Lately, the same low-end Chinese companies that make gray market phones have been eying the fast growing netbook space, whipping up a storm of coverage in the media and blogosphere. They're known as shanzhai (山寨), loosely translated as mountain bandits, and they hack and burn their way into a market with dirt-cheap prices.

when it comes to netbooks, the focus is usually about how they are doing so well in US and European markets, what with consumers looking to save where they can. But in China they’re gaining popularity, too, and for the same reasons that Westerners like them. Netbooks are cheap and handle the basics, an especially good mix for the China market. The cute factor is an added bonus for the ladies, who are the majority buyers in China.

It’s no shocker that the shanzhai are scouting out netbooks – they show an interest in anything low priced, from MP3s and PMPs to low-end phones and picture frames. Usually, they need someone to hand them a fool-proof system design to which they make cosmetic changes. Mediatek is a favorite of these companies for cell phones, and Actions Semiconductor rose to success on the back of cheap MP3s cranked out by shanzhai factories, which are mostly in Shenzhen.

It will be a challenge, however, for the mountain bandits to pillage the netbook market. Their best weapon is low pricing. This isn’t as effective in netbooks, where the point has always been low pricing. This is very unlike other segments shanzhai target, where premiums usually exist until they low-ball the market. Netbooks from Asus, Lenovo and Acer are already cheap (RMB2499-RMB2999), and a few local brands are as low as RMB1900. Click here for a rundown.

The shanzhai will also find it difficult to squeeze out cost because the key components of the system are controlled by Intel and Microsoft. Taiwan’s low-priced CPU maker VIA, as usual, is trying to pick up scraps of CPU market share by pitching itself as the Mediatek of the netbook world, but its efforts usually sputter …虎头蛇尾? Nevertheless, I expect netbook retail pricing in China will be dragged closer to RMB2000 by year end and potentially as low as RMB1500 by mid 2010.

Other factors will also crimp the shanzhai netbook market. With a higher priced, more complicated device like a PC, consumers will be wary of picking up an ultra low-priced model for fear that it won’t last. Dropping RMB500 on a knock-off cell phone is one thing, but RMB1500 on a netbook is another – especially without an after-sales service guarantee.

In the coming months, the major telcos will also release subsidized netbooks with embedded 3G cards to lure new subscribers. Rumor has it that the China Mobile TD-SCDMA netbook will be RMB1000, plus contract, and China Unicom will offer a W-CDMA netbook for RMB2999, including contract. China Telecom also has a deal in the works. This subsidized pricing will make it more difficult for the shanzhai to get a strong foothold in the market. And I doubt the operators will work with the shanzhai because of their dodgy reputations – nor will the shanzhai want to work with operators because of their more rigid requirements.

It’s also important to note that it takes more capital and effort to spin up a netbook factory, compared to one for handsets. Estimates range to as high as 4x the investment. Logistics are also more complex, with the parts list being much more extensive for PCs versus handsets. This will deter the shanzhai, who look for low-hanging fruit.

By some estimates, there are 2000 shanzhai companies egaged in the cell phone market. About 500 of those are rumored to be looking at netbooks. That’s a lot, for sure, but I doubt many will have the appetite to carry through once they realize the effort needed. The key question is will enough punch through to disrupt the market? It’s early days, but the odds are they will have a slight impact – yet nothing near the competitive havoc they have brought to the cell phone market.