3. Shanzhaiji handset industry development
3.1 Origin of shanzhaiji handset industries
3. Shanzhaiji handset industry development
3.1 Origin of shanzhaiji handset industries
The shanzhaiji or bandit handset means smuggling, inferior brands and non-branded cellular phones which have been avoiding the Chinese government’s supervision, copying
appearance and duplicating the functions on the products from some tier-1 company’s handsets.5 Due to avoiding the Chinese government’s supervision, value-added tax and sale tax are ignored by the shanzhaiji handsets developers. There are barely advertisements and promotions on the shanzhaiji handsets so the expenditures on marketing campaign are low.
The shanzhaiji distributing channels can penetrate into remote areas and rural areas to sell the shanzhaiji handsets with incredibly operational efficiency. Mostly the shanzhaiji handsets are incorporated with MTK’s turnkey solution leading to highly fast product launch. With low cost advantage, agile distributing channel and highly fast product launch with attractive appearance and functions, those elements have made the shanzhaiji handsets a cash cow.
The shanzhaiji handset can be classified into three categories: First, black shanzhaiji handsets are smuggled to export to overseas markets or import from overseas markets that it is an illegal activity. Second, absolutely duplicated shanzhaiji handsets are just copying appearance or functions from some international branded handset companies leading to infringement of intellectual property right or trade mark. Third, small branded shanzhaiji handsets are the mainstream of the market that they don't infringe the intellectual property right or trade mark but they do violate the Chinese government’s handset regulation.6 All of the shanzhaiji handsets have the same problem that is avoiding Chinese government’
supervision and regulation.
5 王一春 (2008) 山寨機與國產手機的發展
6 阚凯力 北京邮电大学经济管理学院教授
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The following table shows the sale volume of the shanzhaiji handsets in Chinese domestic market from 2006 to 2008. The sale volume has a trend to increase continuously from 40 million sets of shanzhaiji handsets in 2006, 45 million sets of shanzhaiji handsets in 2007 to 53 million sets of shanzhaiji handsets in 2008.
Figure 3.1: Sale volume of Shanzhaiji handsets in Chinese domestic market
Source: 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 and 李学芳 (2009) 赛迪顾问通信产业研究中心: “山寨＂机走出“山寨＂
The entire shanzhaiji handset industry cluster is situated in huaqiangbei road (華強北路) business district in Shenzhen, Guangdong, China. There are over thousands of the
business-related shanzhaiji handset companies in this area forming a center of a manufacture and production supply chain. It serves as one-stop shopping of phone businesses that
including project management, product design, manufacture, production, procurement, sales and distribution. The reason why Shenzhen is the center of the shanzhaiji handset industry today can be traced back to the change of industry structure in Taiwan due to majority of low
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value-added sectors in pursuit of lower cost have been migrating to mainland china. In the beginning, manufacturing sectors moved to mainland china from Taiwan such as tooling shops and assembly factories...etc. As the industry restructure continuing, there has been following with more component sectors of PCB, LCD, camera, housing, keypad, connector, and battery…etc.
The migration of many Taiwanese companies moving to mainland china can be traced back to the 1978. Since the 3rd Plenary Session of the 11th CPC Central Committee in 1978, the PRC government has decided to reform the national economic setup. One of the earliest and the most successful Special Economic Zones were founded by the government of the
People's Republic of China under Deng Xiaoping in the early 1980s. Since then, China has gained enormous economic growth and average 10% GDP growth per year. The government of the PRC grants special economic zones (SEZs) special economic policies and flexible governmental measures. This allows SEZs to utilize an economic management system that is especially conducive to doing business. Since 1980, the PRC has established special
economic zones in Shenzhen, Zhuhai, Shantou, Xiamen and Hainan.
Under the Chinese government fully support, Shenzhen city can offer the preferential policies to those foreign direct investment (FDI). In 1988, the State Council further opened Pearl River Delta which is adjacent to Shenzhen. In 1999, Shenzhen's new-and high-tech industry became one with best prospects and the output value of new-and high-tech products reached 81.98 billion yuan, making up 40.5% of the city's total industrial output value.7 The special economic zone in Shenzhen is foreign-oriented area. As it adopts different preferential policies, it plays a significant role as developing the regional economy.
