"Shanzhaiji"—Chinese handsets produced by unauthorized or small-scale domestic manufacturers—now account for 25 percent of China's handset market. The export market to places such as Africa is even bigger than the domestic market. Since my last blog post on Shanzhaiji, I have been looking into the revenue model for these handsets. How are these handset makers able to offer such advanced functionality, but still compete with name brand phones on price? What types of "value-added services" do these companies offer?

The answers even surprised me—these Shanzhaiji makers have come up with some very creative ways to sell and profit from their handsets.

Shanzhaiji cost control measures:

1. The current development of cell-phone chip modules make designing a new phone similar to a jigsaw puzzle. Many independent design houses (IDH), mostly from Hong Kong or Taiwan, can design a new phone in one month for RMB 10,000 to RMB 30,000 RMB. These guys can churn out copies of the newest phone designs with amazing speed.
2. The low price of hardware: Due to the specialization of manufacturing, keyboards, chips, and screens are widely available and cheap—individual parts can be had for as low as RMB 3. Lower-quality components are even cheaper and hard to identify as substandard.
3. The low cost of assembly: There are thousands of small electronics factories scattered throughout China that can easily switch to making cell phones. The production quality may not be at the level of Motorola, but they are more than capable of assembling a low-end cell phone.
4. The low cost of sales and distribution: Shanzhaiji obviously do not spend the time or money getting licenses for the phones. They do not have their own stores, sales staff or logistics networks; and they don't do promotions. They do, however, have very localized sales channels that get them into the stores and small shops in towns and villages.

These measures allow Shanzhaiji to keep their costs more than 30 percent lower than those of a brand name cell phone maker.

Next, how do Shanzhaiji attract buyers, and what interesting revenue models have they come up with?

1. Pre-installed wireless value-added services, such as monthly downloads of the newest pop songs (which the cell phone company themselves can download for free online), for which the user is charged without his knowledge. Many of the target customers have never touched a computer, but with his Shanzhaiji he can impress his friends with the newest pop songs blaring from his eight-speaker phone! Sometimes, phones will include subscription services that a typical low-end user has little use for, such as daily stock updates sent by SMS.
2. Other preinstalled content give the phones "added value" and even let Shanzhaiji makers sell their phones for a premium to name brands. For example, a "Nokla" phone may cost RMB 50 more than a similar Nokia. Why? The salesman will show you that the Nokla comes with a free set of photos from the Edison Chen scandal! For a hard laborer who has not had time to dig up the photos online, this is a strong selling point. Customers are more than willing to pay an extra RMB 50 for this extra, especially since it is from a "grand brand" such as Nokla.