Recently one of my colleagues excitedly purchased a GPS unit with no manufacturer's markings from the online auction site, eBay. This particular device, with a price tag of under $100, interested him because it had the characteristics of "Shan Zhai" manufacturing. "Shan Zhai" is a Chinese term referring to businesses based on cloned or pirated products.

Using MediaTek parts, Shan Zhai OEMs are capturing the Chinese device market by giving customers low-cost and innovative products.

As you may be aware, we at UBM TechInsights became quite the expert on clones (www.eetimes.com/showArticle.jhtml ?articleID=201803431) back when we were still called Semiconductor Insights. Our analysts looked at numerous Shan Zhai iPhone clones and were amazed at how quickly these companies were able to replicate the design of Apple's flagship phone. Although Shan Zhai iPhones didn't quite have the same functionality of the real iPhone, the phones were very functional. What we thought then was that the Shan Zhai business was to be a "nuisance industry"-one that existed in the recesses of the consumer electronics market, but not one to be taken seriously as a threat to the major players. We underestimated the impact.

Fast forward three years and the Shan Zhai industry has grown to unprecedented levels in China, mainly in direct correlation with the rise of the Chinese middle class. Some of these companies, unfortunately, operate on the hairy edge of copyright infringement and take advantage of China's still-evolving but still-not-as-stringent (compared with North America or Europe's) IP laws. The enforcement of patent legislation remains a key priority for the Chinese government, but certain Shan Zhai companies have been able to take advantage of the inability of the Chinese court system to deal with complicated technological and intellectual property issues. As a result, there are still products that are blatant forgeries, (anyone for a "Samsing" Wave or a "Pahnosonic" plasma TV?). The positive, however, is that to most Chinese residents, "Shan Zhai" refers now to the domestically created products that cater to their market and at a price significantly cheaper than Japanese, European or North American competitors.

As the industry has grown, it has evolved from simply one that replicates the ideas of more popular brands to one that is taking advantage of the innovative nature of Chinese culture and using that innovation to establish a competitive advantage over foreign companies. The Shan Zhai electronics industry, in particular, has grown from a focus on this domestic market, catering to the large population of China that wants to keep up on the latest electronic trends, and developing a product-introduction cycle that is built around speedy time-to-market and a very low bill-of-materials cost.

It is that last trait, the need for quick product introduction and a low-cost product on introduction, where domestic Chinese semiconductor manufacturers have been able to establish themselves. Considering the vast size of the market that is China and its population of over 1.3 billion people, it is a virtually untapped reservoir of potential sales opportunities. By partnering with the Shan Zhai companies who wish to evolve from simply replicating popular company's products to those who wish to innovate on their own, certain manufacturers have been able to establish themselves as market leaders in China and seemingly stay under the global radar.

A perfect example of this would be the rise of the Chinese cellular manufacturer Tianyu. Tianyu initially began as a clone manufacturer, making cheaper facsimiles of popular Samsung and Nokia models and targeting low-end mobile users in rural and poorer towns and cities. These areas, typically ignored by the large-scale manufacturers like Nokia and Motorola, provided an uncontested market for Tianyu to develop low-cost clones. As sales of these clones drove their business, Tianyu began reinvesting their gains back into research and development. However, it was a partnership with Taiwanese-chip manufacturer MediaTek that allowed Tianyu to cross over from clone manufacturer to mobile innovator. MediaTek adopted a model of developing simple, all-in-one cell phone chip solutions that would reduce the time-to-market and increase the ease of design of the primary mobile operations, allowing companies like Tianyu to focus on developing popular features for its local consumer base. Through this model, the MediaTek brand has become synonymous with Chinese electronics, and they have helped Chinese developers close the gap with international brands. In just the mobile industry alone, MediaTek has a 90 percent share of domestic Chinese phones-and domestic brands account for 30.5 percent of all mobile sales in China-a very impressive number considering the handset industry in China accounts for $1.2 billion.

With 60 percent of their total revenue coming from mobile chip sets and 95 percent of those orders coming from Chinese customers, you can understand why MediaTek is focused on harvesting business in China. This brings us back to our interest in the unnamed GPS unit that came across my desk. When I turned the device on, I was greeted not with Chinese characters representing a little-known manufacturer on the 5-inch diagonal screen, but the MediaTek logo. Seeing the MediaTek logo brought me to pause and made me wonder if MediaTek was now into the business of providing a full-scale GPS solution to Chinese manufacturers-and by proxy, establishing their brand in the very lucrative GPS consumer market of China. There was only one way to be certain and that was to take the GPS unit apart. To do this, I called in the experts, the technical analysts at UBM TechInsights to take apart this unit and verify what we were suspecting.