Coverage of Chinese "shanzhai" knockoff phones tends to be dismissive at best, but the NYT, in a fit of earnestness, has done a full-on, iSuppli-style cost analysis of your typical iFauxne. Spoiler: They're extremely profitable!
Inspiring a knockoff is something like a rite of passage for any new handset, and virtually no desirable phones go uncopied. This article is a decent primer on the industry in general, but its material cost breakdown—the likes of which we regularly see for desirable, legitimate handets—is particularly revealing. These knockoff houses feed from the same supply chains as their mainstream counterparts, and a meaningful proportion of their build costs—for basic parts like mics, vibration motors and speakers—are therefore identical.
The major cost savings come from in the most expensive—and generally, important—components. Judged against, say, a G1 (which carries a build cost of $140), a $40 knockoff will have a significantly cheaper screen, baseband, and camera module. Software, design and marketing costs are almost nothing, so the customary 100%-200% markup, which is roughly inline with—if not a bit lower than—the expected markup for no-contract mainstream handsets, is pure profit. The take-home message: these companies aren't just doing this to be funny. [NYT]