Strategy & Business magazine has an interesting article on the shan zhai manufacturers in China at the moment. It’s the first business press article I’ve seen in the US that takes a relatively balanced approach to reporting on them. It’s worth a read, as it’s a trend that’s already affecting business, particularly the electronics business. It suggests a new approach to economic recovery as well, one based on small companies well-networked with each other.
I first learned about the shan zhai on a recent trip to Shenzen, China, hosted by PCH International and Bunnie Huang (Bunnie’s got a good blog post describing the shan zhai). The popular image of these companies in the US is that they’re producing cheap knockoff goods based on established multinationals, but there’s more to it than that, as S&B and Bunnie point out. The S&B article cites three characteristics of shan zhai businesses:
- They gain market share by moving rapidly, understanding and responding to local needs and tastes, and establishing and maintaining local manufacturing and distribution bases;
- They make rapid and continual improvements;
- They continually invest in future developments.
Bunnie adds another important characteristic in his description: they have established a culture of sharing information about the things they make through open BOMs (bills of materials) and other design materials, crediting each other with improvements. The community apparently self-polices this policy, and ostracizes those that violate it.
There are some obvious parallels here to the open hardware community. Businesses like Spark Fun, Adafruit, Evil Mad Scientist, Arduino, Seeed Studio, and others thrive by taking existing tools and products, re-combining them and repackaging them in more usable ways. We borrow from each other and from others, we publish our files for public use, we improve upon each others’ work, and we police through licenses such as the General Public License, and continual discussion between competitors and partners. We also revise products constantly and make our businesses based on relatively small runs of products tailored to specific audiences. There are some obvious differences too: we’re not making finished consumer goods, for the most part. We don’t face the same criticism that shan zhai business face as knockoff artists, nor the challenges to distribution in the US and Europe that such labels bring with them. For the most part, our manufacturing needs — and skills — are not as advanced as many of the shan zhai businesses, nor are our vendor networks as complex or interconnected. The comparison between these two communities suggests a possible direction for manufacturing.
A few years ago, Clay Shirky described an approach to software development that he dubbed situated software. Watching the students at ITP, he noted how many of their ideas for software tools were developed quickly for a very specific community, and served that need well, but wouldn’t scale to a larger audience. But perhaps scaling wasn’t necessary, he suggested, if software tools afford a quick, improvisational approach to development, and if the result serves the immediate need. Situated software isn’t enterprise software, it’s localized software. Sometimes it’s based on ideas from enterprise software, and sometimes it’s an entirely different beast, but it’s always based on the immediate needs of a local group. Situated software is often built as web mashups. What open hardware companies and the shan zhai point to is a world of situated manufacturing: hardware and consumer goods that are developed in a similar fashion to situated software. The resulting products are sometimes sloppy, sometimes unfinished, but that’s okay, if they serve the immediate need. They can always be improved in the next run, which is never more than a couple thousand units away.
Situated production wouldn’t be possible without the following:
Cheap tools. Laser cutters, lathes, and milling machines that are affordable by an individual or a group. This is increasingly coming true. The number of colleagues I know who have laser cutters and mills in their living rooms is increasing (and their asthma is worsening, no doubt). There are some notable holes in the open hardware world that exist partially because the tools aren’t there. Cheap injection molding doesn’t exist yet, but injection molding services do, and they’re accessible via the net. But when they’re next door (as in Shenzen), you’ve got a competitive advantage: your neighbor.
Internet sales, publicity, and distribution. Justin Hall’s observation that “on the Internet, everyone will be famous to fifteen people” is central to the success of a company like the ones mentioned here, because localization isn’t always geographic. Sometimes the people with whom you share interests and needs are more like you than the ones who live next door. Being able to find your fifteen people is crucial to situated manufacturing.
Cheap short run supplies. A small business catering to a localized audience doesn’t need a million pieces from its vendor. If there’s not a reasonable price break at 1,000 pieces, or at 10,000 pieces, you’re not going to use that part, unless you can pool resources with your competitor and buy in a lot.
Cheap fast shipping. None of this is possible in a world without Fedex, UPS, and DHL, of course.
Open manufacturing information. Manufacturers in this scenario thrive on adapting existing products and services. Call them knockoffs or call them new hybrids, they both involve reverse engineering something and making it fit your market. Reverse engineering takes time and money. When you’re a mom & pop shop, that matters a lot more to you. If you’ve got a friend or a vendor who’s willing to do it for you as a service, that helps. But if the plans for the product you’re adapting are freely available, that’s even better. In a multinational world, open source manufacturing is anathema. Why would Nokia publish the plans for a phone when they could dominate the market by doing the localization themselves? But in a world of networked small businesses, it spurs business. You may not have the time or interest in adapting your product for another market, but someone else will, and if they’ve got access to your plans, they’ll be grateful, and will return the favor, formally or informally.
Among others, Make magazine has been enthusiastically such promoting maker entrepreneurial approaches. In a recent conversation, Dale Dougherty mentioned that Detroit is suffering from a lack of jobs, but not of talent. Imagine what could happen to the city’s industry, he speculated, if a bunch of businesses along the lines of the one Bunnie describes, with the owner’s home on the top floor; his manufacturing shop on the second floor; and his retail shop on the ground floor. Instead of a few monolithic car companies, you’d have a mom & pop auto manufacturing network of companies. Seed this with microfinance loans such as those pioneered by Grameen and adapted for the US by Womens’ Self Employment Project in Chicago, or peer-to-peer investment schemes like kiva.org or kickstarter, and you’ve got a reasonable start to a new recovery. I’d love to see Dale’s vision of Detroit come to pass, but it would rely very heavily on open sharing of information among partners and even competitors in a new startup auto industry. Perhaps the open source 100-mpg car won’t be made common by one company, but by a network of small companies.
The biggest caveat in this scenario is this: in a world of short runs and rapid iteration on localized products, the amount of manufactured waste will increase geometrically. In order for such a world to be economically and environmentally sustainable, there’s need for rapid innovation in recycling as well. It will be essential to reclaim much more plastic, metal, and other materials than we’re currently doing if we’re generating more of it for shorter product lifespans. We can’t afford not to recycle even now, with the average mobile phone being discarded in about a year. There is opportunity here as well, though. Though full recycling of many materials is still too expensive for small businesses, new businesses could arise to prepare products for recycling. Disassembly companies exist already, and their work gets easier and more affordable when there are open BOMs (Bills of Materials) from manufacturers to use as guides to disassembly. There’s no need to speculate about the metal content or the hazardous materials when the manufacturer tells you what’s in the thing. And even if you can’t afford the tools to remove the copper from a circuit board safely, you can generate value by preparing the board for the company who can.
There are also legal issues to consider. The shan zhai and open hardware companies are opening legal cans of worms that make Shawn Fanning and his ilk look like pikers. Warranty? That won’t mean much when the mom & pop company that sold you your blender is out of business and is two new companies making something else now. Stolen intellectual property suits? Sony may not get a lot of cash from the guy making knockoffs in his basement. But if they chose to settle for intellectual property or services exchange in lieu of a cash settlement, both might benefit.
There are some areas of innovation that are difficult to imagine being done without billions of dollars (pharmaceuticals and international transportation spring to mind, though I could be wrong). But as an approach to spurring innovation at local levels, this approach could work well. There has been a great deal of innovation in software and services thanks to the ubiquity of the web, the development of software tools for rapid development and employment, and open sharing of code, tools, and methods. So what happens when that approach hits the manufacturing world? We’re finding out just about now.
This is idle speculation for a Friday afternoon. I haven’t done the background research on these ideas, but if you have, please get in touch, I’d like to pursue it further.