When Chinese manufacturers entered the global hi-tech space, they were known for copying the designs of big companies from other countries. Fledgling manufacturers became notorious for Nokia and Motorola knock-offs in the early days, while Apple and Samsung became the main sources for replication later. Although as China’s hi-tech manufacturers evolved, their propensity for producing knock-offs transitioned into a driver for innovation and niche market adaption which has allowed them to compete against the big brands they copy in many global markets.

The heart of China’s hi-tech manufacturing empire is divided into two parallel ventricles that compete with and feed off each other. One is that of more traditional manufacturers, such as Huawei and Lenovo, along with big international brands such as Apple and Samsung, produce a large quantity of their products in China. The other is a decentralised network of thousands of smaller factories and design houses who operate in an openly cooperative fashion that have been dubbed “shanzhai”.

Shanzhai literally means “mountain stronghold”, as in the hideout of bandits. It became common usage with the 12th century legend of a noble band of Song dynasty outlaws who lived on a mountain in Shandong province’s marshes. The word shanzhai began being used to mean “to copy” or “to parody” in contemporary slang, and shortly before the Beijing Olympics in 2008, it was applied to knock-off goods. Perhaps as a combination of these two meanings, the term shanzhai is now used for China’s massive copycat industry and the design and manufacturing network that emerged from it.

“Shanzhai started as a copycat. Forget about the respect for intellectual property,” says David Li, the co-founder of China’s first makerspace, XinCheJian. “So if someone does one design, more often than not if it is useful it is going to get copied.”

Shanzhai has evolved from these copycat roots into a complex ecosystem which is very much the Chinese take on open source hardware production. Shanzhai has its own code of ethics and its own culture, and the sharing of designs, know-how, and materials is at its core. “The whole system is cooperative. . . meaning people want to share,” Li says.

The big break for shanzhai happened in 2003 or 2004 with an explosion in global demand for cellphones. The industry leaders at the time, Nokia and Motorola, were putting out feature phones in the US$800 to US$1,000 range — well beyond the purchasing power of most of the planet. Massive demand grew in Africa, Latin America, Southeast Asia, India and mainland China for cheaper phones. Due to their cooperative, low-cost system of manufacturing, China’s shanzhai companies were able to drastically undercut rivals, selling phones for less than US$100 retail. “If you look at what happened to Motorola and Nokia, they didn't really get killed by Apple ... they all got killed by shanzhai,” Li says.

While the big brands have money, resources, highly skilled design teams and massive market sway, shanzhai has an ecosystem of people collaborating and building on the work of each other. This is an extremely powerful force. It’s estimated that there are 20,000 to 25,000 shanzhai companies operating in Shenzhen alone producing more than 300 million cellphones a year, a quarter of the world’s supply.

Due to its decentralised nature and focus on the local, shanzhai manufacturers obtain a competitive advantage by going after niche markets that are too small to appeal to the big tech companies. “They find a problem, they fix the problem,” Li says.

One example of this kind of adaption was the addition of a second SIM card slot in cellphones. As China has more than 250 million migrant workers who live in one place but work in another, along with masses of people who regularly travel across telecom zones, the demand for a phone that could function on multiple local plans to avoid expensive roaming charges was huge. Shanzhai filled this need by making phones with two SIM slots, allowing users to toggle back and forth between local cards depending on their location.

Other examples of shanzhai’s innovations include phones with extra loud speakers so users can listen to music without needing headphones, speakers, or another device; phones with built-in UV lights for people working in service industries that regularly scan IDs and currency to detect counterfeits;  phones with compasses which point to Mecca, marketed to users in Muslim countries; phones with outer shells designed after popular cartoon characters or strewn with kitsch, among numerous other additions and adaptions.

“The main advantage for them [shanzhai] is to do it superfast. So Shenzhen production is superagile,” says Silvia Lindtner, a professor at the University of Michigan who has researched the shanzhai manufacturing network on the mainland. “They put on the market small batch production of like 3,000 devices and see if it flies. If it goes they produce more of that. They play with new markets and basically design no-brand or what they often call in Chinese white brand of devices that are bought by foreign companies that put their own label on them.”

Another point of confusion about shanzhai is that many such products often only appear to be knock-offs. While the outer casings of these products will be designed to look like those of the big brands, the insides are completely different. These internal components are generally IP compliant and used legally, relying on open source boards and chips from companies such as Arduino, MediaTek and Intel, who do lots of businesses supplying China’s open source shanzhai ecosystem. Basically, the same stuff can be found on the inside of a “knock-off” shanzhai iPhone as a phone moulded in the likeness of Hello Kitty.

What started in China as legions of copycat manufacturers is now pushing the boundaries of innovation and niche market adaption around the world. Shanzhai has shown itself to be more commercially nimble, adaptable, faster, and cheaper than many of the big monolithic, mass market, IP hoarding traditional tech companies. These abilities are evident in the success of multimillion dollar companies such as Xiaomi and Tinno who grew out of this ecosystem. Shanzhai has evolved into a force that can dominate markets, compete with the biggest tech players, and become a cornerstone of global innovation — it’s not all about copying any more.