Inside the copycat factories that fueled the boom and caused the bust.
Ten days before Christmas, Jerry Feng got the bad news.
His company, Shenzhen Bojulong Display Technology, was wrapping up a terrific 2015. His factory was one of hundreds in China cranking out no-name versions of the two-wheeled devices Western culture has adopted as “hoverboards.” Shenzhen Bojulong produced as many as 2,000 a day, selling them to distributors who resold them online to thrill seekers from Australia to America.
But then Amazon AMZN abruptly pulled most hoverboards from its sites, worldwide, because of safety concerns. By then the battery-driven gadgets had shown a distressing tendency to burst into flames, occasionally burning down owners’ homes in the process. And it wasn’t just Amazon applying pressure: Around the same time, Razor, an American company best known for its two-wheeled scooter, bought licensing rights from the hoverboard’s U.S. patent holder and began cracking down on copycats by suing a big American reseller.
It all spelled trouble for Feng’s factory and its competitors. His company hadn’t licensed any patent—its boards were copycats. Even if it could prove that its boards were safe (Feng says none of his models were implicated in fires or explosions), it could face legal sanctions. Today Shenzhen Bojulong has just 100 employees, having laid off 400 since the double whammy of bad news. Around Shenzhen, since mid-December a cottage industry of more than 1,000 factories that were churning out the boards has shrunk to a couple hundred. “We maybe lost 50% of our revenues after the Amazon announcement,” says Feng, speaking from his shamrock-green factory floor.
Despite its dangerous rep, the hoverboard is as ubiquitous in American culture right now as the Big Wheel once was. It doesn’t actually hover, of course. It’s more like a Segway minus the pole and handlebars, a platform that riders steer with subtle shifts in weight. A well-coordinated hipster can learn to ride one in a couple of minutes. Hoverboards started catching on in the U.S. last May, after Jamie Foxx wheeled one onto The Tonight Show’s set. Initially expensive and hard to buy, they looked every bit the Brookstone oddity. But then Justin Bieber, rapper Wiz Khalifa, and other celebrities released Vines and Instagrams of their hoverboard exploits, fueling a wave of buying that spread from the celeb-obsessed to the gadget-savvy to the average teen. Brands like PhunkeeDuck (Foxx’s choice) popped up on Amazon, while other direct-from-China websites sold $300 unbranded versions. By the end of 2015, 40,000 boards were coming into the U.S. each day. While nobody tracks total sales, manufacturers have shipped more than $2 billion worth of hoverboards over the past year and a half, by Fortune’s estimates.
The fad would have never reached such proportions without companies like Shenzhen Bojulong. China is home to more than 250,000 small manufacturers like Feng’s, according to the country’s National Bureau of Statistics, accounting for about $1.3 trillion in annual output. The nimble operations can switch production lines on a dime, supplying customers worldwide with selfie sticks, pedometers, LCD TVs, and whatever else is trending. And if not all the production is of the highest quality, well, do you really need the best flat-screen TV on your block when a cheaper one will do?
When knockoff manufacturing goes wrong, however, everybody gets egg on his face. Copycats turned hoverboards into one of the fastest global boom-to-bust cycles in modern business. The first reports of boards’ combusting because of shoddy lithium-ion batteries hit social media late last fall. Since Dec. 1, the U.S. Consumer Product Safety Commission (CPSC) has tallied 52 hoverboard fires in 24 states causing $2 million worth of property damage; there have been fires in Europe and Australia too. All the major airlines have banned hoverboards from flights. After Amazon pulled most boards from its site before the holidays, other retailers followed suit—though only after many shoppers had already put one under the tree. Patent-infringement lawsuits among the pop-up brands selling them, meanwhile, have just added to the reputational smog surrounding the product.
The real hammer came down in February, when the CPSC said that all hoverboards would have to pass a new set of safety requirements, and could face recalls or seizures if they didn’t. By then Amazon had removed all the boards from its website, as did Target and Toys R Us.
And yet, despite the news, some manufacturers are still aiming to cash in on the craze. Elsewhere in China, slightly higher on the manufacturing food chain than Feng, another company is still building them. It even plans to shift production onto American soil, just as soon as it receives its new safety certification this month.
