Thursday, 13 August 2009

Shanzhai Mobile Phones: 'Bandit Phones' or 'Fake Phones' from China's Wild West



Have you heard of these brands called NokLa, Samsung, Nukia, HiPhone, etc. ? These are the 'fake phones' manufactured in China.

In 2008, an estimated 150 million, or 20 percent, of the 750 million handsets produced in China were either counterfeit or off-brand phones, according to CCID Consulting, a market research firm based in Beijing. Of those, over 51 million were sold in China while the remainder were sent to foreign markets.

Known here as "shanzhai ji", or bandit phones, China's gray market handset industry was virtually non-existent just a few years ago. While a handful of illegal companies produced black market mobiles, they often were of poor quality mainly because the technology needed to make them was hard to come by and even harder to master.



This all changed in 2005 when Mediatek, a microchip design company from Taiwan, developed what experts call a turnkey solution -- a platform that integrated many complex mobile phone software systems onto a single chip. This made it much easier and cheaper to build handsets and churn out new models at astounding speeds.

"[Mediatek] basically commoditized the entire market," said Jonathan Li, founder of Shanghai-based technology design studio Asentio Design. "They made it really simple and really cheap to make your own phone. Almost anybody could do it."

The shanzhai business got another boost a couple of years later when the Chinese government relaxed regulations limiting the number of companies that could manufacture handsets, lowering the entry barrier for hundreds of entrepreneurs eager to have a piece of the world's biggest mobile phone market.

"It is so easy to do because this whole ecosystem is in China," said Weaver. "It isn't so complex for a guy to figure out by watching how the global supply chain works in the mobile handset space to do his own thing."

By 2008, an estimated 3,000 to 4,000 shanzhai businesses had emerged, many with fewer than a dozen employees operating in offices sometimes comprised only of a back bedroom in a small apartment or basement of a private home. Some blatantly copy major brands, producing knock-offs with slight twists in their names, others come up with special makes of their own.

Either way, the shanzhai phenomenon has not gone unnoticed by legitimate handset manufacturers. The gray market phones, which typically sell for around $100, have already driven down the prices of brand name mobiles and are beginning to take away their market share, too.

"You cannot compete with them. You can't," said an employee of Chinese telecom equipment maker Huawei Technologies who spoke on the condition of anonymity. "It is almost impossible to make a profit [from handsets] now because of shanzhai."

Some manufacturers, like Nokia, say they are working with the Chinese government to crackdown on the counterfeiting companies as well as raise awareness about the potential dangers of the fake phones, some of which have had exploding batteries or expose consumers to abnormal amounts of radiation.


The market for Shanzhai cell phones lies not only in China, but also in the surrounding developing countries in Asia or even third world countries in Africa and Latin America. They identify overlooked/underserved market segments by incumbents like the rural areas and focus on these segments. The outstanding sales performance of Shanzhai cell phones is usually attributed to their low price, (usually lower than $50), multi-functional performance and imitations of trendy cell phone design. Although Shanzhai companies do not use branding as a marketing strategy, they are known for their flexibility of design to meet specific market needs. For example, during Barack Obama’s 2008 U.S. presidential election campaign, Shanzhai cell phone companies started selling “Obama” cell phones in Kenya, with the slogan “yes we can” and Obama’s name on the back of the cell phone. They also designed “Bird Nest” and “Fuwa” cell phones in light of the Beijing Olympic Games.

Who gains from Shanzhai Phones?

None of the stakeholders seem to gain from these low quality phones.

The phones are low in quality and do not necessarily follow the safety standards. Most of the times, the radiations from these phones are beyond the permissible limits and can cause serious damage to the health of the consumer. The FCC has adopted limits for safe exposure to radio frequency (RF) energy. These limits are given in terms of a unit referred to as the Specific Absorption Rate (SAR), which is a measure of the amount of radio frequency energy absorbed by the body when using a mobile phone. The FCC requires cell phone manufacturers to ensure that their phones comply with these objective limits for safe exposure. Shanzhai phones do not follow the SAR norms.

Most of the Chinese handsets have dual SIM slots and allows the consumers to put SIM cards of two different operators. This means that operators would have to share their ARPU with other operators and the competition would lead to lower ARPU and multiple SIM phenomena

The Shanzhai phones do not pay any taxes of regulatory fee resulting in revenue losses to Governments across the world wherever they are sold. Even the Chinese government is in a fix now as the exports benefits given out to these handsets are over claimed. Moreover, since the Shanzhai phones do not have an IMEI number, there is an increased threat from terrorists as it is very difficult to catch a terrorist who uses a mobile handset without IMEI

According to Taiwan's National Communications Commission, people who sell or buy "Shanzai" mobile phones via the Internet or in electrics marts will face a fine of up to NTD300,000, which is about CNY60,000, in Taiwan.

According to reports in Taiwanese local media, NCC recently stated that under the Administrative Regulations on the Controlled Telecommunications Radio-Frequency Devices, Taiwan residents should bring no more than five "Shanzai" mobile phones from the overseas markets at one time and the number should be limited to two if the mobile phones are sent by post.

According to reports in Indian local media, the India government has decided to set stricter quality limits to imported mobile phones, dairy products, and toys and these measures reportedly target China.

The reports quoted the director of the Foreign Trade Bureau of India by saying that from now on, mobile phones without International Mobile Equipment Identities should not be imported to the Indian market, which means Chinese-made "shanzai" mobile phones will not be available in the country.

Check out some more photos here and here.

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