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IP Theft, Nationalism and Security Flaws – 21st Century Chinese Business – Part I

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IP Theft, Nationalism and Security Flaws – 21st Century Chinese Business – Part I
Xiaomi is a five-year-old Chinese start up valued at over $40 billion. That valuation makes it worth more than Sony. Xiaomi is an IT company that makes 90% of its profits from products which ‘heavily borrow’ (1) design and technical components from the competition.

If you’ve not heard of them, you soon will. Xiaomi has designs on the American market. Of course, they cannot enter the market yet, because intellectual property theft precludes such a thing at present. But, through company acquisition and less than inspiring ‘home grown’ designs, the firm is preparing to do just that. Their goal is two-fold, to sell cheap tech to the American market while at the same time attracting enough investor interest to go IPO and simultaneously unseat current Chinese champ Alibaba (2).

What is truly appealing about China’s Xiaomi, is that its business model (3) sheds light on the soul of China – a guide on how business is done there. In order to comprehend the ‘middle kingdom’, one need look no farther than this rising star. Cribbed designs and tech are the base for its cell phones which have been known to covertly carbon copy Beijing on all user private data.

While such antics may not be tolerated overseas, they are more palatable to mainland Chinese. These consumers are enthralled by Xiaomi’s low price, nicked designs (4) and nationalist images which outweigh any unease that loss of privacy could induce. In this manner, Xiaomi’s clever mixture of theft, espionage and ‘China love’ dramatize what success in Chinese business is built upon.

Xiaomi, Chinese Wunderkind

Lei Jun’s Xiaomi is a five-year-old steamroller that wants to ‘techify’ and connect all the gadgets in your home. His team will sell you everything from air purifiers to light bulbs, all of which are controlled by his marquee phone. And just to make sure you don’t feel low brow by purchasing his Xiaomi kit, he and his have fashioned their products in the likes of world class goods. What this means is that you can direct your faux Balmuda (5) air cleaner from the convenience of the iPhone’esque Xiaomi cell in your hands. Of course, no one will be the wiser whether you are using Xiaomi gear or something else, and that is just the way Lei Jun likes it.

Chinese have now and historically had a fascination with mimicry. Thousands of years ago Chinese scholars were taught to cobble together works of experts long since dead, then regurgitate them word-for-word. Should they editorialize or add content of their own, they were punished. After all, who were they to extrapolate on the thoughts of their predecessors?

Even though this occurred during the time of Christ, its consequences are still felt today (6). Rampant piracy is an obvious legacy of this belief construct. But what about Xiaomi?

xiaomi mi 3

Words Indicate Cultural Importance

It is said that the Eskimos have many different words for snow. This number signifies the importance that snow has on their lives. One word indicates the soft and fluffy sort, while another the hard biting granules which quickly turn into ice. The different names connote the impact that those flakes have on their land.

And so copying is to China. Most of us in the West merely call copies just that. They are fakes, an often illegal representation of someone else’s idea. We may try the politically correct route and call them ‘replicas’ but the fact remains that to us, a fake is merely a fake.

In China, however, the names for pirated goods are many and varied. Just as with the Eskimos and ice, each name is an additional source of information about the pirated good.

Xiaomi’s marquee handset bears an uncanny resemblance to Apple’s new wares. So much so, that to many the term ‘knockoff iPhone’ would apply. The Chinese, however, may see it differently.”Sure there are similarities, but differences too. Look at the bezel and camera,” they say, tapping the iPhone ‘near twin’.

All copies can fall into the ‘shanzhai’ family. But each is different from the next. Broadly speaking, there are four typical forms of shanzhai. The first is a direct copy but made of poor quality. It emulates not only design and form factor of the original, but uses its logo as well. This was the case with thousands of electronic parts which made their way into US military equipment a few years ago. Yes, the men and women defending our freedom were manning weapons loaded with 100% fake Chinese gear.

xiaomi redmi note

Other Knockoffs

The second type is the most playful and makes fun of the original. ‘Obama Fried Chicken’ (8), a KFC mime, exemplifies this best. The creators of this genre poke fun at corporate giants, their products are meant to fool no one. They probably best represent the shanzhai ‘mountain bandit’ culture – but more on this later.

Following this is the ‘shui huo’ or literally ‘water products’. These goods are fakes but with a difference. They allegedly use the same materials as the real deal. In other words, shui huo Prada would be made with leftover leather from Prada’s Chinese manufacturing sites. These purses could also be ‘product overage’ that the plant never reports, or even goods produced on illicit ‘third shifts’. Chinese plants are known to run production lines after the real staff has gone home. This type of theft also includes robbing defective goods from product waste and then selling them online or perhaps as new.

There may be more myth than legend to Chinese being able to purchase real products at steep discounts, but who really knows? Anecdotal evidence supports that this phenomenon is much more than myth. It is safe to assume that many Chinese are convinced of its existence.

mi band

Real or Fake?

China’s eBay knockoff Taobao for instance is filled with product offerings not so subtly hinting that they are shui huoof the ‘real variety’. In other words, they as much as tell you that the ‘LV’ bag they are selling for a few hundred dollars is essentially a legit LV. It is made from the same materials and produced at the same shop as all other LV offerings. It is labeled as class ‘A’ kit. For a fraction of the price, Chinese consumers may indeed be getting the real McCoy.

It is in this particular aspect of shui huo that Xiaomi excels. In fact, their sales spiel revolves around saying that they source from Apple suppliers. According to them, they purchase ‘Apple quality innards’. Xiaomi then touts that its phones, which have the same technical components as Apple gear, sell for fifty percent less.

They remind us that Apple is cash rich and monetarily worth more than Russia. The message is that Apple is price gouging the masses, a clear example of capitalism gone bad. It follows that Xiaomi gear is tempting. Why allow global conglomerates to oppress the masses with hyper expensive goods? The solution, of course, is to buy Xiaomi. Just like the shui huo LV bags, a Xiaomi consumer believes that, within reason, the product he holds is technologically identical to an iPhone.

The last is a breed of knockoffs which few Chinese consider to be pirated work. Xiaomi falls into this group as well. These products emulate the original but carry a label of their own. Goods of this sort typically tweak legitimate product design and or logo, but try to remain faithful to the original work. It differs from the former insofar as the quality of this breed need not be as good. Not surprisingly, consumables of this type are protected under Chinese law – for mainland firms at least.

A perfect example would be the Geely GE, by all measures a carbon copy (9) of the Phantom by Rolls Royce. Although it could pass as its legitimate twin, the Geely GE is considered to be a product unto its own. A tweaked fender here and different shape grill there and viola! It is transformed into an IP protected car design in the Chinese mainland.

Instead of companies being fined for IP theft, they can legally protect their ‘new’ product under its own name. It may help that most brands of this sort are local players, just like Geely, but that is merely supposition.

References & Image Credits:
(1) Hunger Marketing China
(2) TSW: Fake Store
(3) Xiaomi Business Model
(4) TSW: Fake Store Part II
(5) PC World
(6) TSW
(7) Shanzhai and Piracy
(8) Neo Geo
(9) Daily Mail
(10) Wikipedia: Xiaomi Images

Originally published on

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