In the U.S., the lament goes, we used to know how to make things. In China, there’s a decent chance that’s how you got your computer. In an engaging new book, Little Rice: Smartphones, Xiaomi, and the Chinese Dream in stores this week, internet guru and NYU professor Clay Shirky looks inside China’s weird world of retail, and what it means for companies trying to break into the country’s enormous market. Here, a lightly edited excerpt from Shirky’s latest release—a perfect primer for anyone looking to do business in China.
The Maker Movement
China is the world headquarters of making things. Golan Levin, who created a twenty-first century upgrade of the camera lucida drawing tool using Kickstarter, decided to have his product made here. When I asked him what he’d learned bridging the gap between American maker culture and Chinese manufacturing, he replied, “The hardest thing to understand when talking to Chinese manufacturers is that there is no shelf. They’d ask, ‘What sort of screw do you want here?’ And we’d say, ‘Well, let’s see, what do you have off the shelf?’ And they’d ask again, ‘Well, what do you want to use?’”
Levin said it took them a couple of go-rounds before they realized that there wasn’t any shelf to get things off of, that any given screw was going to be as cheap as any other because none of those screws existed in advance of demand. The producers didn’t own screws, they owned machines for making screws, so you might as well design everything from scratch. He had gone so far up the supply chain there were no more supplies.
We rely on our electronic devices to augment almost every activity we undertake, and yet we’ve all become alienated from the way that technology gets made. Despite the promise of Intel Inside™, few of us have ever seen a chip, motherboard, graphics processing unit, or hard drive. Computers come from stores; none of us build our own computers anymore, and none of us know anyone who does. Mike Daisey’s long monologue about Apple and China, “The Agony and the Ecstasy of Steve Jobs,” was iffy journalism but brilliant storytelling, tracing his realization that people have made every bit of electronics he owns. In 2011, an iPhone was sold in the U.S. with test photos still on it, taken by a worker inside Foxconn, the giant electronics manufacturer in southern China, one of the rare public traces of the human effort that goes into making.
To an American eye, the whole thing is a little nuts, but it works.
In any big Chinese city and most of the medium-sized ones (which is to say any of the hundreds of cities here with a population larger than Seattle’s) there will be a big electronics mall—Cybermart is a common brand, though there are many others. These are multi-story stores, divided up into booths of different sizes, like a trade show, each rented out to a different merchant. To an American eye, the whole thing is a little nuts, but it works, and traveling through one is like taking a core sample of electronics in China, only here you start at the bottom and work your way up.
The economics of retail floor space mean that the showy, high-margin stuff is at street level, and the gritty low-margin goods are at the top. The ground floor of a Cybermart will tend toward the bright, clean, white space of a showroom floor. There will be a few big booths selling premium brands like Samsung, Apple, Sony, and Lenovo. You could be in a Best Buy in Ohio, except for the Chinese signs. This is the least interesting part of the space; the real action is upstairs.
As you go up a floor, you’ll see more merchants in smaller booths. (Chinese electronics retail remains a distinctly small-scale affair, often literally mom and pop, with the kids hanging out in the store after school.) Up here, there will be more off-brands, Acer and Asus for laptops, Oppo and Huawei for phones, as well as flip phones and Nokias on their way to obsolescence. There may be some nominally-banned-but-who-are-we-kidding consoles and games like the Nintendo Wii. There will be lots of accouterments—mice, joysticks, chargers, and cases. There’s usually a soup place up here, for the workers, and maybe a FamilyMart or a 7-Eleven. Every now and again, some new product will come along, and half the booths will try to sell it. Last fall it was laser pointers. This spring it’s USB chargers with embedded blinking LEDs. Unlike the clean well-lit booths that tend to cluster at street level, the upstairs vibe is RadioShack with Chinese characteristics.
Alongside the unfamiliar sight of computers in potentia, there will be an unfamiliar smell, smoky and metallic. That is the smell of solder.
