I am going to embark on a three part series about Xiaomi. Today, I’ll talk about Xiaomi as a smart phone company. Next, I’ll talk about them as an Internet of Things company. Lastly, I’ll talk about them as an internet services company.
Their Role As a Smart phone Company
Where does Xiaomi fit as a smart phone company? Right now, 95% or more of their volume is in China. It took them five months to sell 1m units in India. Apple still sells more phones in India than Xiaomi in terms of quarterly volume. However, I don’t believe that will be true for long. But, as of the end of 2014, China has been Xiaomi’s primary market. Quite a bit of their strategy and positioning has been focused on China. I detail it in this video analysis. In China, Xiaomi has an app store, an e-commerce store, an e-book store, a video games store, a cloud synchronization and backup service, and more. All of this is regionalized to mainland China.
To take a snapshot with updated data to date, here is Xiaomi’s current quarterly trend line.
You’re probably asking: what happened in Q4? This is where an important point of how Xiaomi is positioned comes out. What happened to them in Q4 was Apple. Apple had its best quarter by a significant margin in China. The demand of iPhone 6 and 6 Plus was extremely strong in China. Understandable since Apple is arguably the most aspirational technology brand in the world.
Here lies the key point which became clear, for me but not everyone, from Xiaomi’s launch of their latest flagship smartphone. Xiaomi is not actually going after Apple’s customer base. Rather, they are setting themselves up to go after those who ASPIRE to buy an iPhone but can’t afford one. Xiaomi’s bet, and I would agree, is this could be a very large audience. This is why they compared the Mi Note to the iPhone 6 Plus. This comparison is designed to make the statement that it’s on par with the iPhone 6 Plus but less expensive. Xiaomi knows they don’t have the aspirational brand Apple does and, while they are building a fan base and a good brand, it is not clear they are trying to build the status symbol like brand Apple has. As I point out in this Insider post, in China everything about a person externally says something about them. Everything from the car they drive, the clothes they wear, the technology they use, etc., says something about them. A Xiaomi phone says, “I’m upwardly mobile”. An iPhone says “I’ve made it.” While there are similar dynamics in western markets, It is exceptionally pronounced in China.
The price of the new Mi Note is $370, which is the one I believe Xiaomi thinks is their mainstream flagship. They also released a Mi Note Pro that costs $532 and is loaded with specs, which the China market likes. This product, while some may think is designed to go after Apple customers, is actually more of a test of their offerings at this price range. I do not have high hopes it will sell in volume in China or any other market.
Comparing Apple to Xiaomi is certainly apt in some areas where there are similarities. But we have to recognize that, while they have similarities in approach, ecosystem, etc., they are targeting different customers. They are, if I can summarize, bringing an Apple-like solution to the middle-low end of the market. They are bringing Apple’s device, software, and services approach to markets Apple does not care about.
All of this leads us to the next question and analysis. Can their positioning go global?
The Biggest Phone Company in the World
Xiaomi’s CEO Lei Jun said publicly, “we want to be the biggest phone company in the world.” I’m not sure I believe Xiaomi is a smart phone company. I’m also not sure Xiaomi believes they are just a smart phone company. However, the Xiaomi team understands the centrality of the smart phone as the primary computer for billions of people. So, whether or not they are ultimately a smart phone company, the smart phone is central to their strategy. This is where we analyze them on the basis of a phone company and ask the question: can they become the biggest phone company in the world?
Honestly, I really struggle with believing they can. Primarily because it goes against the strongest trend wave I’m observing in the market right now, which is what I call “home field advantage.” Xiaomi understands the future is in software and services, not hardware, at least for the market they are going after. I see two fundamental global headwinds against Xiaomi in many markets.
- Local Brands: One of the main points in favor of local brands is local consumer sentiment for local brands. The Chinese are very proud of their local brands. In many cases, supporting a quality local brand like Xiaomi has a great deal of national and cultural pride behind it. We see the same thing in India with Micromax. There are local vendors growing in UK, Russia, Brazil, Indonesia, etc. Not in all cases is local pride a part of the success but there are certainly more than a few pockets where this is taking place. I believe this sentiment exists and it will continue to grow as a trend, assuming the local vendors do not make fatal mistakes in the market.
- Local Services: One of the other reasons local brands are doing well is because they are tightly integrating local services. Local services are driving a great deal of the growing demand in many of these high growth regions. Commerce, media, internet services, etc., are all key parts of local experiences. It is becoming increasingly difficult for foreign brands to identify the key local services and integrate them quickly enough to compete with the brands on the ground in these markets.
The question often comes up as to whether Xiaomi will attempt to enter Western markets like the US and Europe. IP issues are quickly noted, but Xiaomi appears to be taking steps at a component level to take their products international and even to regions where they may have faced IP issues in the past. However, I still think they are a long way, if ever, from coming to the West. These major points play into this opinion but it’s also a matter of how unique the US is when it comes to subsidies. So what if Xiaomi offers an affordable premium product? You can get an iPhone for $199. I’m not sure Xiaomi can offer any product, even for free, that could remotely compete with an iPhone even if that iPhone is $199. Maybe some day, but not in the near future. It is also important to note, Xiaomi doesn’t need to come to the West to be the largest smart phone maker in the world, or to even be successful.
It seems as though, for now, Xiaomi is going to use Google’s services outside of China. Which means price competition will remain a key factor. When you run someone else’s software and services, you are only as good as your lower cost competitor. Fascinatingly, Xiaomi’s greatest competition is the very thing that enabled them to become what they are today, Shenzhen’s manufacturing industry (I’ll dive into why this industry is disruptive in a later post). This industry enables extremely good and very low cost hardware. While Xiaomi may attempt to create lock-in with hardware and services, what is to stop local vendors from using the Shenzhen manufacturing industry to create equally good hardware and tightly integrate their own local software and services? Yes, Xiaomi will try for lock-in via their own software and services but it is very difficult to create globally differentiated and regionally specific services plays at the same time.
Xiaomi would have to fight against these headwinds. They are the exact same ones causing Samsung’s decline. Keep in mind, Samsung has a good, strong brand in many of these markets. Yet, they are running into the above issues themselves. So what does Xiaomi do or offer that Samsung hasn’t or doesn’t in these regions? More importantly what will Xiaomi offer that local vendors can not or are not? We will explore this in part 3 of this series.