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Shanzhai 101 - How to scam an industry out of billions

Posted by Ryan Williams on Monday, Mar 19, 2018

Chinese counterfeiters are copying unprotected brands

If I mention Chinese counterfeit products, what do you imagine? Your mind might jump to comically poor knock-offs, like the ones below. Would you have imagined an immense network of highly professional manufacturers? An industry leading the charge in East Asian innovations? If not, you should probably make yourself aware of shanzhai.

Pop Station, the shanzhai attempt at copying Sony’s PSP

Simply put, shanzhai is China’s grassroots manufacturing ecosystem, but it goes far deeper than just that. As Wade Shepard explains, shanzhai refers to “China’s massive copycat industry and the unique network of design and manufacturing that sprouted from it.. The word essentially means ‘fake’, but not as a synonym of ‘rip-off’, as you might imagine. It’s maybe more comparable to tinker; referring to an almost plucky ability to create a product with what few resources you have. Shanzhai has a historical significance, the literal translation is a hideout for bandits and alludes to rebellion against the emperor. It should be no surprise that shanzhai is a source of some pride for the Chinese.

Business in China, especially manufacturing, happens differently to in the West. Consider their relatively recent move away from a collectivised communist system; the sentiment of sharing is still alive in many ways, and when we look at shanzhai, this mentality returns as a core value, along with risk-taking, industriousness and grass-roots development. So we can forget respecting intellectual property; if a product has no service protecting their brand, they will be at the mercy of counterfeiters.

Evading the authorities is as key a part of shanzhai as it’s ever been, but the outlaws’ sanctuary has become a sprawling empire. The practice covers tens of thousands of factories, design houses and product distributors working together, with interconnected communication. After forty years of shanzhai, the rip-off merchants have become innovative and powerful market leaders. The spirit of the bandit lives on.

So let’s take a look at a Shenzhen, a city in the south of China, to see shanzhai in action.

 

Shenzhen, the city of knock-offs

In nondescript buildings, unbranded and unnamed, thousands of workers are hidden away in secret factories, blending in seamlessly with the rest of the Shenzhen suburbs. Here, they make every conceivable type of product, like hood ornaments, sex toys, Bose speakers; it’s all available, and it’s largely a forgery.

An unassuming suburb in Shenzhen, concealing thousands of shanzhai workers

The workers arrive in the morning and are handed the instructions of what they’re going to make on that day. They read through the sheet, put their heads down and get to work. Tomorrow, they may get a new instructions sheet and an entirely new product to make.

The scale of these operations ranges enormously; you can find a lone worker manufacturing with an induction mold in their basement, all the way to someone watching over a giant factory making $40m per month. Furthermore, due to the cooperative nature of shanzhai, these are all interconnected; they share knowledge and methods to improve production.

These workers are often extremely talented, so much so that an image of an item is often all they need to produce their own version of a product. Many of them have experience working in legitimate Chinese factories, and have brought their expertise over to shanzhai.

So, where do these products go, once they’ve been made?

A shanzhai worker in Huaqiangbei, busy making knock-off products
 

Huaqiangbei, the de facto capital of shanzhai

To call Huaqiangbei an electronics market is to truly understate its size. This place has been dubbed the "Silicon Valley of Hardware". The south Chinese district is ground zero for China’s electronics manufacturing ecosystem. Built upon an area of Shenzhen’s old manufacturing centre, Huaqiangbei has become a colossal, sprawling market; a city inside of a city. If you’re interested in knock-off iPhones, SD cards or maybe drones, this is where you go.

Wired has made a fantastic video on Shenzhen, so take a look if you want to learn more

However, Huaqiangbei is a wholesale market. It’s unusual for someone to ask shopkeepers for a single item; people generally aren’t here to go shopping for themselves. Items are churned out in vast quantities, so merchants expect to sell dozens, hundreds or even thousands of their products to clients.

A huge technology market in Huaquiangbei

When they want to sell their wares to the consumers directly, the internet is their best friend. To see how devastating shanzhai’s strategy of copying and undercutting existing patented products can be, we needn’t look further than Kickstarter, the internet’s favourite crowdsourcing platform.

 

Kickstarter - A smorgasbord of products without brand protection

Entrepreneurs Michelle Ivankovic and Adrienne McNicholas launched a Kickstarter campaign in 2013 for Food Huggers, their silicon-based food preservers, but sadly have suffered massively from infringements on their brand. Shanzhai counterfeiters were able to steal the design of their product simply by looking at the images from their Kickstarter page. In fact, with little to speak of any brand protection service, Food Huggers were targeted by counterfeiters so quickly that their own innovative products arrived to the market after the counterfeiters who were copying them.

That’s right, in the time between showing off their prototypes and crowdsourcing funds to begin manufacture, counterfeiters were able to find the product, create a blueprint for their manufacturers, mass-produce it and flood the market. The knock-offs were first sold on sites like Alibaba, which primarily operate in Asian markets. Ivankovic and McNicholas had hoped the infringements on their brand would be relatively contained to foreign consumers. To their dismay, however, the Chinese versions of their products were swiftly being sold to Western consumers through sites such as Amazon and eBay.

Food Huggers’ original product, which suffered greatly from counterfeiters without brand protection technology

The concept and design of the product weren’t the only things the counterfeiters stole. They brazenly used Food Huggers’ own logo, videos and images to promote their copies. They even paid for sponsored listings, so their products appeared above the legitimate originals on web searches.

This case is just one of many. Worldwide, online marketplaces are being flooded by shanzhai rip-offs. Creative startups everywhere are having their products stolen and the effects on businesses can be devastating.

In the next article of this series, we will take a closer look at other platforms taken over by shanzhai sellers and just how they get away with this operation on a global scale.

Inspired by a Red Points webinar with journalist Wade Shepard

Wade Shepard talks about counterfeits on Amazon and what brands can do.

About the author

Ryan Williams

Post Written by Ryan Williams

Ryan is a copywriter and researcher at Red Points, focusing on topics surrounding global affairs, new technology and culture.