Shan zhai ji, literally meaning bandit handsets, refers to white-box or “open” mobile phones manufactured by small-scale operators in the south of the mainland. In the beginning, these devices were essentially clones of branded versions, but in recent times they have evolved to become a showcase of boundless creativity. In fact, they often boast more functions than one would normally expect from an established product, but at much lower prices. In just a few years, these products have become so popular that clone artists have emerged in other business and social sectors, creating a unique shan zhai sub-culture.
As the world’s largest production center for handsets, the Chinese mainland produced 750 million such devices last year, of which 150 million or 20 percent are shan zhai ji, according to mainland-based CCID Consulting Co. Ltd. The Taiwan-based market researcher Topology Research Institute estimated that these products created NT$300 billion (US$8.87 million) in business opportunities in 2008, and the number is expected to reach NT$500 billion in 2009.
The mainland is also one of the fastest growing markets for mobile phones, with an average of 6 to 8 million new subscribers signing up for the service every month. As of October last year, there were more than 627 million handset users on the mainland.
While the act of cloning is well established and can be found in every corner of the world, MediaTek Inc., Taiwan’s largest fabless integrated circuit designer, is arguably the greatest driving force behind the unique phenomenon on the mainland. According to CCID, MediaTek was the leading supplier of baseband chipsets to the mainland in 2008 with a 23-percent market share, followed by Texas Instrument Inc. at 13 percent and Qualcomm Inc. at 12 percent, both from the United States.
From 2006, MediaTek introduced several total solutions that integrate the functions of mobile data transfer service, music phone, digital camera, video and gaming on a single chip. Similar to motherboards that hold all the components required to run a computer, the company’s mobile platforms literally enable any business without technological know-how to jump on the bandwagon.
By simply selecting features from the chip designer’s multimedia capabilities, and with standardized components readily available on the mainland, a company can add its own designs to churn out handsets in just a couple of months. When compared with the product development cycle of nearly one year generally required by major manufacturers, the benefits are obvious.
Although these devices are frequently criticized as knockoffs that thrive on the infringement of intellectual property rights of legitimate products, MediaTek sees the phenomenon from a different perspective. “The spirit behind these handsets is destructive innovation, which is a very positive economic force,” said MediaTek Chairman Tsai Ming-kai. He argued that these products are instrumental in narrowing the digital gap between developed countries and emerging markets such as mainland China, India and the Middle East.
“The negative connotation associated with the term shan zhai undervalues these products,” he said, adding that these devices have changed the landscape of the industry, a development that fits perfectly with the theory of innovation. “Our mobile solutions have made it possible for second-tier players to speed up their product development processes,” he stressed. “This kind of destructive innovation initiated by the lower end of the market has created great pressure on existing leaders.”
While the company emphasized that it does not support illegal business practices, Tsai said the popularity of these products underscored the dynamic competition of the industry. First-tier manufacturers can no longer rest assured of their market dominance, while second-tier players have the opportunity to challenge industry heavyweights, he said.
The craze for these gadgets has greatly benefited the IC designer. The company produced 150 million handset chips in 2007. The number jumped to 250 million in 2008 and accounted for roughly 60 percent of its revenues of NT$90.4 billion.
It also helped the company clinch fifth place in the 2008 global ranking of fabless integrated circuit design houses, following Qualcomm Inc., Broadcom Corp., Nvidia Corp. and Marvell Semiconductor Inc., all from the United States. The ranking is based on research by the Texas-based Global Semiconductor Alliance.
Amid the backdrop of the global downturn, MediaTek was the first semiconductor company on the island to revise upward its sales forecast in March, thanks to the booming demand from the mainland for its chipsets. The island’s other sectors, including printed circuit boards, display panels, camera lens modules, power management ICs and IC distribution, also enjoyed a slice of the shan zhai ji pie.
In January, the mainland’s China Telecommunication Technology Laboratory announced a strategic alliance with MediaTek to jointly develop new technologies and promote the 3G format. Market analysts saw this move as a gesture by the mainland authorities to recognize the legitimacy of these handsets, arguing the scheme will also bring in orders from the first-tier suppliers to the company.
According to Yu Ming-to, MediaTek’s chief financial officer and spokesman, the agreement will not only benefit the company, but also advance the interests of its clients. “The collaboration will help mainland handset makers raise their technological capabilities and global competitiveness,” he said.
Inspired by the success of the shan zhai approach, other sectors of the consumer electronics industry are looking for the next killer application of the concept. With MediaTek’s 2007 acquisition of a 67-percent stake in NuCore Technology Inc., a fabless designer of image processors based in the United States, some market analysts have cited digital cameras as the next potential candidate. But more aggressive action has already been taken in the notebook segment.
VIA Technologies Inc., another of Taiwan’s IC design houses, teamed up with Microsoft Corp. and more than 15 manufacturers and infrastructure partners on the mainland to form the Global Mobility Bazaar last October. With support from the personal computer ecosystem, the alliance provides a turnkey platform for a variety of affordable mini-notes, netbooks and notebooks built around VIA’s low-power processors. More than 200 businesses have signed up with the program so far.
“By connecting the local supply chain and vendors, and by offering a detailed reference design, the technical barriers for partners who wish to enter the market is lowered,” said GMB Chairman Kevin Y.C. Huang. He acknowledged that VIA’s role in the alliance is similar to that of MediaTek in the handset market. However, “the path taken by the VIA GMB Alliance will be different to that of white-box mobile device manufacturers,” Huang stressed, explaining that the consortium plays a much more important role in assuring product quality, reducing supply chain costs and providing backend services to its participants.
With the advantage of an integrated ecosystem, GMB partners will be able to cut their product development cycle in half to around three to four months, and bring down retail prices to around US$220, or roughly 25 percent lower than those of established products, Huang said.
Some PC makers remain skeptical about VIA’s move, arguing that unlike the case with handsets, the lower profit margins for laptops will greatly reduce the cost advantage expected from the company’s solutions.
However, VIA sees the development from a broader perspective. “Through effectively integrating industry resources, the alliance will strive to assist downstream suppliers to speed up their transformation from imitators to innovators,” Huang said. Since shan zhai laptops are an inevitable course of development, “it is the vision of the alliance to help those at the lower-end of the market upgrade their technical capabilities and guide the industry toward orderly development,” he noted.
Write to Meg Chang at meg.chang@mail.gio.gov.tw