Lessons from the shanzhai: what Chinese counterfeiters can teach us about innovation

The idea that imitators can teach anyone anything about innovation seems at first to be absurd. Surely, the one is the opposite of the other? Not according to Lyn Jeffery, a student of what she calls the Chinese “informal economy.” Today I am learning all about how the imitators have turned innovators at a small session at SXSW.

As Research Director of Institute of the Future in California, Jeffery has undertaken some fascinating research into the “shanzhai” – which, literally translated, means “mountain fortress” and, in Chinese culture, has Robin Hood style overtones. It now refers specifically to the 15% or so of the Chinese manufacturing sector that is dedicated to the production of fake, branded goods. This loosely networked body of disparate small businesses employs 16m Chinese (as opposed to the 11m employed in the entire US manufacturing industry).

In the last 10 years or so, the shanzhai has branched out. First, it started producing white label goods – based on branded originals, but without the dishonest kudos of the brand name. In the last couple of years, it’s even started improving on the originals – double and triple SIM mobile phone handsets, for example, were originated by the shanzhai , according to Jeffery. And this isn’t the only product innovation the counterfeiters have been responsible for as they spot lucrative ways to service needs that the big players have hitherto missed.

But what’s really instructive about the shanzai is not what it makes, but how it makes it. In many ways, its rules are the opposite of best practice in established corporate culture.

By its nature, the shanzhai is decentralised: innovation happens at small scale and is then shared quickly. Sharing and mutual trust between the nodes of the shanzhai network are vital to the success of the whole. If a practitioner in the network lets the collective down, word gets around and they are ostracised. But, otherwise, trust is assumed.

Now, what if the businesses the shanzhai is disrupting could learn from this approach? What if these incumbents stopped obsessing about efficiency, predictability and control and started to embrace speed, adaptability and the routine delegation of initiative?

Kris Gale, VP of Engineering at Yammer, is partnering Jeffery at this talk. He perhaps has a vested interest in promoting open internal communication, but I like his theory that businesses should organise themselves around the value they provide – and then give their employees the freedom to innovate in order to find new and better ways of providing that value.

Some successful businesses do this already, of course. It is what led Netflix first to develop a streaming service to supplement the mailing of DVDs; and more recently, under threat of disruption itself, as the likes of HBO launch their own streaming service, it has embraced the origination of programming with the series, House of Cards. The value provision model in all three phases of Netflix’ development is the same; the means of providing it are what’s changed.

To the shanzhai, this kind of approach is second nature. There is a clear goal – to recreate affordable versions of new and expensive items for which there is a proven demand – but every operator has the freedom to innovate and find the best solution.

More often than not, it’s a process innovation – finding ever quicker and cheaper means of production – but sometimes, as we’ve seen, it’s also a product innovation. Either way, theirs is a model from which we can all learn.

 

John Owen is the deputy chairman of Dare and is at SXSW this week

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