Fake iphones

How fakes help to drive industry

Conventional wisdom holds that copying products is bad. But in many cases it's a creative enterprise that helps keep product lines fresh and extend their reach.

Dr Benjamin Franklin was an inventor, a musician, a diplomat and more besides. He was also a copyright pirate who reprinted the works of non-American 18th Century authors without paying them a penny. When he started his business, almost all of the books printed on US soil were Bibles and basic text books. The rest were shipped expensively from Britain. Many of the London booksellers did not want to take the risk of shipping their products overseas when they could easily sell their stock locally. So Franklin and his fellow printer-publishers decided to make their own copies of works such as Samuel Richardson's 'Pamela'.

A war and a lack of obvious loss meant few British authors noticed at the time. But within a century, the US had become a pirate nation: snapping up bestsellers and pocketing the entire proceeds. When Charles Dickens complained, he was mocked for his ancient views and that knowledge from richer countries such as the UK should be freely accessible – the 1790 copyright law only protected American citizens. In any case, publishers told Dickens he should be glad of the publicity.

For inventors, the US led the way in protecting ideas. The UK did not adopt a patent law until the late 19th century, long after the industrial revolution. In France and the UK, citizens could happily not just copy, but claim ownership of inventions they uncovered in patent claims overseas.

Fast-forward 150 years and it's not hard to find these free-wheeling practices in a new set of industrialising economies. China has elevated the art of the knockoff to a new level. Take the SoPhone. At first glance, it is an incredibly accurate copy of the Apple iPhone 4. The case and icons are identical but one runs the original Apple software and the other a localised version of Linux. As a result, users see a distinct difference between the two phones. Attach the SoPhone to a computer and it will not synchronise to iTunes. The phone's resemblance to the real thing is purely skin deep and one of the reasons why the knockoff industry based around Shenzen has acquired the term 'shan zhai', or 'bandit'.

But with products that go under names such as Nokir, Samsing and SunyEriccsun, the shan zhai manufacturers have done more than simply ape the look and feel of products from abroad. By focusing on the simple fakes, companies in the western world risk missing more important features that underlie the shan zhai phenomenon.

Xiuli Rong, head of Beijing Tianyu Communication, is known as the "godmother of shan zhai cellphones" for transforming the company from a designer of knockoffs to a major player in the Chinese market. It's in a position to do deals with multinationals such as Qualcomm and develop a Linux-based cross between the Amazon Fire and Apple iPad for Alibaba, China's hybrid of Amazon and eBay.

Like many shan zhai operations, Tianyu is simply the public face of a loosely coupled group, each of which takes on a different part of turning a basic handset into a mass-produced device. As most of the work is outsourced, shan zhai companies can quickly move into new markets by assembling different groups for specific projects. One of the big beneficiaries is local chipmaker MediaTek, which has built up production of its mobile chipsets through these networks more quickly than was possible through deals with established multinational handset makers.

The shan zhai experience mirrors Franklin's experience with British booksellers. Companies such as Tianyu built up much of their customer base not in the major cities of China, but the outlying regions that multinational corporations (MNCs) avoided. And that is still the case to some extent, says Edward Tse, co-author of a 2009 report for Booz & Company: "Although MNCs have started to recognise the importance of the mass market in lower-tier cities, weak execution and strong compliance requirements still work against MNCs to penetrate successfully these lower-tier markets."

Crackdown on shan zhai

There are indications that, as with western economies, shan zhai may be a passing phase. Earlier this year, IHS iSuppli analyst Kevin Wang pointed to a decline in Chinese consumers' appetite for shan zhai products. He says shan zhai mobile handset shipments peaked in 2007 at 50 million and are likely to fall below 13 million by 2015.

"Customers are concerned about the quality and after-market care of grey-market handsets," says Wang.

Tse says: "The consumer segment, which previously generated the demand for shan zhai and counterfeit products, is gradually upgrading to favour branded mass-market products. This is mainly driven by increasing living standard and purchasing power, and growing demand for branded products in rural areas."

A crackdown by the government on grey-market handsets has not helped upstart shan zhai producers. A similar policy in India has choked off the supply of shan zhai over the past couple of years.

Economists such as Joseph Stiglitz claim that the tight controls on IP rights in developed nations do not benefit technological infrastructure that is still developing. But, as these countries develop their own expertise they come under pressure from entrepreneurs and corporations to treat IP with care, as was the case in the industrialisation of the West in the 19th and 20th centuries and is now happening in China.