It’s got reason to be optimistic: It created the hoverboard hype, after all.
The offices of Hangzhou Chic Intelligent Technology, a.k.a. Chic Robotics, are 40 minutes outside downtown Hangzhou, some 800 miles from Feng’s factory, in a yellow, pastel-painted office park coated with construction dust. It’s a division of Innoworks, a partly state-owned company that matches academics with businesses to help China meet its goal of accumulating patents. Last year Chic recorded about $30 million in sales—80% of it from hoverboards.
Until recently Chic was best known for turning out imitation Segways. But its toy of choice changed, thanks in part to a 34-year-old American named John Soibatian. Soibatian, a former scout for startups for Verizon VZ , had been in talks with Chic about exporting other products to the U.S. But on a 2014 trip to Hangzhou, he saw Chic’s hoverboard prototype for the first time. He recognized something special, a toy fusing Silicon Valley geekery with skateboarder cool. He told Chic CEO Ying Jiawei that he thought the new invention could sell well—very well—in America. “My idea was to have this as the hottest-selling item of 2015,” Soibatian says.
Chic moved fast, submitting design patents in China, Europe, and the U.S. and unveiling its hoverboard to thousands of potential customers at China’s biggest trade expo, the Canton Fair. Rapturous responses followed, and Chic set aside factory space to build boards especially for Soibatian’s U.S.-based company, IO Hawk, which sold them for up to $1,800 each. Chic also started making boards that it sold for less under its own brand, S1.
Demand quickly grew in China (where hoverboards are known as pinghengche, or “balancing wheels”) and abroad, and Chic couldn’t produce enough. It soon licensed its design to 30 other Chinese factories. The factories agreed to build boards according to Chic’s safety and quality standards; in return they got detailed blueprints.
The expansion plan, however, poured fuel on an already raging copycat fire. Unlicensed manufacturers had begun copying Chic’s board immediately after it appeared at the Canton trade show. By the summer of 2015, more than a thousand factories—up to 10,000, by some estimates—were making boards for distributors who sold them abroad online. Factories like Feng’s that had been making LED screens or iPhone cases switched to building hoverboards in a matter of days. And many factories, licensed and otherwise, cut corners on safety standards, often by subbing in cheaper, potentially flammable batteries. “We have licensed to 30 factories, but only a few follow our rules,” Ying laments.
By late last year Chic had filed some 100 lawsuits against copycats in China. But the damage was done: Chic’s efforts to prop up the industry had emboldened the very factories that were ripping it off.
Shane Chen argues that it wasn’t Chic’s board to begin with.
Chen grew up in China and moved to the U.S. at 30; he’s now a serial inventor who lives and works outside Portland, Ore. He’s the creator of a vegetable strainer that has sold on QVC QVCA , a single-person water-levitating hydrofoil, and a gyroscope-powered unicycle without a seat called the Solowheel. Chen also invented a hoverboard, one he patented in the U.S. in 2014 and started selling under the brand name Hovertrax.
The Solowheel sold modestly in the U.S., but it appeared everywhere in China after dozens of companies copied Chen’s idea. Chen filed several lawsuits and learned a lesson about legal reality in the country. After he sued a company that had government ties, the judge in the case advised Chen over the phone to settle. “Even if you win the case, they will set up new a business and come back,” Chen says the judge told him. “You never can enforce the law, even if you win.” (Chen eventually took a settlement.)
Chen relayed this story to Chic’s CEO Ying in person last September, when he visited Hangzhou. By then, Chen had already sued Chic’s partner, IO Hawk, in the U.S. for patent infringement. Chen thinks that Chic’s designers watched a video Chen had made for a Kickstarter campaign for the Hovertrax and copied his concept. “That’s my guess,” he says. “They’ve been knocking off Segways for many years.”
Still, Chen went to China ready to make a deal. He says Chic offered to buy his patent as a backup to its own and promised to pay Chen 5% royalties. “We were laughing” about the copycat epidemic, Chen says, adding that Chic executives “felt very angry that everyone copied their [design], not mine.” But Chen says Chic asked for too much (he doesn’t elaborate), and talks broke down.
