://www.sz.gov.cn/zfgb/2009/gb644/200904/t20090402_953310.html
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shanzhaiji handset developers should transform to Original Equipment Manufacturing / Original Design Manufacturing (OEM/ODM) operation to provide their service for the branded companies due to advantages of lower cost, faster provision and unique product appearance. At the same time, the shanzhaiji handset developers can learn Own Brand Management (OBM) operation model from those branded companies. From OEM as the simple manufacturing and production to ODM as manufacturing, production and design, it is a common way for a beginner of an industry because most branded companies have gone through the same way as to increase the capabilities gradually from simply manufacturing for customers to self innovation. Without those steps from OEM/ODM to OBM, a company might not be able to develop OBM operation.
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The emergence of shanzhaiji handset industry has been impacting the handset industry significantly in the mainland china with the turnkey solution from MTK since 2003. The shanzhaiji handset products with lower cost, faster provision and unique product appearance have been mushrooming and booming in the handset market. They are prosperous during the period of 2003 till today. However, competition has increased among the shanzhaiji handset developers since Oct 2007 as handset production license was phased out bringing new comers of the shanzhaiji handset developers into the handset market. The low margin among the shanzhaiji handset developers has been happening because of the low threshold to
produce shanzhaiji handset leading to drastic competition. The shanzhaiji handset businesses have to be regulated by assistance from Chinese government. Otherwise, the competition of the shanzhaiji handset businesses may lead to chaos.
The structure of the shanzhaiji handset industry in Shenzhen is huge and complicated that there are over 10 thousand upstream and downstream participants that the chip venders are around 3, the scheme design houses are around 200, the shanzhaiji handset developers are around 2000, the provincial as well as local channels are around 1000 and the components suppliers are around 3000. The entire shanzhaiji handset industry is fully developed that the shanzhaiji handset businesses do bring tremendous economic effects in Shenzhen leading to prosperous regional development. Nonetheless, the shanzhaiji handsets are illicit products which are infringing the intellectual property right, copying the trade mark and avoiding Chinese government’ supervision as well as regulation.