The IFTF Blog
Innovation spaces of the future: research notes on China's shanzhai meeting the Makers
Over a few months in early 2011, in the course of doing research for an IFTF Tech Horizons Program’s study on the future of “open fabrication,” I convened what turned out to be a remarkable, free-wheeling conversation among a set of pioneering thinker/makers in China, Singapore, and the U.S. What started out as a set of distinct one-on-one research emails turned into a group discussion on the nature of Chinese manufacturing, global open innovation, and the burgeoning, disruptive potential of the growing connections between (mostly) Western-based hackers and agile Chinese manufacturing networks. As David Li wrote: Shanzhai and Open Source Hardware are twins separated at birth and if we can join them, it will create some very interesting opportunities.
I wrote a piece for our internal report, available to Tech Horizons clients, which focused mainly on 3D printing and design. However, our email conversation ranged well beyond that topic, and I’ve been meaning to release this great stuff into the wild for some time now. I’ve cobbled together two readings. Below you can find some of the best quotes taken out of context and lightly organized across some broad categories. You can also download the long, slightly edited, more-or-less chronological version of our conversation, with the permission of all participants. 19 pages of conversation. Hope you enjoy.
Bunnie Huang, Chumby General Manager, Asia Operations, bunnie studios LLC owner
Lyn Jeffery, Director, Technology Horizons Program, Institute for the Future
David Li, founder of Xinchejian, China’s first formal hacker space
Eric Pan, founder and CEO of SeeedStudio
Shanzhai sharing circa 2011: hardware design and manufacturing, not UI
Eric Pan In Shenzhen, there are (estimation from an insider) about 2000 design houses designs electrical solutions and produces the main board (ODM), and over 5000 product integrators consolidate them into products. The design houses generate boards from the chip-sets focusing on different direction. Small design houses still have some unique solutions (imitating iphone, N97 or else)…The most diversified part is on the product integrators, they do their best on the enclosures and look closely at the markets. A good board could dress hundreds of enclosures as different phones.
David Li The shanzhai sharing have become more business-like in form of readily available designs, boards, molding and others. Also, design houses working with Shanzhai vendors all offer open BOM options. "Open parts" (?????) are public available cases, panel, boards, battery and etc that are manufactured by multiple companies with open design. Anyone can acquire these on open market and modular from different supplier can work together.
David Li The kind of publicly available cases and boards I see in Shenzhen are becoming very sophisticated fast. The drive to do public available parts may be partly due to lack of IP protection (if it's going to be copied, it may just well be open and shared) and part due to cost saving. But the ecosystem emergent from these practices is almost like the vision laid out by open manufacturing. After all, it's about sharing and exchange of how to build and collaborate on the manufacturing. While we're still trying to figure out how open source hardware may work, they get a system in place already. The simple parts are getting complicated fast because new ones are not designed from scratch but build on top of the previous products.
Eric Pan Small design houses now survive from reputation and groups. Sharing is a must between small design houses, they group to exchange ideas, know what each other is working on. This is exactly like motor industry in Chongqing, it has several key benefits: avoid direct competition with in groups, standardize supply (or open BOM) to share supply chain, forward/outsource orders to more suitable player. The bottom line is UI, design houses would not share or ask each other, where differentiates their works remarkably.
Bunnie Huang One thing I'd throw in is that in my experience, firms that try to operate or project themselves as "legit" are hyper-sensitive to IP propriety issues in China…. However, I do appreciate their position, because every foreigner comes into their factory swaggering about and demanding audits and treating them all like potential IP thieves, so they operate very defensively to maintain their strong foreign customer base.
It’s hard to collect good data on shanzhai
Bunnie Huang I would imagine that if you did an academic survey of any company that has a "legitimate" front that they absolutely would not share anything with you. I've spoken with some web developers in China and clients specifically request their websites have no CSS or fancy formatting because people in China associate well-polished websites with government and foreign interests and are therefore less credible. The mistrust runs deep.
