"Imitation as Innovation: Lessons from the Shanzhai" was the most intellectually challenging topic from my first day at SXSW. This talk from Lyn Jeffery, Research Director at Institute for the Future and Kris Gale, VP of Engineering at Yammer had so many paradoxes fly about the room, it took a good minute after the presentation was completed before the audience could absorb the messages deeply enough to ask any questions.

Fake Goods, Real Speed

The Shanzhai (pronounced shan-jai) are a very loosely organized community of underground manufacturers who make counterfeit goods. The Shanzhai are global, powerful and hidden. They are the dark matter of manufactured goods. The Shanzhai are responsible for many things both good and bad. From the fake Coach bags on the street corners near you to the imitation Apple stores in china, the shanzhai are everywhere and their impact is real. 

The numbers are serious: 30 thousand cartons of fake cigarettes were found in New York. Canada had to move to a new set of holographic metro cards when the Shanzhai copied theirs (too bad it took the Shanzhai less than a year to copy the holographic ones as well). Knock-off electronic components from Shanzhai manufacturers were found in tens of thousands of US military systems.

The Shanzhai make up to 15 percent of the Chinese manufacturing economy which employs 16 million people. For comparison's sake 100 percent of American manufacturing employs 11 million workers. It is estimated that 50 Million Shanzhai tablets have been sold which would represent 50 percent of the overall tablet market.

The Shanzhai believe they are doing good in the world by providing for an unmet need. They make fake goods, for people who could not otherwise afford them, with no regard for the law. In the eyes of the Shanzhai, they are good for the common man much in the same way as Robin Hood. It has even been said that the arab spring could not have happened without the flood of ultra-cheap devices made by the Shanzhai.

The Structure of Decentralization

The Shanzhai are small, independent operators in an informal economy. They don't do R&D. They don't pay taxes. They don't observe labor laws. They don't do marketing. They take existing things and they iterate. And while the numbers are serious, the variations can sometimes be silly. Case in point, Obama Fried Chicken:


Lyn has studied the Shanzhai in depth and has distilled their ways into 5 rules:

  1. Design nothing from scratch -- Use existing designs as sources for products.
  2. Innovate at small scale -- Iterate on and innovate on process.
  3. Share as much as you can -- Work as openly and transparently as possible with your partners.
  4. Sell it before you make it -- Don't build solutions in search of problems.
  5. Act responsibly in the network -- Assume and maintain trust with your partners.

Competition Makes Strange Bedfellows

Strangely enough, the five principals of the Shanzhai are the bedrock of the Yammer culture as well. These ideas are clearly ingrained there, as Kris was adamant on how staying true to these ideals was "the only way to scale."

Kris described a Yammer culture that was very similar to the Netflix and Good to Great models. One of the most provocative ideas he described was that at Yammer, there are no technical architects and no code reviews. Each and every technical staff member is trusted to design and implement solutions that will scale appropriately. If problems are spotted in an implementation, Yammer culture addresses this by making sure that the developer receives education and training to handle the core knowledge issue. 

Kris also described how the cultures and ways of Yammer have begun to affect Microsoft (e.g., Microsoft employees are beginning to "work out loud" in the social way), but did not mention any examples of the reverse. Kris offered no hint that he was worried about the Yammer culture being subsumed by the big machine and my after session discussions with him revealed a highly constructive and open individual with a deep commitment to his belief model.

Faith Despite the Paradox

I spoke with both Kris and Lyn on the inherent paradoxes in their model and they neither denied them, nor elevated them. Both Kris and Lyn simply allowed them to be. When presented with the obvious conclusion that the five rules lead to a culture of evolutionary innovation that cannot produce revolutionary and holistic products that don't currently exist, they both agreed with me and persisted on. Kris acknowledged the need for central planning for big commitments and held fast to the idea that religious decentralization was the only way to truly scale.

When presented with the idea that their technical talent strategy operates only in a world of talent abundance and falls apart in a world of talent scarcity, Kris again agreed and persisted on, once again agreeing with the observation and repeating the mantra. Going even deeper, we spoke of how the Shanzhai model of no value being placed on intellectual property can only sustain if scarcity in general is overturned (e.g., the pie grows infinitely thus alleviating the need to defend IP) or if the IP conscious companies continue to churn out big advancements.

These paradoxes led both Lyn and I to identify what may be a way forward -- symbiosis rather than parasitic. Lyn was able to identify one innovation from the Shanzhai (multi-sim card smart phones) that bubbled back up to the big players. I hope this pattern can multiply, as neither party can actually stamp the other out of existence and hopefully each will realize that, like the crocodile and the plover bird, it does not have to.