MobileActive.org

Vodafone's release of a $15 cell phone earlier this year at the GSMA Mobile World Conference made waves in the mobile industry, but the phone may have some stiff competition. Shanzhai phones coming out of China provide smartphone capabilities with prices that are significantly lower than phones from Western mainstream brands.

Shanzai.com describes the shanzhai (alternate spelling shanzai) as “1. mountain fortress/bandit 2. a vendor, who operates a business without observing the traditional rules or practices often resulting in innovative and unusual products or business models.” The production of knock-off phones in the Shanzen region of China is having an impact on the mobile industry as a whole. The shanzhai phenomenon is relatively new. New York Times explored the shanzhai phone explosion noting: 

All this innovation comes from an industry that only took off in 2005, after Mediatek, a semiconductor design company from Taiwan, helped significantly reduce the cost and complexity of producing a mobile phone.

Using what experts call a turnkey solution, Mediatek developed a circuit board that could inexpensively integrate the functions of multiple chips, offering start-ups a platform to produce a low-cost mobile phone.

The industry got another boost in 2007, when regulators said companies no longer needed a license to manufacture a cellphone.

That set off a scramble by entrepreneurs in this electronics manufacturing center. Counterfeiting and off-brand knockoffs flourished. Tiny companies would buy a Mediatek chip loaded with software, source other components and ask a factory to assemble them.

The shanzhai term doesn't have the negative connotations that "black market" or "counterfeit" carries. However, the market is difficult to track: different news sources and reports offer differing information on the size and influence of the Shanzhai market, although multiple sources point to the figure of shanzhai production at over 100 million. Bernama.com quotes a report from the AVC consulting company as “It was reported that production of such imitation mobile phones or "shanzhaiji" reached 145 million last year.” The previously quoted New York Times article cites the research firm Gartner which says that Shanzhai phones account for 20% of the phone sales market in China. Shanzai.com cites The Linley Group for their estimation that China produced 150 million Shanzhai phones in 2008. Although some of the numbers differ slightly, it’s clear that shanzhai phone are having a huge effect not only on the Chinese market, but also on a global scale. So what does this mean for other countries? 

Wireless Intelligence.com estimates that the current number of mobile phones in use in Africa is nearly 463 million. At the same time, the Gartner study suggested that nearly half of the shanzhai phones produced in China are exported to other countries.

In Africa, mobile phones can provide not only links between communities, but also access to valuable health, agricultural and educational opportunities. However, affording a phone and its fees can be difficult for low-income consumers there. While the release of the $15 phone at the GSMA mobile world congress is a step forward to making mobile phones more affordable for a greater number of people, they are also extremely basic phones, offering only voice and SMS features.

Smartphones, with their access to wireless Internet and ability to run applications, can provide many more opportunities to users in developing countries than a basic phone. This is where shanzhai phones come in – on average, they run about one-half to one-third of the cost of equivalent phones from traditional brands.

However, shanzhai phones are counterfeit, and there are obvious problems that stem from their outsider status. There are risks involved in buying the fake phones: no legal recourse if the phone doesn’t work as promised, reports of cheap batteries overheating/exploding, higher radiation levels and lower quality screens. More importantly, some countries are trying to stem the flood of shanzhai imports in a more draconian way. India, for example, recently started to shut down service to phones without an IMEI number; the majority of these phones are shanzhai phones.

A cnet article explains some of the difficulties of policing the industry: 

Industry insiders say the task of policing Shanzhai phones is difficult because of the decentralised nature of the manufacturing process. Factories work in small teams with a few employees, mostly in southern regions of China, in back shops and houses. Shanzhai phones destined for foreign countries are smuggled over lax borders where they bypass government taxes, circumventing safety checks and regulations. Bypassing these overheads and using cheap and accessible hardware with pirated software — usually Windows Mobile — results in a decent profit for those in the Shanzhai phone food chain.

But the market may not need to be controlled – the phones fill a need for consumers who want new products but can’t afford the real deal and are willing to accept the risks. Some of the phones aren’t true knock-offs, but amalgamations of different features from other phones. Many have upgrades compared to the orginal phones theey are mimicking: dual SIM card capability, larger screens, or combining features from multiple phones. According to Shanzai.com, creating a customizable product through Shanzhai manufacturers isn't difficult:

In Shenzhen, a small group of workers have their own factories with R&D, software development and hardware manufacturing facilities. Go to any shop in Shenzhen in the morning and tell them the features you want in your mobile phone and collect your phone in the evening!

So, what does this all mean? Are consumers forced to choose between an affordable knock-off or a high-priced original in order to get the service the want? Not exactly. 

As outsider producers create better, cheaper products, traditional brands will be encouraged to match their pace if they want to stay relevant in emerging markets. Some providers are already stepping up: Synchronica and KC Mobile announced in February their plans to release email-enabled phones in developing countries that will cost only $99. But this doesn’t mean that shanzhai phones will be backing down either; the phones already exist in an odd place – they're illegal, but they have advertisements and show at trade fairs and markets. Market competition could encourage shanzhai phone makers to produce more independent, creative designs rather than continually knocking-off established brands as they move towards a legal place in the phone production industry. The Financial Times announced that a group of shanzhai producers are already considering moving some of their manufacturing to India in order to be recognized as legitimate businesses there.

The mobile phone market is competitive, and developing countries are the frontier. Shanzhai phones meet the needs of consumers more than many of the offerings from traditional brands – and if consumers can get more features for less money, they will most likely choose to go that route. Quality may not function into consumers’ decisions as much as features and affordability. As the African market is flooded with cheaper Chinese imports, it doesn't make sense to wait around for the traditional companies to produce cheap but low-functioning phones. Africa is embracing shanzhai phones; it's up to the traditional providers to keep up. 

Anne-Ryan Heatwole is a writer for MobileActive.org