Soibatian of IO Hawk says Chen’s patent isn’t enforceable. He may be right: The patent is light on specifics about the interior functions of the hoverboard, says Benjamin Bai, an intellectual-property lawyer and a partner at Allen Overy in Shanghai who reviewed the patent for Fortune. If the patent is too narrowly constructed, whether Chic borrowed Chen’s idea may be a moot point. (The suit is set to go to trial in April 2017.)
Chic, which isn’t named in Chen’s suit, says it has been developing a hoverboard since at least 2012. In his Hangzhou office, Ying brandishes originals of Chic’s patents in China, the U.S., Canada, Japan, Britain, Russia, and the European Union. “His project is very similar to Segway’s,” Ying says of Chen. “That’s why Segway has a lawsuit against Shane Chen.” (Indeed, the Chinese company Ninebot, which now owns the Segway brand, has released its own hoverboard, and it sued Chen’s company last fall. Chen replies, “Our lawyers don’t think we infringe any of the Segway patents.”)
Chic is one of the few hoverboard players not currently tangled in a U.S. lawsuit. But it’s keeping an eye on Shane Chen’s new ally, Razor. In November, Razor bought exclusive rights to use Chen’s patent for its hoverboards; almost immediately Razor sued Swagway, one of the bigger U.S. importers of Chinese boards. Razor has claimed victories in past patent battles, having won injunctions and restraining orders against American companies importing Chinese copies of its eponymous scooter. “Razor intends to enforce its patent rights and seek to stop the flood of knockoffs,” a company spokesperson says. (Swagway says it doesn’t believe that Chen’s patent is valid.)
Since December, U.S. Customs officers in Los Angeles and elsewhere have been seizing incoming Chinese hoverboards, citing both safety and intellectual-property issues. But February 18 is the day the weakest copycats may remember as the end of the line. That’s when the Consumer Product Safety Commission told hoverboard makers and sellers that they’d have to comply with brand new guidelines drafted by Chicago-based Underwriters Laboratories. If they don’t pass UL’s test, their boards are subject to the CPSC’s confiscation or recalls. Since the rules are new, no company’s boards have passed them. Shane Chen confirmed to Fortune that Razor has submitted their board for testing; Chic says it plans to submit for the test.
For Chic’s Ying, events since December have been vindication for his side in the copycat wars. None of Chic’s boards have been linked to fires. (Neither have Chen’s.) Amazon still wasn’t selling Chic’s hoverboards when the CPSC made its announcement—Ying says Amazon’s lawyers haven’t told him why, and the company declined to comment to Fortune. But Chic’s own boards and IO Hawk’s were still getting through customs at the time, Ying says, because they have other safety certifications and patents. And the new round of certifications could weed out even more of their competitors.
Next up for Chic this year: U.S. expansion, though its plans still sound embryonic. “What do you think of the brand name ‘Chic’ in America?” Chic’s overseas director, Simon Wang, asks a reporter. “Not very good, right? Maybe something else? ‘Powered by Chic’?” Chic is searching for factory facilities in Houston or Denver, where former General Motors GM plants offer attractive leases. A legal showdown with Chen and Razor may loom, but for now Chic appears unconcerned. “For office locations, what’s better, the West Coast or East Coast?” Wang asks.
For Feng, the manufacturer in Shenzhen, Razor’s entrance into the fray was one headache too many. “It is hard to export to the U.S. now,” he says. The fact that Chic’s boards have a decent chance of surviving on the U.S. market is ironic: If Feng’s company had licensed designs from Chic before controversy erupted—something that would have cost just 10,000 renminbi ($1,500) in royalties, and was encouraged by the local Shenzhen government—it could still be selling hoverboards today.
Instead, Feng has abandoned the fad to chase a more reliable opportunity. Shenzhen Bojulong is now a licensed contract manufacturer of an American company’s drones.
A version of this article appears in the March 1, 2016 issue of Fortune with the headline “Boom! Goes the Hoverboard Fad.”