Counterfeiting and “Shanzhai”: Comparisons and Policy Suggestions
Yi-ni Li
School of Management, Zhejiang University, Hangzhou, China
(lee_kazuki@163.com)
Abstract –Counterfeits and “Shanzhai” products are
both produced based on imitating the brand products and
then will challenge the original articles in return. On the
basis of previous researches in related areas, this paper has
made some in-depth comparisons between counterfeiting
and “Shanzhai” in purchase motivation, innovativeness,
business mode and legality, and then provided some policy
suggestions both to the “Shanzhai” enterprises and the
brand enterprises.
Keywords - Counterfeiting, deceptive counterfeiting,
indigenous innovation, legality, modularization, nondeceptive counterfeiting, Shanzhai
I. INTRODUCTION
Counterfeiting has been a headache for governments
and brand enterprises for a long time. It is reported that
counterfeits transactions will decrease both the symbolic
value and brand value of original products, and the
prestige of the original products enterprises and their
brands may also be damaged [1], which will in turn bring
down their profits. As a result, the suffering enterprises
may decrease their investments in research and
development, which will further lead to unemployment in
associated industries [2]. Besides, counterfeits transactions
also have a negative influence on government’s tax
revenue [3]. What’s even worse, some transactions are
even reported to be associated to organized crime and
terrorism [4].
It is consumers’ demand for counterfeits that makes
counterfeiting always profitable. That’s also the main
reason why so many laws and policies aimed at
eradicating counterfeiting from the supply side failed.
According to the International Trade Commission,
counterfeits sales worldwide grew from $5.5 billion in
1982 to over $500 billion in 2009 [5]. And this growth
trend is expected to continue.
On the other hand, in China, a phenomenon named
“Shanzhai” has been quite popular in the past few years.
“Shanzhai” first appeared in IT industry and was known
for “Shanzhai” mobile phones. The unexpected success of
“Shanzhai” mobile phones contributed to the birth of
other “Shanzhai” products, such as “Shanzhai” clothing,
“Shanzhai” cosmetics and even “Shanzhai” automobiles.
These “Shanzhai” products bear resemblance to some
brand products in appearance so much so that they may be
considered equal to counterfeits. But in fact, besides
imitation, “Shanzhai” products do also make some
innovation based on the original products, which is the
key point that distinguishes “Shanzhai” from
counterfeiting.
This paper has summarized the results of previous
studies in related areas, made some in-depth comparisons
between counterfeiting and “Shanzhai” in purchase
motivation, innovativeness, business mode and legality,
and then provided some policy suggestions both to the
“Shanzhai” enterprises and the brand enterprises.
II. CONCEPTUAL BACKGROUND
A. Counterfeiting
Counterfeiting is the reproduction of copies that are
identically packaged, including trademarks and labeling,
and copied so as to seem to consumers the genuine
articles [6]. Generally speaking, counterfeiters will make
their copies look identical to the original products (at least
in appearance) as long as it’s possible in cost and
technology.
It’s important to distinguish between the two types of
transactions in counterfeiting: deceptive and nondeceptive. Grossman and Shaprio defined deceptive
counterfeiting as a situation in which the consumers are
not aware of buying a counterfeit at the time of purchase
[7]
. In deceptive counterfeiting, the counterfeit is displayed
and sold as genuine product, and the consumer also
believes it. Whereas in non-deceptive counterfeiting, the
consumer recognizes that the product is not authentic
according to specific information cues such as price,
materials, or purchase location [8]. Not all consumers are
able to distinguish between genuine products and the
counterfeits. The degree of deceptiveness apparently
depends on the consumer’s awareness, knowledge, and
experience [2]. The existence of consumer demand for
counterfeits can be inferred from non-deceptive
counterfeiting. These consumers are those who attempt to
get the halo of genuine brand products through consuming
the cheap copies.
B. “Shanzhai”
“Shanzhai” is a phenomenon first appeared in mobile
phone industry in Guangdong Province of China. In
Chinese, the word “Shanzhai” means “village”. And in
Cantonese (the dialect in and around Guangdong
Province), it also refers to some small-scaled underground
plants. As more and more of “Shanzhai” plants engage in
manufacturing cheap mobile phones that bear a striking
resemblance to popular brand mobile phones both in
appearance and function, “Shanzhai” also becomes a
name for these products. These products imitate the
appearance of brand mobile phones, combine their
functions and also make some innovation. Thus, these
“Shanzhai” mobile phones are not only cheap but also
multifunctional, which makes them quite competitive. In
2007, 150 million “Shanzhai” mobile phones were
produced, and the market share was over 25% [9]. The
unexpected success of “Shanzhai” mobile phones
contributed to the birth of other “Shanzhai” products,
Such as cosmetics, clothing and even automobiles. Due to
the popularity of “Shanzhai” products, the word
“Shanzhai” became familiar to people, and turned to be
the name of certain economic phenomenon that was
characterized as imitative [10]. Nowadays, “Shanzhai” can
be used to refer to any imitating activity or its products.
