Telco regulator MIIT is moving to crackdown on knock-off phones (山寨机) in China, produced mostly by Shenzhen companies and widely available. At the same time, MIIT and the city of Shenzhen will try to encourage these companies to move up the value chain and become true innovators. For the majority, this won’t happen.

The strength of these companies is that they quickly churn out models with very little R&D. They heavily rely on easy to execute system designs by Taiwan’s Mediatek Inc. If MIIT is effective with its crackdown – and that’s not a sure thing – it’s likely that most of these companies will move on to other low hanging fruit. This is only incrementally negative for Mediatek, since most of the business lost from MIIT-targeted firms will probably roll over to other Mediatek clients that target the same market.