At the back of this floor (or, in bigger ones, on the next floor up) you’ll change environments again, with booths selling something most Americans haven’t seen in two decades: parts. Want to make your own PC? All the fixings are here—chassis, power supply, motherboard, RAM in any pin configuration you’d care to name, enough hard drives to store the world’s vacation photos. (When was the last time you laid eyes on a heat sink? Maybe never? They’re available by the crateful, and so cheap.) Nothing here is branded Dell or Sony; many things are branded Nanya or Western Digital, the companies that make the pieces that make your Dells and Sonys worth owning. China is a place where people still build their own computers, a habit Americans dropped about the time Windows 3.1 shipped. The vibe in this part of the store is more warehouse than retail. There’s little advertising or style—the customers up here know what they want and are shopping on price.
Alongside the unfamiliar sight of computers in potentia, there will be an unfamiliar smell, smoky and metallic. That is the smell of solder, the molten mixture of tin and lead that wires all of your electronics together. The people with the soldering guns are engaged in full-on disassembly, modification, and repair of pretty much anything that has a screen. (Anyone in a city with a large Chinatown can probably find some small-scale version of this.) You’ll see broken screens everywhere in this part of the store, enough shattered glass to redo the façade of every Urban Outfitters in America. You know that message on the underbelly of your electronics? “No user-serviceable parts inside”? They scoff at that message here. This part of the Cybermart, far more than the sales floor or even the booths selling raw parts, exemplifies the Chinese relationship to electronics as a completely ordinary thing you make and modify, free of any trace of mystery.
This is in strong contrast to the new vogue for making things in the U.S., often called the Maker Movement. Maker-y-ness in the U.S. comes as part of a complex of oppositional attitudes toward mainstream culture that is more about social signaling than unvarnished commitment to DIY. The Maker Movement involves ostentatiously DIY products, designed and assembled against a background of nostalgia for the old U.S. manufacturing industry, often produced in small batches for connoisseurs of the handmade, created as a form of conspicuous production.
Having a brand that stands for quality at an acceptable price is a big deal here.
Meanwhile, back in China, nothing in the Maker Movement is taking place against a background of nostalgia, because “the time when this country knew how to make things” is just a synonym for “this morning.” Homemade stuff here is generally homemade because one, it’s cheaper or because two, the thing you need doesn’t exist. The part of Chinese manufacturing culture that says, “Hey, here’s a pleather purse branded YSL” is prevalent but boring. But away from the Fauxlex watches and Svmsmvg phones, brand still means what it did in the U.S. a century ago, a sign of quality in an environment with a lot of lousy versions of everything floating around. A company can do well by making moderately more expensive but considerably more reliable vacuum cleaners, as long as it can communicate that fact to people who need vacuum cleaners. Overt signs of quality have been hard to come by until recently—high-end milk advertises its arrival via a 4-degree-cold chain right there on the carton and the best Chinese appliance firm, originally the Qingdao Refrigerator Company, renamed itself Haier, so that people would associate it with Germany.
Having a brand that stands for quality at an acceptable price is a big deal here, because this country is cheap, cheap the way many Americans were if they grew up in the Great Depression. Last fall, I went by my local Cybermart to get a Mi4, then the hottest Chinese phone since the Mi3. I’d gone there straight from a meeting so I even looked like a businessman instead of a nerd, and I rolled up to a second-floor booth selling Xiaomis and got the attention of the lady behind the counter. I am a bald white guy, I speak pidgin Mandarin with a flat Midwestern accent, and I was in a suit—the only way I’d have looked like an easier mark is if 100 yuan notes were spilling out of my pockets like in cartoons. I announced that I wanted to buy the priciest phone any Chinese company has ever produced. The lady behind the counter looked at me and said, in English, “You don’t buy that phone. Too expensive.” China is cheap like that: Even people paid to take your money are offended if they think something costs too much. Tell me the next time that happens to you at Best Buy.
