From Phones to Tablets. Moving Up the Counterfeit Value Chain

0 Comment

The original tablet (circa 1969)

The world of counterfeiting here in China is definitely a distorted, bizarro environment that is influenced by industry trends, while at the same time pushing back and giving legitimate manufacturers and retailers plenty of trouble in return.

How are the shanzhai (knockoff) players swayed by the marketplace? Here’s a fun example:

Falling prices for real smartphones is putting such pressure on copycat cell phone makers that many are moving into China’s tablet computer market.

The mobile phone market is quite mature of course, and there are many reasons why prices have dropped to their current levels. But you know that the shanzhai guys themselves contributed to the problem. As one analyst noted in a China Daily interview:

Most of the tablet computer makers in Shenzhen today were previously making copycat cell phones. They have the same approach to tablet computers as how they did (to cell phones).

The only thing they do is to launch a price war and then everybody is stuck in the mud.

Right. So let me get this straight. Copycat phone makers, doing what they do best, drove the price of mobile phones into the ground, killing their own profits. What’s a shanzhai factory to do but catch the next (profitable) wave, tablets?

And now the wheel turns again, and we’ll be seeing the next price war in the shanzhai community. Well, technically it’s already started. The tablet rolls off the assembly line, with several hundred RMB worth of hardware, and the copycats fall all over themselves trying to push as many units out there as possible before the market price dips down towards cost.

You gotta love perfect competition. The problem for the knockoff guys is that they have nothing going for them except cost:

The copycat products have no advantages in brand and distribution compared with branded products. And the low cost of the hardware means they do not have satisfying performance. When the branded products reduce their price, the copycat products will be elbowed out of the market.

You almost feel sorry for these guys. As soon as these products are made, the clock starts ticking.

Wait a second. That sort of reminds me of something else. What could it be? Oh yeah, it’s a lot like the problems faced by genuine producers and distributors!

Talk about bizarre. Clients ask me all the time about what they might face in China from copycats. Depending on the industry and the product, I often tell them that as soon as they start making/selling the products over here, the clock starts ticking. Eventually the copycats will get moving, and the brand owners will start to see fakes eroding their market share.

With a new product or consumer trend, what we really have are two different timelines. The brand owners introduce the product, knowing that it’s just a matter of time before the copycats come after them, nibbling away cost-conscious consumers.

At the same time, all those copycats also have one eye on the clock as well, knowing that eventually the market will be saturated with shanzhai product. And since the knockoffs cannot justify a markup, all that competition will eventually kill their profits.

Of the two, of course, the real guys have the edge. Just think about the difference in retail price between a genuine Apple iPad and a shanzhai alternative. And Apple is pushing a lot of units as well. Moreover, that pesky perfect competition situation? That’s only at the low end of the market — up at the top end, Apple, with its branding/religion, can continue to demand high prices.

If I get a kick out of seeing shanzhai guys struggling to make a buck, does that make me a bad person?

6 responses on “From Phones to Tablets. Moving Up the Counterfeit Value Chain

  1. ecodelta

    I wonder if an smart strategy could be used to take advantage of the productiveness, invention and resourcefulness of thes copycat companies.

    Consider for example a company that produces a series of articles, with a new version each 1 or 2 years.

    That company could reach an agreement with copycat producers to let them manufacture and modify copies of previous year products, give them some brand awareness to increase benefits, while the company concentrate on new products.

    For example, even if it is a little extreme, consider apple. They take to market a new Iphone every 1 or 2 years. For example we are now at iphone 4. Let recognized copycat producers manufacture phone 2 and 3, maybe even allow variations in the design. Maybe even a special brand name, for example “shanzied iphone”

    The agreement with copycat producers should include a guarantee of a minimum quality levels.

    It could be a beneficial relationship. Engage copycat producers, use them to fight against other low quality copycat producers by cornering the market, provide some brand awareness for local companies to entice them to stay on your side, and also profit from ideas that may come from them.

    1. Stan Post author

      Interesting licensing strategy. I wonder how the competition between the licensed low end product versus the non-branded product would go? If they are just fighting on cost, the licensed product loses out, particularly if there are minimum quality standards.

    2. Justin Liu

      This is basically the same strategy generic drug makers employ. They make off patent drugs and often first line drug companies like Pfizer GSK, etc will actually cut a deal with a generic maker (product method, marketing etc) when the patent expiration deadline is looming. They at that point have nothing to lose, but I think this is unlikely to happen here because someone who settles for an iPhone 4 won’t buy a iPhone 5. Apple is better off catching the smaller % of those willing to splurge above their price range (since we are assuming the target is budget customers) than taking a cut from the generic company.

  2. S.K. Cheung

    As long as there is no effective protection of brand names, copyrights, and ip in china, this 2 tier reality will continue. You can pay full price for the real thing, or you can pay a fraction of the price for a fraction of the thing.

    Appearance is one thing. But performance is another. So for things that transact primarily in appearance, like a Louis vitton purse, perhaps they are more susceptible. You can pay a bunch for the real thing, or you can pay a little for a fake. But either one will carry your stuff.

    On the other hand, apple for instance is a little more protected. A fake iPad might look like the real thing, but it certainly doesn’t perform like one. So the user “pays” a substantial penalty for going fake. For those who can afford it, people will pay for the real thing in order to get legit performance. For those who settle for a fake because they wouldn’t have been able to afford a real one anyway, apple didn’t lose a customer because that person would not have been a customer to begin with.

  3. pug_ster

    The problem is that right now the tablet makers are running the older version of the android software, which is meant for phones. The newest version of google, running Honeycomb (3.x) is not open source so these shanzai tablet makers could incorporate them into their products. The next version of android (Ice Cream Sandwich) was supposed to be open source and hopefully we will see them into these shanzai tablets.

  4. Justin Liu

    We as consumers probably shouldn’t complain. Mobile device makers still have plenty of chances to squeeze us on other products. This might go a ways to making the market competition a little closer to “perfect” as Adam Smith meant it.

    *ps love the podcast Stan.