The Study On Causes And Influences Of Shanzhai Phenomenon

The phenomenon of Shanzhai means many small firms selling brandless products enter into some industry where a few oligopolists provide brand goods。The study of Shanzhai phenomenon will encourage a clearer understanding of "market entry" which is a traditional subject of industrial organizational theory and provide a certain reference and apocalypse for contemporary Chinese enterprises.This article suggests that as a industry phenomenon, the emergence of Shanzhai product stems from two factors included "supply" and "demand". From the supply perspective, Shanzhai firms can only assemble since these companies are small scale and weakly technological strength. For that matter the basic conditions of Shanzhai phenomenon is downstream firm could purchase all kinds of intermediate goods which is needed for assembling final production and the assembly process should be simple. This article reviews the course of development of industrial organization in the past hundred years and concluded that industrial organization’s vertical disintegration and the arise of modular products is the basic premise of Shanzhai phenomenon. Modular reintegrating further improve the environment of ShanZhai firms.From the demand perspective, Opposite to brand goods, Shanzhai goods’core characteristic is the lack of brand. We argue that its appearance can be regarded as a dynamic process and the mechanism behind it is also our interest of research. The most important function of brand is that it can provide quality guarantee for the products. It is difficult for most consumers to know the exact of quality of potential goods without experience after purchase. But brand can used as a perfect signal of quality, and consumers are willing to pay more for brand products because they think they have higher quality. Due to its influence on quality expectation, many large firms spend millions of money on brand building and brand is one of most important market barrier.How can potential consumers estimate the quality of Shanzhai goods, which have no brand at all? This paper found that upstream firms’strategy of ingredient branding could increases consumers’confidence on their quality, which will consequently help consumers to trust the quality of Shanzhai goods integrated with such intermediate goods. In other words, ingredient branding strategy will reduce consumers’dependence on final goods’brand when judging their quality, which provides an opportunity of market entry for Shanzhai firms. For example, the reason that a consumer is willing to purchase a Shanzhai smartphone may be that it uses CPU from Qualcomm or display screen from Samsung despite no brand of final good itself. In fact, ingredient branding provide potential consumers with a second way to better learn the actual quality of products. To some extent, we can argue that arising of Shanzhai phenomenon is induced by branding of intermediate goods.The further analysis indicates that ingredient branding strategy has significantly positive externalities, that is, firms of other related intermediate goods can also obtain high benefits as free-riders. The existence of strong externalities will undermine upstream firms’incentives to implement ingredient branding strategy. If some final good consists of many independent but compatible parts or modules, high free-riding benefits as well as huge branding cost will make all upstream firms reluctant to adopt ingredient branding strategy. However, module integration thanks to improvement of manufacturing process or other related innovation could greatly mitigate negative impact of free-riding, which make ingredient branding strategy more attracted to firms of intermediate goods. Since module integration is the inevitable result of technology evolution, we have enough reasons to believe that Shanzhai phenomenon will be more and more popular in many industries with the acceleration of technical progress.Base on analysis of this paper, we argue that ingredient branding will have significant impact on power distribution in industrial chain, which is beneficial to upstream firms but harmful to downstream manufacturers. In the traditional market, consumers are more familiar with the brand of final goods, which make downstream firms have a stronger bargaining position in the cooperation with upstream firms. But the ingredient branding will change the old pattern and more bargaining power and profits in the industrial chain will be transferred to upstream.