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Market Insight

[Display Dynamics] Is Xiaomi ready for going global?

September 22, 2014


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Key findings: 

• Xiaomi's competitiveness lies in its software, allowing it to supply high-end products at relatively cheap prices. 

• Its image of the “Apple of China” is believed to be a highly calculated marketing strategy.

• When advancing into developed markets, it may not be free from having the images of an Apple replica and patent disputes.

• The future of Xiaomi's growth depends on whether it can obtain competitive contents.

 

Xiaomi Corp. made headlines in early August after it took the crown from Samsung Electronics Co. in sales of smartphones in China in the second quarter of 2014. The result might vary depending on estimates calculated in different ways, but it came as a large shock that this only four-year old Chinese company is threatening Samsung Electronics, which has been the largest smartphone seller in the Chinese market for years where it successfully beat rival Apple Inc. 

But it was not the first time that Xiaomi drew attention. The company has been under the spotlight for its fast growth, along with other Chinese firms including Huawei Technologies Co., ZTE Corp., and Lenovo Group Ltd. Established in 2010, Xiaomi has been rapidly growing, launching its first smartphone Mi1 in 2011. In 2013, it reported that its smartphone shipments reached 18.7 million units. In early 2014, the company announced it aimed to deliver 40 million units this year, doubling from last year. Some viewed the target as too aggressive. But its shipments in the first half already exceeded last year's shipments of 18.7 million units, so it recently revised up its shipment target for this year to 60 million units. 

Xiaomi reported sales of 550 million yuan (about $89.49 million) in 2011, 12.65 billion yuan (about $2.06 billion) in 2012 and 31.60 billion yuan (about $5.14 billion) in 2013. It is targeting sales of 50 billion yuan (about $8.14 billion) in 2014 and 100 billion yuan (about $16.27 billion) in 2015. It is gradually diversifying into other businesses, recently launching UHD TVs that are priced merely one fourth of other companies' products and very cheap fitness bands, priced at a $10 range. 

 

Strength is in software, allowing supply of high-end products at relatively cheap prices

Xiaomi’s biggest competitiveness is that it sells hardware with better features than its rivals for less than half the price. Although the Beijing-based company doesn't make special hardware that can lead the smartphone industry, it is offering its smartphones with specifications that are similar to ones of global makers' flagship models at nearly half their prices. Moreover, it is also showing competitiveness not only in its smartphones with high-end features, but also in mid-range to low-end models equipped with performance that is relatively superior to other companies' models with similar specifications. 

Xiaomi’s ability to supply smartphones with such high-end features at half the price of its rivals can be seen as a strategy similar to Amazon. Xiaomi co-founder Lin Bin once explained that its hardware is only a platform to implement services and it has no plan to earn money from hardware. He also said that the company expects users of its hardware to use its mobile applications and other contents, and such services are expected to generate profits. Such Xiaomi’s strategy is almost the same as Amazon selling the Kindle tablets at low prices to make it a platform to consume its e-books or video contents. But compared to Amazon, which raked in huge profits from its contents, Xiaomi has been making only small profits from selling its accessories, games, and applications.
Moreover, Xiaomi doesn’t spend money in advertising like its rivals. It cuts production costs through online distribution. Most of its smartphones are sold in online stores and mobile messengers, rather than offline, enabling the company to minimize costs in maintaining and managing offline stores. In 2013, Xiaomi sold about 80% of its products via online stores, and it is known to have spent costs one 50th of others per smartphone by trimming costs in inventories and distribution.

Lastly, Xiaomi can provide mid-range to low-end models with good features because of its competitiveness in software. From the beginning, Xiaomi wasn’t a company that had an edge in manufacturing hardware. It was founded by Lei Jun with engineers from Microsoft Corp. and Google Inc., and it launched its first smartphone Mi1 in 2011. But even before that, it rolled out Android-based operating system MIUI in 2010. MIUI by Xiaomi is a skinned version of Android, so it doesn’t support Google play store (users can separately install this). But as it provides its own app market, users have no problem in using most of the apps. Such software and services enabled the company to offer devices with superior performance to its rivals’ products and create a system in which it can update services every week, reflecting customers’ views posted on its own blog.  

