Tuesday
Aug162011

Mirror World: China's Evolving Technology Sector

China’s move from market to maker will shake up the global technology balance.


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AT THE END of July, embarrassed local authorities in the Chinese city of Kunming, the capital of Yunnan province, ordered the closure of several Apple Store locations. The closure was not in response to some slight by the consumer electronic giant against China’s government. The problem was that these weren’t actual Apple Stores at all. Instead, they were meticulously created facsimiles, in effect knock-offs of one of the West’s most iconic retailers, “China-fied” with alterations to the facade and some internal details but filled with bona fide, sought after Apple products.

But for most consumers shopping in these stores, and even for the employees, most of whom believed they were working for the actual company, the glass-fronted stores appeared to be the real deal,  staffed by what looked like Apple employees in their iconic t-shirts and neck tags. Five shops were found in total, none real, according to Reuters. Only four genuine Apple Stores exist at the moment in China, and none of these are even in Yunnan province. If not for the eye of an American blogger living in the city who reported it on her site, the charade might have gone on for some time.

The story has been the source of not a little humour, but is only one of numerous tales of so-called shanzai tech stores that purport to be the real thing, with a wink and a nod, no doubt. It may be the most bald-faced counterfeiting at such a scale uncovered yet. More than anything, it appears to be the frontstage of KIRF (Keepin’ it Real Fake, a term coined by popular tech blog Engadget to refer to counterfeit tech products), for which the backstage contains hundreds of workshops and factories, and thousands of artisans and con artists, engineers and hackers who toil to create China’s technology mirror world. At one end are the hundreds of thousands of units of “iPone” and “Nokla” clones that litter global markets. At the other are the kind of high-tech weapons that I wrote about in this column last month.

The issue of product fakery would remain largely an intellectual property and piracy discussion if it wasn’t happening alongside a parallel evolution of China’s technological capabilities, from design through to engineering and research. The rising tide of China’s economic growth has lifted a wide array of boats—from domestic desire for status-object electronics such as iPhones and iPads (and their innumerable knock-offs), to the latest entertainment gear and even energy efficient cars. In these areas and others, the demand of an increasingly wealth population is meeting an unregulated supply of new products and services. It does it in a structure that sits partly inside and partly outside the frameworks of innovation and development the West has taken for granted for a century or more. In short, China is paving its own multi-lane highway. One lane is a combination of grassroots entrepreneurship, grey- and black-market ingenuity. Another lane is marked by aggressive learning curves among its growing cadre of technology producers companies. Yet another runs through it, showing a heavy dose of top-down investment in more traditional, if highly independent, state-driven and academic R&D.

This center lane of domestic manufacturers provides many of the gadgets we now center our lives around in the rest of the developed world. Such electronic must-haves begin their lives in China on the assembly lines of what are called in the industry "OEMs", or original equipment manufacturers. These are where the Apples, HPs and Dells of the world outsource final production and polish of new products. OEMs are no secret: there is now not just one but a half-dozen or more ways to track your new Macbook Pro or iPad from its birthplace in Shanghai through port of entry, usually in Alaska these days, to your front door.

A number of these OEMs have risen from no-name contract manufacturers a decade or less ago to rising stars in the technology firmament, including Lenovo, Huawei, Haier and ZTE, now global brands. Like Taiwan’s HTC, not long ago a white label producer of mobile phones and now among the top ten mobile brands in the world, China’s OEMs-turned-retail brands have learned engineering, design and marketing lessons by working for, and watching, their current competition. They're not just mimickinganymore, but instead shaping market strategy. Along the way, they're also paving the way for the Chinese equivalent of the Silicon Valley garage entrepreneur—the persistent but resource-constrained hacker who produces his wares out of a shed or unlabeled workshop today, but who might end up either with a lucrative business selling in market stalls across the region, or as a rising startup in a few years’ time.

While these big brands are reshaping day-to-day markets, it's the third lane, so to speak -- state-sponsored technology development -- where China’s efforts have the potential to gradually shift the global balance of power over the next few decades. One important element of this has been the development of the so-called Dragon chip, or Loongson processor. Driven by a desire to satisfy future domestic demand for computing power and an unease with running military applications on Western chips, Loongson has been under development for a decade, and is expected to debut this year in low-end electronics, as well as in supercomputer configurations. While the head of the project to develop Loongson says his team’s efforts are probably 20 years behind market leaders Intel, the potential to free itself of Western processors can put China on an even more technologically independent path down the road, again evolving from customer into competitor.

The geopolitical implications of this diverging highway are important at cultural, economic and political levels. As CEOs in businesses that have grown fat on a largely monopolar world can already tell you, the advent of a strengthening second center of power eats into already cloudy future market opportunities. It also has the capability to reshape demand based on different sets of values—those of Shanghai and Beijing casting a shadow on or displacing Madison Avenue and Sandhill Road. On a political level, China’s multi-lane technology future will fuel growing insularity and further stoke a return to regionalism. Just as the Chinese are uneasy about long-term use of Western components for military applications, there are rumblings in Washington about insecurity in technology supply chains flowing to the West from China. This is likely to be inflamed even more as field reports from an escalating East-on-West cyberwar become more alarming.


Not everyone is worried. The global south that China is targeting as it own future overseas markets isn't bothered where its circuit board are printed. Loongson’s creators see opportunities in African markets now being courted by Chinese government and brands. Like Western pharmaceuticals, its microprocessors and operating systems come with hefty licensing fees, making low-cost technology from other sources attractive.

While feeding open source chips into emerging markets isn’t going to break Intel, Microsoft et al anytime soon, their technological genes won’t be the only ones replicating on an uncontested frontier. As emerging markets grow and their embrace of China’s technology deepens, its technological DNA will spread. As has been the case with Western technology's DNA for a half-century or more, how it is constructed, what it defines and runs, and who funded and wrote it, will matter.  


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Scott Smith is the author of Discontinuities, CI's monthly column on disruptive technology and innovation in emerging markets. He is founder and principal of Changeist, LLC,  foresight and strategic design consultants advising companies on navigating complex futures.

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