An investigation into the key elements of the Chinese Shanzhai model: Alternative path to growth, cross-specialization partnership, and opportunistic niche infiltration

How do small emerging-market late-entrants with weak capabilities and scarce resources overtake leading U.S. and European firms in emerging markets? To answer this question, this study investigates Chinese Shanzhai firms in mobile phone, automobile, and notebook PC through secondary data, firm interviews, and retail channel observation. The result of this study not only helps understand the Shanzhai innovation model but extends the theory of vertical alliance and provides other aspiring emerging-market late-entrants a framework for devising winning innovation strategies. This study finds the key to the rapid and steady rise of Chinese Shanzhai firms is their vertical alliance model characteristic of alternative path to growth, cross-specialization partnership, and opportunistic niche infiltration. First of all, these firms seek out room in the marginal areas of the existing industrial system by changing their scope of operations and restructuring the value network. Secondly, they build up an open platform for innovation different from that of the incumbents' through cross-industry partnerships for collaboration and value co-creation to make up for what they lack. Lastly, they target a niche market by providing maximized Price-to-Performance ratios and maintaining diverse product lines to then infiltrate the mainstream market.