7 Special Economic Zones and Open Coastal Cities, http://www.china.org.cn/e-china/openingup/sez.htm
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The PRC government has provided preferential policies for SEZs that special tax incentives for foreign investments in the SEZs and greater independence on international trade activities.
Economic characteristics are represented as 4 principles. First, construction primarily relies on attracting and utilizing foreign capital. Second, primary economic forms are sino-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises. Third, products are primarily export-oriented. Fourth, economic activities are primarily driven by market forces.8 These preferential incentives make Shenzhen a full-fledged supply chain especially on manufacturing and component sectors.
In the shanzhaiji handset industry, there are four major roles. They are handset chip vender who supplies turnkey solution as MTK is the leading player, scheme design houses who follow reference design from MTK to provide the schemes of PCB-related to the shanzhaiji handset developers with fully integrated semi-product, the shanzhaiji handset developers who engage in ID (industrial design) and MD (mechanical design) as well as phone system manufacture and production to provide the final goods to channel agents and channel agents who distribute the handsets to markets. 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 and local channels are around 1000 and the components suppliers are around 3000. 9 10
8 Rajkumar S. Adukia, A handbook on Special Economic Zones
9 林柏全 (2008 ) 解讀聯發科的成長密碼
10 李学芳 (2009) 赛迪顾问通信产业研究中心:“山寨＂机走出“山寨＂
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Figure 3.2: Four major roles in Shanzhaiji handset industry
Source: self compiling
3.2 Role of MTK to make shanzhaiji handset industry booming
The most critical technology to manufacture the shanzhaiji handsets is the chipset platform.
MediaTek Inc / MTK is playing an significant role in the shanzhaiji handset industry. MTK has introduced turnkey solutions integrating the plenty of functions in 2004.11 MTK has possessed around seventy to ninety percent of market share in the shanzhaiji handset segment since 2007.12 13 In China's shanzhaiji handset segment, the MTK has strong brand power which is deeply rooted in the shanzhaiji developers’ minds that it is the top cell phone platform choice like the Intel. It is the MTK make the shanzhaiji industry booming that many Chinese media and developers describe MTK’s chairman Ming-Kai Tsai (蔡明介) as the "godfather of bandit cell phones." MTK’s success is the provision of a cheap and easy-to-develop turnkey solution
11 林柏全 (2008 ) 解讀聯發科的成長密碼
12 林柏全 (2008 ) 解讀聯發科的成長密碼
13 Karl J. Weaver (2009) Shan Zhai Ji 山寨機
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that integrates the software and hardware for all of the complex functions such as radio, digital camera, video camera, touch and MP3…etc on a single chip as well as offering a menu of functions selection that it is easy for the shanzhaiji developers to tailor their products.14 Thus, the shanzhaiji developers have swarmed MTK’s turnkey solution to develop diverse functions.
To decide the functions in the phone, it is like in a restaurant ordering a meal. Once the functions in the menu are checked, MTK’s sales representatives immediately quote a price to the shanzhaiji developers. Within a few days, the shanzhaiji developers have a recommended chipset and customized software. With its turnkey solution, Mediatek has lowered the
threshold for producing handsets.
The shanzhaiji handset developers have no or little R&D capabilities. The main reason why the shanzhaiji industry is booming in mainland china is that MTK’s turnkey solution with both hardware and software incorporated with low cost advantage, providing the entirely system reference design as well as giving excellent after service for the shanzhaiji handset developers.15 This new business model has changed the game rule of entire phone sector and structured phone industry value chain. In 2004, when MTK’s turnkey solution was just launched, there were very few phone developers to adopt it. As mentioned previously, the efforts for the shanzhaiji handset developers are quite low when they are developing the shanzhaiji handset as well as they have scarce R&D resource problems and barely R&D capabilities. Thus, the shanzhaiji handset developers in mainland china have been willing to cooperate with MTK due to fully supports of turnkey solution.
In the beginning, MTK’s chipset sale revenue was only 30 million USD in 2004. It was amazing that it earned 300 million USD in 2005. Following, it doubled sale revenue to 600 million USD in 2006.
14 Karl J. Weaver (2009) Shan Zhai Ji 山寨機
15 林柏全 (2008 ) 解讀聯發科的成長密碼
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11 Figure 3.3: MTK’s chipset sale revenue
Source: 林柏全 (2008) 解讀聯發科的成長密碼
Furthermore, according to figure, 100 million chipsets had shipped out from MTK in 2006 and 150 million chipsets in 2007.
