This picture taken on January 7, 2015 shows a member of staff waiting for customers at a Xiaomi shop in Beijing. WANG ZHAO/AFP/Getty Images
On the farthest fringes of Shenzhen, in the Laokeng Industrial Zone of Pingshan New Town, sits the speckled pink-walled factory of Gaoyu Electronics, a relatively small manufacturer of cooling technologies for electronic devices. This company doesn’t stand out from many other similar manufacturers in Shenzhen’s industrial belt, and is a good example of the transition which many are now going through.
Gaoyu Electronics got its start 15 years ago as a small producer of cooling fans for the local market. “In the beginning we just produced DC fans and heat sinks for Huaqiangbei, then they would assemble the computers together.” Aaron Yu, the company’s sales manager, told me the story of his employer's humble origins.
However, over the years Gaoyu Electronics grew, and eventually began taking on contracts for the likes of Cisco, Google , and even Foxconn. As the company continued growing it began looking beyond merely producing products for other companies, and in 2014 Gaoyu Electronics unveiled its own brand: Ecotherm.
Ecotherm is the label that Gaoyu Electronics now markets some of its most innovative products under. These include a DC fan that can keep running even after a device is powered off and various types of smart technologies. Of the company’s 200 workers, 20 are engineers involved in research and development.
Producers in a variety of industries in China have been gradually increasing the complexity and earning potential of their operations over the past 10 or 20 years. Many started out as contract or original equipment manufacturers (OEM), producing already designed products or components for the products of other companies. Then, as many manufacturers began developing more sophistication, they began transitioning to original design manufacturers (ODM) -- which means they started handling many aspects of the total manufacturing and design process, often making complete products which other companies would merely stamp their own brand names on prior to retail sale.
“It has happened in all the industries,” David Li, the founder of the Shenzhen Open Innovation Lab, a prominent Shenzhen-based makerspace, said. “The factories have been transitioning from OEM to ODM for a very long time, especially in the past ten years. It happened in the textile industry, it happened in shoes, it happened in fashion, and it has been coming to electronics.”
Then the European crisis hit, and international demand for Chinese products began decreasing, Li explained. This caused a knee-jerk reaction that rattled many of China’s manufacturers, who started finding themselves with a lack of contracts to produce their designs and gluts of unsold inventory. One solution was to start slapping their own names on their own products and unloading them on the domestic market themselves.
This was the beginning of a movement that would soon permeate through all strata of China’s manufacturing empire, from copycat factories who were once solely bent on getting their handbags to look as much like Gucci as possible to giant high-tech companies who were shipping tens of millions of no-name phones to markets all around the world.
“Traditional OEM manufacturers were seeing their margins increasingly squeezed as more manufacturers came on board and demand slowed globally,” explained Mark Tanner, the director of China Skinny, a Shanghai-based market research firm. “They are finding inspiration from the pin-up brands such as Xiaomi, Haier, and Lenovo , who are operating on much stronger margins and much more to their terms rather than taking a whipping as OEMs.”
It was a strategy that not only proved to be an adequate contingency plan in a pinch but a new business model that could be leveraged for competitive success both in China and abroad.
“The [profit] margin of self-branded products is like 10X over stuff that you sell through a channel in the United States for a Chinese factory,” said Bunnie Huang, a high-tech innovator who has worked on projects like the Novena, the world’s first open source laptop. “So at the end of the day there is a lot of value in the brand.”
This fact is evident from even a casual walk through the cellphone markets of Huaqiangbei, the commercial epicenter of Shenzhen’s electronics industry. Signs of budding new brands like Laimi, Skyhan, Umi, and NO.1 are everywhere, and each is pushing their newest feature phone, vying to become the next Huawei.
China’s central government has also been very much at the helm of this transition, pushing its manufacturers to be more innovative and to start their own brands. With strategies that include top-level officials talking up innovation via public speeches, pronoucements, and prominent visits to factories and makerspaces, creating preferential economic policies for domestic companies, using state media to shift public sentiment away from foreign brands, and, especially, providing large amounts of funding for innovative initiatives.
“There are many incentives for brands who are in the categories they [the central government] are backing, which will bring high value jobs and build the China Inc. brand globally,” Tanner said. “Many in Beijing aren't happy about purchases of Japanese toilet seats and rice cookers, with the 'Supply-Side Reform' buzzword in the capital hoping to address this.”
Two stores for domestic Chinese brands, Oppo and Xiaomi, flanking an authorized Apple re-seller in Huaqiangbei, Shenzhen.
Li Na, a fashion designer by trade who is currently working for the Shenzhen Institute of Industrial Design (SIDA), has seen this transition directly. She told me that she was once approached by a large contract manufacturer and offered a position to design their clothing. At first she was confused, as this factory was making millions each year simply producing designs for big Western brands. “We have to change our model,” the factory explained.
“Now, the local community, the local government was saying no more of this, you need to have your own brand,” Li Na said. “You can't just use the designs that came from abroad, from Zara or from H&M, and just copy them and sell them for a cheaper price here. You can't do that anymore, you have to set up a new brand.”
While there are currently not any policies requiring factories to start their own brands, the influence of the government is particularly strong. “There is no law, but they are pushing,” Li Na said. “And when the government pushes, trust me, the industry will listen.”
There are now many models for Ecotherm’s ambitions. Huawei is also the world’s largest telecom infrastructure provider, Lenovo is the world’s top selling laptop brand, Haier is one of the world’s most dynamic producers of home appliances, and seven of the top ten smartphone brands in the world are Chinese.
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