David Li There are shanzhai which makes grey market goods that are not exactly legal by the law. Not much statistics are collected about them until recent years, as they are shipping hundreds of millions of handsets to China, India, south east Asia and Africa. Most of these vendors are not licensed by the government to produce ICT products. Analog to US would be the economic statistics collected on illegal immigrants.
Shanzhai’s beauty is in the eye of the beholder
David Li The celebration of hackers is not quite there yet but this is more cultural…. One of the reasons I started the Xinshanzhai talks are to stir up the debate and to show a side of Chinese innovation that are simply ridiculed and dismissed. It was kind of funny to have IDEO standing on stage at a recent talk, talking about how incredible Shanzhai is, and have a full room of Chinese young designers in Shanghai in disgust. It's a big culture bridge to cross between Shanghai/Beijing and Shenzhen/Guangzhou.
Characteristics of shanzhai innovation
David Li The shanzhai vendors are moving fast to the trend. They used to produce knock-offs after original vendors had the products on the market. In the past year, I have seen a lot of them act on the latest TechCrunch rumor, especially those related to Apple. It was kind of funny that there are several large size iPhone (7" and 10") being produced by the Shanzhai on the rumor that iPad would look like a large iPhone. :) …They see a market niche, move fast to secure design and open BOM and go to manufacture and sales…It happens with large numbers of the assemblies trying to fill every niche they can think of.
Bunnie Huang It's this very embryonic stage where the innovation happens. Once a Shanzhai innovates and figures out how to knock a couple points off the cost, they get a ton of orders and then they just turn the crank until no more money comes out of the machine; but until then you never really hear about them much….And to be clear, an "innovation" in the Shanzhai world could be as simple as figuring out a more efficient way to jig the assembly so that labor time is reduced by 20%, or figuring out a reliable way to refurbish certain used parts to be like new. Tedious optimization for cost reduction isn't really glorified as innovation by western standards, but if you can reduce labor cost by 20% that's a huge improvement in cost structure and that's what matters most to the Shanzhai.
Jon Philips With China, some Social innovation and some other industries necessary to grow high tech are vastly behind. I might even go so far to say social innovation is 150 years behind in china. And, with Ai Weiwei and others being bagged and some other friends being questioned, equipment confiscated right now, I don't think its changing very quickly...
Lyn Jeffery Shanzhai Rules
1) Design nothing from scratch; rather, build on the best of what others have already done.
2) Innovate the production process for speed and small-scale cost savings.
3) Share as much information as you can to make it easy for others to add value to your process.
4) Don’t make it until you’ve already got a buyer.
5) Act responsibly within the supply chain.
Bunnie Huang Shanzhai Rules (response)
1) Buy low, sell high -- and time counts as money. No holds barred.
2) Confucius' silver rule, do not do unto others what you would not have them do onto you; or, "what goes around comes around". (this is the equivalent of #5 and the loose moral thread that binds the ethic of the community).
3) Don't make what you can buy for less. (your #1)
4) "A bird in hand is worth two in the bush"; or perhaps "cash flow is king". There is little faith in the future value of IP or inventory. If sharing my specs with you means I close a deal faster, I will share it with you. Waiting a day to sign an NDA means a day longer I sit on my inventory (see my rule #1). This covers your rules #4 and #3.
5) "there is no propriety, only results", or, perhaps "If it fits your foot, it's a shoe." (aka the thereifixedit.failblog.org mentality) An equivalent of #2 down below, except phrased in their mindset. They aren't in the innovation business for innovation's sake -- they are in it to drive costs down (my rules #1 and #3). It also explains why there is a no-holds barred culture around reverse engineering.
6) The only intangible property worth anything are personal relationships ("guanxi") (corollary of my #2 and reinforces your #5); also, the most valuable thing one may have is good guanxi. See en.wikipedia.org/wiki/Guanxi
A corollary of #6 is that "If I can't embody it in a physical vessel, it has no value". This explains why IP licensing in China is so awkward because they think of everything in terms of a bill of materials; every item must be inventoried and counted. Yet strangely, IP takes up a line item but has no space on the shelf in the factory, which seems like you're just paying someone for nothing. So why pay it?
