January 1, 2011｜China
Deputy Senior Research Fellow, East Asian Studies Group, Area Studies Center, Institute of Developing Economies, JETRO
BoP (bottom of the pyramid) has become a catchphrase in the business world. The uppermost layer of the global economic pyramid is comprised of 75–100 million affluent consumers. In the central section are the poor of the developed nations and the newly emerged middle class in developing countries. And at the base of the pyramid is concentrated the population of 4 billion people who have a per capita income of less than US$1,500 (in terms of purchasing power parity). With the markets of developed nations having stagnated with the Lehman shock, great hope is attracted to the potential of the BoP giant market.
Research relating to BoP business has been pursued to date centered mainly on researchers in the English-speaking world. Cases have been introduced, including the initiatives in the Indian market of the Unilever subsidiary HLL and Grameen Bank of Bangladesh. These cases, however, are nothing more than individual instances at most, and the construction of BoP market-oriented business models has generally come to be considered a task yet to be begun.
In fact there is, however, a country that is having great success in BoP business. I introduced it in my last opinion piece: in China’s domestic market at least 60–70% of commercial products are traded at traditional “markets.” Most of them have been developed for the low-income stratum. In other words this is because in China BoP business is already being developed on a massive scale with its target the giant population of one billion, which rises to one quarter of the low-income stratum for the entire world.
I shall introduce one example of BoP business representative of China. It is the cell phone called the “shanzhai cell phone”. Its “integrators” (fabless manufacturers carrying out assembly only) have accumulated on the perimeter of Shenzhen in Guangdong Province, and are mostly small enterprises of around 20 people. Many shanzhai cell phones are unlicensed products and many are also imitations. When Apple developed the iPhone, within a matter of days the iOrange, the “shanzhai” version, was on the market. Additionally, you could get hold of one for around a tenth of the regular price of an iPhone. In Shenzhen it is said that “You purchase a cell phone as you would vegetables.”
This shanzhai cell phone, however, is the most successful example of BoP business. In Shenzhen in 2009, approximately 300 million handsets were shipped, and not only to the domestic market: they amounted to close to half of exports to emerging markets, including Southeast Asia and the Middle East. World top-level cell-phone manufacturers from among shanzhai manufacturers are also growing. In the Indian market there is the company called G5 which holds a share (30%) approaching Nokia’s (40%), and launched a mere 2 to 3 years ago as a shanzhai manufacturer with a few dozen employees.
Regarding the success of shanzhai cell phones, several factors can be highlighted. First, regarding product development, in all events the meeting of the basic needs of the low-income bracket is given top priority. Within China, were counterfeit bills to be everywhere, a cell phone with a function to check for them has been developed. For Muslims it is necessary to turn toward Mecca and pray several times a day, and a cell phone has been developed that has a compass in order to meet that need and which can play religious music. Quality is not that bad either. According to a Shenzhen Mobile Communications Association survey, looking at the number of defective phones sent for repair, it was indicated that the quality of shanzhai cell phones has improved 10-fold since their first production. Furthermore, after-sales service is included for China domestically. In any city domestically, the time taken for phone repairs, from receipt through to delivery into the hands of the customer, is inside of 72 hours.
Another strength of shanzhai cell phones is that they can meet the needs of the BoP market for small batches and quick delivery. For example the integrators will develop a new model even if there is an order of just 10,000 units. When it comes to design houses, they will accept orders even for batches of 3,000 units. Regarding turnaround times, it takes 30–45 days in the case of a full-fledged model, and 2–3 months in the case of a product with new functions. In contrast, in the case of major international manufacturers it’s usual for it to take 7–8 months or a year from new product development to mass production.
In the BoP research that has focused on the experience in the English-speaking world, to date expectations have been placed on the role of multinationals as actors supporting BoP business. It was thought that the construction of the necessary, complex commercial infrastructure for BoP and resource mobilization straddling dispersed rural areas, and complex market strata could only be done by multinationals. When it comes to shanzhai cell phones, however, on this point too the situation is being transformed.
Looking from the perspective of production, in Shenzhen, except for high-level IC-chip manufacturers, the integrators have built up to over 2,000 firms (some 250 firms have obtained production permits). Other than that, there are close to 1,000 design houses (including PCBA design and IDMD design), over 1,000 SMT factories, and over 20,000 PCB manufacturers (Pearl (Zhu) River Delta region). The situation for distribution is practically the same also. Regarding the cell-phone wholesalers in the markets of Huaqiangbei, which has become a sales hub for cell phones, in Mingtong “market” alone 4,000 companies can be counted. Regarding provincial-level wholesalers, in one province more than 100 companies are in existence. Moreover, at the city or county level, retailers (dibao) can be found in every regional city and county-level city. In this way, in each segment of the value chain for shanzhai cell phones a high-level competitive structure is being formed, with small and medium-sized enterprises as the actors.
[Translated by ERINA]