III. COMPARISONS BETWEEN COUNTERFEITING
AND “SHANZHAI”
A. Purchase Motivation
As is previously discussed, in counterfeits
transactions, there are deceptive transactions and nondeceptive transactions. In deceptive counterfeiting, a
counterfeit is sold to a consumer as genuine article. And
the consumer is not aware of that at the time of purchase.
In this situation, the consumer does not have any
motivation to buy counterfeit. In a word, the consumer’s
subjective process in deceived counterfeit purchase is
quite the same as that in authentic product purchase.
But as to the undeceived consumers, why do they
knowingly buy these products?
As is revealed by some researches, on the one hand,
consumers can use counterfeits in a carefree manner
without thinking about their material value [2]. One the
other hand, people desire to associate with the current
social class they are in or the class above them, and they
will purchase brand products that convey affluence,
wealth, and social class [11]. When the symbolic meaning
of a brand product is quite important and the price is
unaffordable or unreasonable to a consumer, he or she is
more likely to choose the cheap substitute— counterfeit.
Likewise, it is also for the lower price and the
symbolic meanings brought by the appearance similar to
brand products that consumers buy “Shanzhai” products.
“Shanzhai” products utilize the symbol brand, and
diminish the gap between the selling price and the usevalue of famous brand products with the low price [12]. For
the target group of “Shanzhai”products, which consists
of students, migrant workers, and those low-income
white-collar workers, “Shanzhai ” makes fashionable
and high-tech products cheaply accessible.
Both counterfeits and “Shanzhai” products are
attached to or depend on mainstream products. And the
transactions of counterfeits and “Shanzhai” products have
somehow acknowledged and further reinforced the
leading role of mainstream products and the culture they
represent for. However, different from counterfeits, the
innovation “Shanzhai” products make have also somehow
distinguished them from mainstream products and
conveyed resistance to mainstream culture [13].
B. Innovativeness
Both counterfeiting and “Shanzhai” are based on the
imitating of existing popular brand products. However,
although some uncompetitive “Shanzhai” enterprises may
transform into counterfeiters [14], and some counterfeits
may also label themselves as “Shanzhai” for a better fame,
the fundamental difference still lies in different degree of
innovativeness: counterfeits will copy the genuine articles
as much as possible, whereas “Shanzhai” will make some
innovation in addition to imitation in appearance and
function.
As long as it’s possible in cost and technology,
counterfeits will copy everything of authentic articles
such as appearance, design, materials, and functions. An
“excellent” counterfeit will be strict in every detail, even a
small warranty card.
Whereas “Shanzhai” will imitate, combine, and then
innovate the appearance and functions of brand products,
and then produce their own “Shanzhai” products that may
defeat the original articles in appearance, function and
price. Take the representative “Shanzhai ” product
mobile phone as an example. In a total solution for mobile
phone named “turn-key” invented by the Taiwanese
company “Media Tek”, motherboard, communication
module and system software are all integrated together in
a small chip. With this chip, “Shanzhai” manufacturers
can easily assemble powerful cell phones by connecting
modules, such as shell, screen, battery, and camera, to the
standardized interfaces of the chip [15]. As a result, a
number of multifunctional “Shanzhai” are produced.
Some just looks like a watch, and some looks like a PSP.
Some can function as pinhole camera, and some are even
waterproof. All of this makes “Shanzhai” mobile phone
far more than a mere copy of brand phone.
C. Business Mode
Counterfeiting is an unsupervised underground
activity. Counterfeiters will never intentionally publish
anything about themselves. So what is known about them
is relatively limited. It is only reported that they are some
small-scaled plants with little core technology or
competence, hiring low paid but overtime working
workers, using materials below standards, producing
unauthorized copies that look similar or even identical to
authentic brand products [4]. Then these counterfeits will
be sold in black markets to consumers aware or not of
what these products really are. The only “advantages” of
counterfeiting may be low investment, little supervision,
and little tax.
On the other hand, the success of “Shanzhai” lies
largely in its unique business mode: consumer-oriented
innovation, modularized production, and multiple
marketing channels.
Product is the foundation of marketing. Any
marketing activity should be based on its product.