Opportunities and future growth
David Li One thing I am thinking is hackerspace pointing to an alternative path of evolution for China's economic development. Manufacturing doesn't have to "upgrade" to a service economy to increase value. Micro manufacture is another path.
David Li I think open source hardware in the West is a more symbolic anti-consumerism movement. Combining that community with the shanzhai will have global impact. It will vastly accelerate the spread of technologies to developing worlds…We are at an interesting point where several of these forces are coming together: an efficient (cut throat) supply chain that's getting ready for micro manufacture and a global movement of hackerspace and the march of millions of amateurs…. Shanzhai and Open Source Hardware are twins separated at birth and if we can join them, it will create some very interesting opportunities.
Jon Philips The value of dads in the garage in wealthy countries compared to shanzhai sales and development (S&D vs R&D) is an interesting nexus of opportunity. Will the dad get out of the garage beyond his religiousness of free and open mantras to making a real product that is scalable and can the S&D model move to economies that can handle the vicious competition?
David Li I am totally agree with Bunnie's earlier blog post where he concluded that that this system will reach critical mass. I expect to see this in the next two years with tablets. While everyone's focus is on the "iPad killer," the price points of tablets are creating a large under served market in BRIC and other developing countries. For example, while Samsung is trying to clear whether the 2 millions of Galaxy are sell-in or sell-out, Gome already shipped over 5 millions of Fly Touch. The current 3rd generations are expected to ship over 10 millions in 2011. Everyone I talked to in Shenzhen this time are getting business from Russia, India, Brazil and other South America countries.
David Li The tablets will ride on the uber Moore’s Law and the hardware will soon overshoot the point which Clayton Christensen calls the "diminishing returns in innovation." Machines will get to "fast" enough soon enough. As the trend develops, the high-end will likely to be dominated by iOS with mid and lower ranged dominated by these currently unknown Chinese brands (they already have 3 out of top 5 selling tablets on Amazon). Brands other than Apple will lose out big time on this one.
Eric Pan In the long run, they think weaker companies will fade out, best design houses usually became product integrators themselves, then fight with brand. But even big players outsource a lot to small design houses to sustain its diversity in product line. There are also some design house try stepping out, like phone with EEG sensor for elders.
David Li On the side note, met with a design house in Shenzhen whose team actually quit their jobs in large design houses located in Beijing and moved to Shenzhen last year to start the business.
Bunnie Huang From what I've seen, I wouldn't be surprised if a lot of the phones in Egypt were provided by the Shanzhai. A market like that would be perfect for their product; I can't imagine that the average Egyptian had an android or iPhone....maybe the shanzhai provided the twitter/facebook backbone for the arab spring.
David Li Cell phones play a major role as tool of communication in the recently upraise in Middle East but while Twitter and Facebook are hailed as the tools, few have bother to look at what kind of cell phones are used by the protestors. More likely then not, they are Chinese Shanzhai phones.
Jon Philips I didn't realize where all the shanzhai products were sold until we opened our hackerspace in Syria. Man! Actually, found the shanzhai products cheaper than in china...less bargaining power of the gwailo in china! The shanzhai products are many times preferred I found in Syria. The arab world, china, and usa are completely connected.
David Li If ones are looking to bring social change via technologies to China, Shanzhai is more effective then Twitter/Facebook. The typical Twitter/Facebook users in China are well-off. Some unofficial survey shows Chinese Twitter users have average 12,000/month income, which puts them comfortably in top 5% of the population and part of the elites in the status quo. They want political voice because of their wellbeing financially, but they are not going to do anything that would risk their comfortable lifestyle. On the other hand, the Shanzhai users are the mass and social changes will only occur if they are on board.
Long version of the conversation here.