From Phones to Tablets. Moving Up the Counterfeit Value Chain

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?

Go to China Hearsay for more China intellectual property news. Also look for me on Google+ and Twitter.