 

Xiomi is an outstanding marketing firm

There is no reason to underestimate Xiomi’s competitiveness in manufacturing hardware and software, but it is also believed to be a superb marketing firm.

For example, Xiaomi frequently uses the following promotional phrase: “15,000 units of Xiaomi Mi3 smartphones are sold out in just two seconds in India!” This feels like completely different from the quarterly sales or annual sales figures hardware companies generally use when releasing their earnings. Surely, such a selling method attributes to its unique distribution system that only uses online channels while rejecting offline sales that require high costs. But it leaves an impression similar to buying limited editions of products. Consumers who buy smartphones in such an atmosphere can have psychological satisfaction as if they are the chosen ones. They can also get attached to the products and have a positive image on Xiaomi brand.  

Its own OS MIUI is also seen as a medium that raises customers’ loyalty. As mentioned earlier, Xiaomi carefully listens to users’ views posted on its blog and reflect them weekly to improve and update. It informs users if their opinions have been reflected, inducing more active participation from them. Such a system is effective in inducing consumers to more actively use its OS and enable its users to feel they are steadily being managed by the company.  

In addition, Xiaomi had initially made headlines not only with positive news but also with negative ones, and some of such issues are believed to be made intentionally and continuously by the company to use them in marketing. When announcing its first smartphone Mi1 in 2011, Xiaomi’s Chief Executive Lei Jun wore a black T-shirt and jeans just like Steve Jobs. Also, the design of the Mi1 reminded people of the iPhone, hence gaining a nickname “Apple of China.” Such a series of moves by Xiaomi, then a new comer, worked as a chance to make headlines, and they definitely were not believed to be a coincidence or its intention to be a laughing stock, but a marketing strategy that was planned from the beginning. 

 

Challenges of going global

Since Xiaomi launched its first smartphone in 2011, it has been showing an explosive growth in the Great China Region market and recently appears to be planning to advance into overseas markets. However, it is moving rather cautiously. Given the boldness it has shown in the past three years, it may be reasonable for the company to advance into typical developed markets, such as North America or Europe. However, Xiaomi chose Italy, which has a relatively small presence in Europe. Moreover, in Asia, it has been focusing on India and countries in Southeast Asia rather than South Korea or Japan. 

It seems to be that its image of the “Apple of China,” which has been helping its growth, is working as a double-edged sword. There have been a lot of criticisms in the past that Xiaomi has imitated Apple, but Apple itself has been keeping quiet on this. A vast majority sees that Apple is cautious to hold Chinese firm Xiaomi in check, being mindful of the Chinese government while it is trying to boost its presence in the Chinese smartphone market. But with even the shape of MIUI’s icon quite similar to that of Apple, Apple will no longer stay mum if Xiaomi advances into North America, where Apple is based at.

Setting aside the software part where its original strength lies, Xiaomi, which has grown significantly in the short three years, won’t likely avoid patent lawsuits from Samsung Electronics and Apple in hardware manufacturing.  

 

Can it be China’s Amazon?

Xiaomi’s achievements have indicated that its goal is to become the Chinese version of Amazon, not the just Apple of China. But before making Kindle tablets, Amazon already owned a vast amount of contents. It was the world’s largest book store and e-commerce company. After taking this into considerations, it is likely to be tough for Xiaomi to meet such a goal.

This is because e-commerce giant Alibaba, which surpasses Amazon in sales, already exists in China. Compared to them, it is true that the amount of contents Xiaomi owns looks relatively insufficient. Moreover, its contents—applications, accessories, and other services—related to sales make up of merely 3% of its total sales. 

Despite this, Xiaomi’s growth so far has been phenomenal and its business model to enter the smartphone market seen as already saturated has also shocked others in the market. If Xiaomi continues to execute the same things, it can evolve into a genuine global firm. If not, it will remain as a local firm that once made headlines. It will be worth to keep an eye on what strategies it will take for the next few years to boost its contents and advance further to achieve its goal. 

 

 

 

 

 

 

Geography
China
Organization
Xiaomi
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