Thin wallets are the mother of invention; so much design in China is about saving money. The cheaper a phone is, the likelier it is to be dual-SIM, so you can save money network-hopping. Electronics markets are filled with every type of video and audio and network switcher and splitter and converter because people don’t throw the old stuff out, they just find a new place for it to work. This profusion of systems—high tech and low, custom-built and jury-rigged, all side by side, is the normal case here.
I announced that I wanted to buy the priciest phone any Chinese company has ever produced. The lady behind the counter looked at me and said, in English, “You don’t buy that phone. Too expensive.”
This widespread competence in making is part of what made Xiaomi possible. The move into manufacturing the Mi1 came in 2011, in part because of frustration that Xiaomi could only get so much value out of optimizing their software for other people’s hardware, and partly because the geek love that sustained them in their first year was not evenly spread through the world’s population. (When was the last time you replaced the operating system in your phone?) Manufacturing was a huge shift for a firm that had been, up until that point, a software company, including a new round of hiring, since most of the original co-founders had been software and services people. Indeed, Xiaomi was seen as such an unlikely target for releasing hardware that the Chinese rumor mill assumed Xiaomi would partner with an existing hardware firm that wanted to enter the Chinese market, like Motorola or LG, in order to offer a phone pre-loaded with MIUI.
The arrival of the phone was a surprise, and it was greeted with skepticism. As one analyst said at the time, “The market for the device is very narrow since it will only cater to customers in first-tier cities. I think the company is too naive about the cell phone market.” Even people paid to follow the Chinese mobile phone market did not understand how quickly or completely consumer preference had changed. Hundreds of millions of people were in the market for a good enough, cheap enough smartphone.
Unlike software, launching a new hardware brand presents a chicken-and-egg problem—manufacturers don’t want to sell to you if you don’t have customers, in part because every bit of contracted production creates both a risk of not getting paid and a risk that you will have promised a key bit of inventory (screens of a certain size; memory chips of a certain volume) to several small manufacturers when Samsung comes calling. Then there are the costs of dealing with several small companies at once, versus a few large ones. These difficulties are in turn reflected in the cost of hardware. A firm buying a hundred screens, to create test models, will pay something like $35 per screen, but a firm buying a hundred thousand screens will only pay $20. This creates a barrier to entry for new brands; the wholesale vendors of electronic parts have a strong preference for having a few large contracts from a few large firms, versus many small contracts from many small firms.
The population of mobile phone users in China is larger than the combined population of the U.S. and Western Europe. (Not larger than the mobile phone using population, larger than the total population.)
Xiaomi’s response to this problem was to lean on their expertise in online commerce, coupled with the potential size of their initial market. The problem small, new firms face is uncertainty—forecasting demand is a famously hard problem for retail. Because of its experience with Mi Fans, Xiaomi was able to pre-sell phones it had not made yet, pocketing the deposit money to reassure its suppliers, and negotiating for parts with visible demand behind them. Online selling allowed it to buy components as it went along. (The constant upgrading of electronic production means that some components fall in price by 1 to 2 percent a week.) In addition, working online allowed phones to be made in batches, rather than having to have them made continuously. This allowed Xiaomi to make and sell only the phones it could get components for.
All of this allowed Xiaomi to use its original market as a staging area for early growth before becoming a global firm. The population of mobile phone users in China is larger than the combined population of the U.S. and Western Europe. (Not larger than the mobile phone using population, larger than the total population.) Nearly 90 percent of the adult population in China has a mobile phone (the only kind, in many households). The rise of Xiaomi marks another phase of maturity in the Chinese market, from simply trying to escape penury in the 1970s and 1980s; to seeing local markets for cheap goods grow by leaps and bounds, even as the stuff for export was better made and more valuable; to today, when a Chinese firm can make money selling products designed to do well anywhere. Lei Jun seems determined to demonstrate that China is more than cheap factories and knockoffs—that a Chinese brand can even be coveted and adored. That this transition has happened at all, given the parlous state of the country only a generation ago, is little short of a miracle.