“Shanzhai” manufacturers usually adopt customeroriented policy in the process of innovation. One of the
main reasons why “Shanzhai” products are so popular is
that they can satisfy various demands of consumers in the
market. “Shanzhai” manufacturers develop different
products up to different consumer groups. They may even
customize new products according to the need of specific
customers, which makes customer-oriented mass
customization [15]. Therefore, “Shanzhai” manufacturers
could timely know from their customers any slight change
in the market, and then immediately develop distinctive
updated products according to the new demand. Through
customer-oriented innovation policy, the manufacturers
can lower the market risk and avoid the failure caused by
information asymmetry [16].
The concept of modularization first appeared in
machine design area at the beginning of the 20th century.
It refers to based on the division of labor, dividing a
complex system into several independent functional
modules, and reassembling them into a new complete
system with interfaces after all the modules are
individually implemented [15]. Modularization can
simplify complicated problems. In modularization,
modules can be integrated together smoothly as long as
each one is designed and implemented up to the standard.
Due to modularization, “Shanzhai” manufacturers do not
need to master the technologies and processes of all
modules in the system, or to engage in the production of
all of them. All they need to do is to focus on their core
competency, produce the module in which they are
competitive, and get the other modules through
purchasing or outsourcing. The production cost of these
manufacturers has also been dramatically brought down.
Therefore, the innovation resources are efficiently utilized,
which makes “progressive innovation” mode [15]. This
production mode has promoted the specialization of
industry chain for “Shanzhai”, and enabled the
manufacturers in the chain to fully explore their
advantages and rapidly respond to market. As a result,
innovation becomes much easier. Improvement could be
accomplished separately in each independent functional
module, which changes complicated system innovation to
an integration of simple module innovation.
Besides the traditional channels such as retailers and
wholesalers, the main marketing channels of “Shanzhai”
products also include internet, TV home shopping and
sales conventions. All these make a comprehensive
marketing system of “Shanzhai”. Through these
diversified channels, “Shanzhai” products can reach to
their target consumers at any social class or any place
easily and rapidly. This has dramatically improved the
competitiveness of “Shanzhai”.
D. Legality
As business modes adopted by small enterprises that
are lack of core technology or competence, both
counterfeiting and “Shanzhai” are somehow attached to
authentic brand products, and “seal” or “share” the added
value brought by the brand symbol of authentic articles.
However, counterfeiting is definitely illegal. But as to
“Shanzhai”, although often involved in copyright
infringement issues, the legality of “Shanzhai” still can
not be uniformly defined because of its innovative
elements.
Both deceptive counterfeiting and non-deceptive
counterfeiting are illegal. Because counterfeiters are
always unsupervised and adopt low-cost policy, the
quality of their products can not be guaranteed. The
consumers of counterfeits are running financial,
performance and functional risks [17]. What’s even worse,
their safety and health may also be threatened. On the
other hand, counterfeits transactions may not only take
away potential consumers of original products, but also
damage their image. Especially in deceptive
counterfeiting, the awful consuming experience will be
mistakenly ascribed to original product and its enterprise.
And the damage will be even greater if the deceived
consumer conveys the mistaken judgment to his peer
group. Moreover, counterfeiting may have a negative
influence on government’s tax revenue. And inferior
counterfeits will also damage the image of the industry
and even the image of the country— that’s the very
embarrassment “Made in China” are suffering today.
On the other hand, “Shanzhai” is no longer a small
enterprise special thing. Some local brand manufacturers
in China also chose “Shanzhai” as a part of their business
mode. For example, some local brand automobile
manufacturers have produced their own “Shanzhai” cars
based on imitation and modification of the appearance of
some foreign prestigious brand cars. However, this kind
of “Shanzhai” is at most a low-level innovation or, in fact,
a trick to avoid the name of copying. The development of
these enterprises will excessively rely on the original
products, which is not conducive to long-term
development. What’ more, there will be extra cost both in
money and time for these enterprises when copyright
infringement suit is brought against them.
It is necessary to point out that some dishonest
businessmen may also make evil use of the similarity in
appearance of “Shanzhai” products to brand articles, and
intentionally sell them as original ones. This situation is
almost the same to deceptive counterfeiting and is no
doubt illegal.
IV. POLICY SUGGESTIONS
A. To “Shanzhai” Enterprises
“Shanzhai” is not a China special phenomenon. The
history of the development of modem economy implies
that imitation and innovation based on imitation is one of
the main forces behind the growth of economy. For those
who are at a low level of economic development,
“Shanzhai” is a specific stage on their way to catch up
with and surpass the advanced world level [18]. Many
prestigious enterprises also used to resort to imitation and
innovation based on imitation in the early stage of their
business. For example, NIKE used to imitate the “Tiger”
shoes of ASICS Company [14]. What’s more, about 60
years ago, “Made in Japan” also used to be considered as
a representative for fake and shoddy products. However,
through the efforts of Japanese people, Japan has become
the largest electronic products manufacturer today [19].
