3. Shanzhaiji handset industry development
3.5 Chinese handset market and shanzhaiji handset distribution
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GiantPlus TECHNOLOGY and WINTEK corporation and INNOLUX Display Corp, and PCB vender - PLOTECH CO., LTD and TRIPOD TECHNOLOGY. Taiwanese companies have built the world’s biggest handset supply mainland china. The following figure shows the key component venders supply chain on the shanzhaiji handset industry.
Figure 3.8: Taiwanese components supply chain for Shanzhaiji industry
Source: DIGITIME and Karl J. Weaver (2009) Shan Zhai Ji 山寨機
3.5 Chinese handset market and shanzhaiji handset distribution
The international branded companies dominated the entire Chinese handset market before 1998 due to there was no competition. In the 1999, the Chinese domestic branded phone started to rise and gained some market share of 3%. In the 2000, its market share came to 7%.
The Chinese domestic branded phone was sold to 102 million sets or market share of 15% in 2001. It continued to reach the market share of 18% in 2002. In the 2003, the Chinese
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domestic branded phone came to an unprecedented market share of 56%.17 However, after reaching the highest market share of 56% in 2003, the Chinese domestic branded phone started to decline gradually. The market share of Chinese domestic branded phone were 48%
in 2004, 45% in 2005, 35% in 2006 and 31% in 2007.18 What happened to the Chinese domestic branded phone market in the year of 2004 that its market share was shrank? The MTK obviously has something to do with this situation when it announced its turnkey solution aiming at the shanzhaiji industry in 2004.
Figure 3.9: Market share Chinese domestic branded phone in mainland china
Source: 杜舟 (2008) 山寨机疯狂内幕调查 and 程平芳 (2004) 渠道在國產手機成長中的作用
The territory of mainland china is extensive. The difference and discrepancy are quite drastic from tier-one cities to rural areas as well as from eastern coast regions to western inner land regions. It is such circumstance leading to multilayer and diversified handset market. There
17 程平芳(2004) 渠道在國產手機成長中的作用
18 杜舟 (2008) 山寨机疯狂内幕调查
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are over a thousand shanzhaiji handsets delivered to Chinese domestic market in a year.19 It still cannot meet the demands from each consumer group such a little gap becoming a niche for the shanzhaiji industry to survive. The shanzhaiji developers have applied a strategy of taking the handset market by penetrating tier-two and three cities as well as rural areas at the outset.20 As some Chinese domestic branded handset companies had gone through the same path initial in 1999 in order to avoid the tremendous competition in tier-one cites with tier-one handset companies.21 Comparing with Chinese domestic branded companies, the shanzhaiji handset has more advantages on the cost, function and good appearance. Thus, the shanzhaiji handset gains the market share. Most of the Chinese people in those regions have lower disposable income and do not have or have very few brand recognition. Low end segment is the Shanzhaiji’s target market that some multinational branded companies have ignored.
Without commercial advertisement and sales promotion, the shanzhaiji handsets can be delivered to the end users in the tier-two and three cities as well as rural areas. In fact, the shanzhaiji handset channel is extraordinary efficiency. In a normal case, when the phones are produced from manufacturing production factories to terminal retailers, there should be at least 4 layers of consignees from the handset makers to the agents. Each layer takes some margins leading to the price increase imposed to end users. However, there may be around 1 to 3 layers of consignees to the shanzhaiji handset channel. The structure of layers of
distribution is shorter resulting in the imposed price is lower to the end users. As
aforementioned, the shanzhaiji handset industry cluster is located in huaqiangbei business district in Shenzhen, Guangdong as a one-stop shop. Thus, majority of the merchants are
19 夏勇峰 (2008) 山寨机产业链解析
20 王京莹 (2009) 赛迪顾问通信产业研究中心:经济观察报-山寨机市场规模扩大 亟待政策引导良性发展
21 程平芳 (2004) 渠道在國產手機成長中的作用
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from tier-two and tier-three cities to procure the goods in huaqiangbei business district and there are very few merchants are from tier-one cities. Before the June 2007, the shanzhaiji handsets were found only in tier-two and tier-three cities as well as rural area. After June 2007, the shanzhaiji handsets have shown up in tier-one cities penetrating into the market.22 Under low cost, multiple function and good appearance strategy and experienced channel agents, the shanzhaiji handsets have taken majority of the market share in those areas.
Figure 3.10: The territory transition before and after middle of 2007
Source: 杜舟 (2008) 山寨机疯狂内幕调查
In order to lower the risk of financial default from the agents and the retailers as well as avoid Chinese authority’s supervision, all business activities of the shanzhaiji handset are cash only for deals from upstream business to downstream business. Furthermore, in the entire
shanzhaiji handset channel, the rule of profit margin is defined at each layer of consignees. The shanzhaiji handset developers can get 10 to 20% profit margins, region wholesale agents as well as local wholesale agents gain 20 to 25% profit margins and the rest of the profit margins
22 杜舟 (2008) 山寨机疯狂内幕调查
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are around 55% to 70% for terminal retailers.23 Profit margin maximizing for terminal retailers, it is an immense motivation to sell harder on the shanzhaiji handsets.24 Furthermore, with attractive low cost, full function and individual appearance on the shanzhaiji handsets, the shanzhaiji handsets have been even exporting to overseas markets especially in the developing countries such as India, Pakistan, Vietnam and Russia...etc. Moreover, some buyers come to Shenzhen to procure the shanzhaiji handsets to cater to their domestic demands respectively and some small operators or carriers from offshore have established the offices in Shenzhen for handset customization. 25
23 顾列铭 (2008) 山寨机:手机业的搅局者？
24 王一春 (2008) 山寨機與國產手機的發展
25 杜舟 (2008) “山寨機＂狡兔三窟應對嚴打 草根創新不示弱令正規品牌汗顏
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