"Chinese companies have become more conscious about IP infringement and more willing to invest resources to build up their own IP portfolio," says Tse, pointing to telecom equipment maker Huawei as an example. "According to the court data in recent years, local Chinese firms are filing more patents than ever. When domestic players gain market power and technology capabilities, and want to expand their market overseas, this trend normally accelerates," Tse adds.

"As a whole, the Chinese government will not abandon its effort to improve IP protection. As the Chinese economy becomes more dependent on knowledge-based production and more integrated with the global economy, the government is not likely to loosen IP protection."

Tse cautions that, despite the counter-trends, rumours of shan zhai's death are exaggerated: "There is no fundamental change of the Chinese culture of being 'fearless experimenters'. The flexibility and creativity among Chinese entrepreneurs will last."

There is a further problem facing those who need to protect their IP against copyists in China, says Tse: "It will take a long time to change the mindset of most Chinese people, who do not normally view protection of intangible property rights as important as that of tangible property rights. The infringers are also not adequately deterred from infringement because the damage awards are significantly below the economic harm."

The shan zhai companies have taken it to a new level but the disaggregated business model of the electronics industry has helped foster a culture of using copies, clones and knockoffs to break into a market and then develop it. Take the PC market: the only real difference between its early days and shan zhai is the avoidance of passing off with trademarks, which is largely a consequence of strong protection in western economies. But the preponderance of light-beige PCs during the first 20 years of its development cannot be a coincidence.

Unlike its high-margin mainframes and minicomputers, IBM decided its best chance of breaking into the PC market was to embrace outsourcing. IBM would still make its own hardware but bought in the operating system and other software and used off-the-shelf components. These decisions made the IBM PC relatively easy to copy and fostered a manufacturing model based on outsourcing. The Basic I/O System (BIOS) firmware was where copyright law would cause problems for any would-be cloner but even this was not too tricky to reverse engineer.

In common with the way shan zhai developed, the first properly PC-compatible to arrive was not a straight clone. Compaq's oversized lunchbox machine attacked a market that IBM had failed to address: that of portable machines. Others then followed with their own takes on what a PC should look like. By the early 1990s, some of the larger clone makers were considering ways of breaking their dependence on Intel and Microsoft: their primary suppliers.

Function cloning has since proved to be a successful strategy for many other related sectors. Best-selling ideas do not retain a monopoly for long. As soon as a winning product arrives, other companies attempt copycat versions, either selling on price or additional features to gain a toehold in the market. The availability of clones and knockoffs can help a new type of product gain share quickly, although it might not help the OEM that came up with the original design.

Fashioning clones

The world of fashion tacitly accepts knockoffs: authors Kal Raustiala and Christopher Sprigman call this "piracy paradox" in their 2006 paper for the Virginia Law Review. "Copying is rampant," they argued, but pointed out that this did not discourage haute couture designers from continuing to pump out new products at regular intervals.

The authors claimed that the readiness of high-street retailers to sell copies, albeit under a different label – so they are not classed as counterfeits or fakes – helped maintain a high turnover of designs.

The ready availability of close copies of high-fashion products tends to make them obsolete in the view of consumers. When almost everyone has a pair of sheepskin boots, the fashionable choice is to move onto the next 'hot product'.

The question remains whether the industry will evolve to greater enforcement of IP rights and use legal means to fend off the copyists or whether shan zhai is symptomatic of a greater shift in attitudes to IP and product design.

Author and business analyst Joe Pine sees a gradual shift away from the product model. He points to Apple as an example of how a product maker has used the concept to protect sales of its hardware.

"Apple does a better job of turning goods into experiences. It's the experience of using the iPhone or iPod that drives the demand," Pine claims. "It's clearer than ever that people want experiences. We don't really want more stuff: it's not the things we have that make us happy. It's in the experiences that we share."

The counterfeit cannot offer the same experience and so, in a sense, is outcompeted by the genuine. However, it is possible for experience to become commoditised: when everyone offers the same thing. Similarities to the fashion industry emerge at this point.

"Companies have got to keep thinking about how they refresh the experience and avoid the commoditisation trap," Pine argues. "Ideally, you think about design for refreshability."

Technology such as 3D printers may provide a further body blow to the idea of protecting a product design from fakery. 3D printing is still in its infancy: "We're not at the level of the Star Trek replicator yet," says Pine. But, armed with the data for a design, people will use the machines to make copies of everyday objects with ease.

People will all have the ability to become pirates of physical design as easily as they can with digital music and movies. That will almost certainly force industries to reconsider whether it is worth trying to protecting IP directly or rework the way they do business. Like it or not, fakery has changed the world and is continuing to do so. *

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