Thus, for Chinese manufacturing industry, “Shanzhai” is
an unavoidable stage in the process of development.
In past few years, due to the growing number of
“Shanzhai”
enterprises,
problems,
such
as
homogenization and blind price war, have emerged [14].
To respond to new challenges, it’s quite necessary for
“Shanzhai” enterprises to transform into a normative and
independent innovative development pattern to get rid of
the reliance on the imitation of brand products and then
develop in a more healthy and sustainable way. The more
indigenous innovative enterprises there are, the better it
will be for the promotion of the indigenous innovation
ability of China and the development of industrial and
regional economy.
To achieve the transformation, “Shanzhai”
enterprises should improve the quality as well as the aftersell service of their products to upgrade the image.
Besides, to gain and keep updating their own core
technologies, it is advisable to cooperate with the research
institutes with outstanding ability [14]. What’s more, in
transformation, much more importance should be attached
to intellectual property strategy. Because the leading
enterprises often have many patents with which they
monopolize technology, “Shanzhai” enterprises with
weak awareness of intellectual property are often involved
in copyright infringement issues. Therefore, independent
innovative “Shanzhai” enterprises should act in
accordance with norms, and apply for licensing agreement
when it’s needed. On the other hand, during innovation,
these enterprises should also construct their own patent
system to protect their innovative achievements [14].
B. To Brand Enterprises
Counterfeiting, especially deceptive counterfeiting
will erode the brand assets of the original products. And
along with non-deceptive counterfeiting, “Shanzhai” is
taking over low-end market which is ignored by famous
brand enterprises before. What’s more, even the
traditional market shares of original products are slipping
with the extension of product line of some successful
“Shanzhai” enterprises [14]. It’s quite a challenge for brand
enterprises to respond to the new competition in market.
Here are some policy suggestions for them:
Because it is the appearance of brand products that is
most imitated by counterfeits and “Shanzhai” products,
brand manufacturers should concentrate more on
innovating and updating their products in appearance,
design, materials and any visible aspect so as to make the
original products distinctive and hard to imitate.
Besides, as previously discussed, the popularity of
“Shanzhai” products and counterfeits can also be a
promotion for original articles. The leading role of brand
products in fashion is reinforced by the consumption of
the cheap copies and imitations. And even in consumption
of counterfeits, there is still some positive effect to
original products. For example, it is revealed in some
researches that a number of counterfeit consumers take
the using of the cheap copies as an opportunity to get used
to the original articles. And if the try is satisfactory, these
consumers will probably purchase the original articles in
the next time [2]. Therefore, the key is to properly educate
these consumers by stressing the irreplaceable aspects of
original products, such as authenticity and brand
connotation, and then conduct them to switch to original
products and never slip back to counterfeits.
What’s more, it is well worth paying more attention
to those “aspirational” consumers who are trying to
distinguish themselves from lower consumers and identify
with upper elite consumers [4][20]. These “aspirational”
consumers are always purchasing for status with relatively
limited budgets. It is estimated that about 60% to 70%
consumers are aspirational. Therefore, brand enterprises
can attract these consumers by product line extension to
reply to the challenge from counterfeits and “Shanzhai”
products. For example, many luxury brands have
introduced accessory lines which are more affordable, but
with much greater profit margins [21].
V. CONCLUSION
Both counterfeiting and “Shanzhai” are profit modes
chosen by enterprises that are lack of core technology and
competence. However, based on previous discussions, it
is known that “Shanzhai” is the more advisable way.
Definitely, there are still drawbacks in “Shanzhai”. For
example, some “Shanzhai” products may be involved in
intellectual property infringement or tax evasion. Some
have imperfect after-sale system, and some may even
cheat consumers. However, on the other hand, “Shanzhai”
products do have enabled the masses to enjoy the
convenience brought by new technologies at an earlier
time and a lower price. What’s more, to some extent,
“Shanzhai” has also helped to promote economic growth
in China. All in all, “Shanzhai” is an unavoidable stage
for Chinese manufacturing industry. And the key is to
achieve innovation through imitation, and then turn to
indigenous innovation, which makes sustainable
development possible. On the other hand, brand
manufacturers should try to make their products
distinctive and hard to imitate, make full use of the
positive effect brought by counterfeits and “Shanzhai”
products, and pay more attention to the aspirational
consumers so as to respond to the challenge in the market.
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