SHANZHAI (“BANDIT”) MOBILE PHONE COMPANIES: The Guerilla W arfare of Product D evelopment and Supply C hain M

1. SHANZHAI (“BANDIT”) MOBILE PHONE COMPANIES: The Guerilla Warfare of Product Development and Supply Chain Management Presented By: Ricardo Garcia

2. Presentation Outline • What is Shanzhai? • Chinese ShanzhaiCompanies and characteristics • Shanzhai Mobile Phone Companies and their Phones • Product development processes • Technology, Production • Government approvals • Challenges facing Shanzhai • Pictures

3. What is Shanzhai? • In Chinese, means a bandit’s mountain stronghold outside of government control • Refers to companies that operate outside traditional rules and practices • Chinese imitation and pirated brands ofgoods, particularly electronics

4. Chinese Shanzhai Companies • Produce many types of low end products used in daily lives of Chinese consumers • Computers, televisions, cars, hand bags, skin cream, mobile phones, and other products • Initially Shanzhai targeted lower income consumers, over time has gained popularity among a broader range of users

5. Common Characteristics of Shanzhai Companies • Initially focuses on domestic market • Target mostly mass customers • Strive for short cycle time • Focus on cost • Tailor product features and functions to local requirements

6. Shanzhai Mobile Phone Companies • Produce low end phones imitating known brands • Do not use branding as marketing strategy • Known for their flexibility of design to meet specific market needs • Do not obtain NAL (Network Access License) and IMEI (Mobile Equipment Identity)

7. Shanzhai Mobile Phones • Designed and manufactured in China • Other Markets: Asia, Africa, and Latin America • Some are knockoff products, copying or mimicking the functionality and appearance of well known models from established brands

8. Shanzhai Mobile Phones • Counterfeit handsets bearing names similar to known branded companies • Sometimes hard to distinguish between genuine and counterfeit products • Many Shanzhai models have intentionally misspelled brand names • Examples: • Nckia instead of Nokia • Sumsung instead of Samsung

9. Ways to Identify a Fake Mobile Phone • Brand name misspelled • Phone does not support English • Phones of same model are different sizes and shapes • A logo upside down or back to front • Price too good to be true

10. Product Development Process of a Traditional Company • Concept design • Determine availability • Prototype developed and tested • Negotiation with suppliers • Launch product • Manufacturer applied for the approvals needed to sell handset in China • Development time, 4 to 6 months

11. Shanzhai Product Development Process • Simple conceptual design • Research relies on input from distributors • Design often imitates popular existing designs • Testing and quality inspection usually omitted or performed in a superficial manner • Selling without proper branding • Found ways to bypass the required government approvals

12. Technology in Shanzhai Mobil Phones • A mobile phone is basically a radio that communicates with a base station using sophisticated electronics • Enable large number of phones to simultaneously communicate to the same base station • Provide sufficient data transfer speed to enable voice and data to be sent and received from handsets and base stations

13. Technology in Shanzhai Mobil Phones • Mobile phone chipsets- provide communications functionality and a computer for the interface and other applications • MediaTek is a chipset supplier for Shanzhai mobile phone industry • Introduction of turnkey solution • Was used by both mainstream and Shanzhai mobile phone companies

14. Shanzhai Handset Production • Production time required from conceptual design to mass production could be as short as 45 days • 8 days to analyze and copy a new model, including circuit board, software, and structure • Shanzhai companies did not get NAL (Network Access License) resulting in faster rate and lower prices

15. Government Approvals Between 1999-2007, two government approvals were required to legally produce handsets in China • Handset production license- for manufacturing of handsets in China • Network Access License (NAL)- required for every model of telecommunications product sold in the country

16. Government Approvals In 2007, The Production License System was terminated • Any company could now legally produce mobile handsets in China • Some Shanzhai handset makers became mainstream suppliers • Companies still needed the Network Access License (NAL) in order to legally sell handsets in China • Mainstream mobile phones had a unique International Mobile Equipment Identity (IMEI) number

17. Challenges Facing Shanzhai Mobile Phone Makers • Established brand companies pressuring the Chinese government to crack down on Shanzhai mobile phone companies • Product quality, tax evasion, property rights • Security concerns, Shanzhai phones did not have International Mobile Equipment Identity ( IMEI) codes and can not be tracked

18. Shanzhai Phones

19. Shanzhai Phones

20. BUS 550 CASE QUESTIONS Shanzhai (“Bandit”) Mobile Phone Companies • Which is NOT a common characteristic of a Shanzhai company: • Focus on cost • Strive for short cycle time • Initially focused on domestic market • Invest in R&D for quality improvements • Shanzhai Product Development Process includes: • Selling without proper branding • Research relies on input from distributors • Simple conceptual design • All of the above • What license system was terminated in 2007: • International Mobile Equipment Identity (IMEI) system • The production license system • Network access license (NAL) • None of the above