Understanding Xiaomi Part 1: As a Smart phone Company

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.

Screen Shot 2015-01-15 at 3.01.56 PM

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.

  1. 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.
  2. 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.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

14 thoughts on “Understanding Xiaomi Part 1: As a Smart phone Company”

  1. I don’t think Samsung’s branding is as strong as posited. They have amazing presence, but that brand lacks the fervor and devotion necessarily to build an ecosystem. Samsung tried and failed to turn their brand into an identity, and I would argue that weakness comes from their weakness in software, UX, and integration.

    1. I agree about the ecosystem point, but there is more to unpack there than just brand. They get very high net promoter scores. Their brand has a high degree of consumer mindshare and sentiment. But what is interesting is how they started from the low-end and really struggled to create a premium brand. Hard to become truly premium when you start at the bottom.

      This is what makes Xiaomi interesting. They started low-ish end but aren’t trying to go to luxury premium high-end. They seem to want to own the middle to low-end. So the brand parts of them are different than Samsung. This one angle is why I think it is possible things play out for Xiaomi different than they did for Samsung.

      1. I think another interesting point for Xiaomi is that the sequence of their execution is different from Samsung’s. They’re trying to build their ecosystem in parallel with their brand, whereas Samsung only tried to build an ecosystem after their brand had been established.

      2. I don’t know how the Lexus brand managed to become a successful luxury brand in the US, but I’m sure that would be something to study for Samsung to study.

        In Japan, I think the general sentiment towards Lexus is a high-end Toyota. It isn’t bad, but hardly a threat to Mercedes or BMW. That’s why I don’t have much perspective on this. On the other hand, I think the relative failure of Lexus in Japan could be a cautionary tale for Xiaomi in that it might suggest becoming a luxury brand in your home country is actually more difficult than doing it abroad.

      3. Xiaomi is trying to go the luxury(or at least premium) path , but in weak way , by creating expensive phones. But i don’t see any of the marketing(and operations) that usually comes with premium products, aimed at creating psychological benefits for the consumer(i.e. feeling special, unique, better or some other self-image benefits ). It’s still expensive though so it might be used as a status symbol, so it’s partly premium.

        And it’s hard to imagine xiaomi adding such marketing/operations expenses because it’s totally against it’s lean business model.

        As for samsung’s lack of sucsess as a premium brand – at the first years of it’s existence , android was far from a premium experience – and samsung didn’t really control any of that – so they couldn’t compete with the iphone. At the point where android have become a high quality experience it was already probably too late.

  2. Xiaomi is a shameless copycat. Writing about their “business model” is sadly legitimizing it. If it were in the journalism business, your three part series about Xiaomi would have a few edits and be given away.

    Lei Jun, CEO of Xiaomi, who before he started his Bolex company, was quoted “We’re all just waiting for Steve Jobs to kick the bucket.”

    I wouldn’t drop a nickel for anything Xiaomi makes.

    Not enough criticism is leveled at its unscrupulous business practices.

    1. In the same industry, business models are always similar. Could you say Target is copying Wal-mart? Or that T-Mobil is copying AT&T? If copying a business model is made illegal, every industry would be a monopoly.

      Techpinion will most likely expand into the other service & product offering Xiaomi has that makes it unique in the next two parts. You should not dismiss a company as a copycat so quickly.

      Steve Job once said that “great artists steal.” I’m not implying Xiaomi stole, but I agree that they have adopted strategies that made Apple successful. However, they are expanding on these and have added their own mark in what will be the biggest and probably most demanding smartphone market in the world. To simply dismiss them as a copycat and consider them irrelevant is a mistake.

      Xiaomi is a promising company that has succeeded in their home market and will perhaps succeed abroad. We’ll just have to wait and see…

    2. We have to understand all of this in its context. I’ve been reading a great book called The End of Copycat China, and it is very insightful as to why Chinese companies have copied today (easy money) and why they will not be able to keep copying and have to start innovating if they want to grow and get bigger.

      I’ve played with a number of recent Xiaomi phones and they are getting much more independent with their design and software. They still certainly borrow a lot from Apple but I’m seeing some things they are doing on their own. This is essential for them to be a global player. But as I point out, even that isn’t a slam dunk.

    3. One perspective that I think we definitely need to have is that copying is not always a bad thing. Copying is how we learn as babies growing up. Copying is how we learn to play sports. To my knowledge, copying is the only proven formula which an industrially backward country can apply to grow and eventually rub shoulders with the economic powers of the world.

      Japan has done it, Taiwan has done it, South Korea has done it. China is simply next in line (although the size of the country, the fact that Japan and Korea’s history can serve as a guide, and the rapidly changing tech environment causes some truly crazy things to happen). Although I don’t know too much about US history, it seems likely that even the USA did it a century ago according to this account of Charles Dickens’ trip to the USA in 1842. Dickens does not mention direct copying, but given the very low consideration to intellectual property, it is reasonable to assume that copying was rampant. By all accounts, it looks like even the USA was just as shameless as China is now, once upon a time.

      http://www.bbc.com/news/magazine-17017791

      To give you some additional perspective, look at the photo on this website of an old Canon camera from the 1930s. Try to tell the difference between the Leica cameras of this time. Consider how much Canon has grown up since then.

      Canon
      http://web.canon.jp/Camera-muse/history/canon_story/1933_1936/1933_1936.html

      Leica
      http://en.wikipedia.org/wiki/Leica_III

  3. Doing the analogy thing, isn’t Xiaomi to smartphones what Dell was to PCs in their heyday ?
    The product itself is good (specs, design, build), but not, erm… “magically” so. The services are at par too. What really differentiates the product is price and underlying logistics/distribution and cost structure. Compared w/ Dell, we do lose the BTO/customization part, but for some reason, smartphones haven’t gone that way (yet ?).

    Is there need for a more complicated explanation ? In a commoditized market, once you’ve established your products are good, lowest price wins. That does require a lot of work (finding the right product specs, keeping costs low), but I think this strategy is more straightforward than trying to spec or brand-image your way out of the commodity part of the market, especially when everyone else is trying to do just that (and against a good incumbent or two), leaving a wide open opportunity at the biggest segment of the market.

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