Figure 3.4: MTK’s chipset shipped out volume
Source: 林柏全 (2008) 解讀聯發科的成長密碼
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The market share of MTK’s turnkey solution is around 70% in mainland china as a leader in 2007, second is Taxes instrument (TI) and third Spreadtrum Communications (展訊通信). 16
Figure 3.5: The market share of MTK, TI and Spreadtrum in mainland china
Source: 林柏全 (2008) 解讀聯發科的成長密碼
3.3 Shanzhaiji handset developing process
There are eight major high level steps for shanzhaiji handset development from product concept proposal to product delivery. First, when the shanzhaiji developers are interested on a newly launched handset or they have some brilliant ideas for their products, they can gather the related information quickly to scheme design house for the study report showing all technical aspects for developing a type of shanzhaiji handset that it takes around 8 days.
Second, after study report is approved by the shanzhaiji developers, it takes 10 days for a prototype or product proposition. Third, the shanzhaiji developers provide the handset proposal to the channel to see the reactions that it takes 1 to 3 days. Fourth, based on channel reactions, the shanzhaiji developers do some specification adjustments on the phone that
16 林柏全 (2008 ) 解讀聯發科的成長密碼
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taking 7 to 10 days. Fifth, doing no verification or doing simplified verification or doing fully verification of handset taking 45 to 60 days (some the shanzhaiji developers ignore this step in order to save the time). Sixth, the shanzhaiji developers hold a meeting in a hotel for product announcement for the agents or retailers to acquire the handset order taking 2 to 3 days. Seventh, tooling development is based on the handset orders received from the agents and retailers taking 7 days. Eighth, deliver the shanzhaiji handsets to the agents and retailers that a batch is around 3000 to 5000 handsets per day that it takes 7 days. From the following table, it shows the shortest time of new type of the shanzhaiji handset development is 42 days and the longest time of new type of the shanzhaiji handset development is 108 days. The developing time difference is depending on whether the steps of the shanzhaiji handset development are fully conducted or not.
Table 3.1: A high level procedure of shanzhaiji handset development
Steps The Shortest to longest developing time (unit: day)
1 Product concept 8 8 8
2 Prototype or product proposition 10 10 10
3 Handset proposal 1 1 3
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To develop a new handset to the market, a company has to go through the entire process as Hardware Design, Software Design, Firmware Design, Industrial Design, Mechanical Design, design verification, components procurement, supply chain management, qualification of components, manufacturing production, quality control on production and phone certification in order to secure a handset with good quality.
Figure 3.6: A standard phone development process
Source: self study
However, the shanzhaiji developers don't have any ideas of development process of the product. Under the support from MTK’s turnkey solution of Hardware, Software and
Firmware integrated, what they normally do is only on Industrial Design, Mechanical Design and manufacturing production only. Those shanzhaiji developers normally ignore and avoid the quality control on production, qualification of components and certification for their products. Thus, many problems are occurring when the shanzhaiji handset end users are using the shanzhaiji handset due to the carelessness attitude to develop a phone as well as saving the time and costs.
A standard phone development process
Hardware design
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Figure 3.7: The shanzhaiji phone development process
Source: self study
3.4 Component Supply chain overview
In fact, MTK’s turnkey solution is quite stable. As mentioned previously, when Shanzhaiji handset developers are using the turnkey solution, MTK provides the entirely system reference design to them. The system reference design normally suggests what components that the shanzhaiji developers should comply with due to those components are co-verified or co-validated by MTK and the component venders. Actually, almost all of the key components are supplied by Taiwanese vendors accounting for 90% in the shanzhaiji handset product. In fact, Taiwanese component venders have served as the main driving force in the shanzhaiji handset industry. Main chip is MediaTek Inc. the solution providers accompanying with Power IC vender - Richtek Technology, Sensor IC vender - PixArt Imaging Inc. , Touch IC vender - ELAN MICROELECTRONICS, Image and audio IC vender - eGalax_eMPIA Technology, Speaker, receiver and microphone vender - Merry Electronics, Camera module vender - Altek Corporation, LED vender - Harvatek and Unity Opto Technology, Cristal vender - TXC CORPORATION, IC channel vender - WPG Holdings, LCD/LCM vender -
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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
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