Understanding Xiaomi Part 2: As an Internet of Things Company

In part one of this series, we looked at Xiaomi as a smart phone company. While smart phones are essential to their lineup, I don’t believe Xiaomi is a smart phone company. In the same way companies such as LG, Samsung, Apple, are in the smart phone business but are not smart phone companies. Every company has a lineup of products. These product portfolio’s are generally quite strategic. Xiaomi is also in more categories that just smart phones. They also make TVs, smart set top boxes, routers, portable power bricks, and even air purifiers. I fully expect the number of connected products Xiaomi makes to grow and grow quickly. For Xiaomi, I believe the smart phone is the gateway to not just the lifestyle but the connected ecosystem they want to build.

This by itself does not sound too terribly unfamiliar, since you could make a case Apple, Samsung, LG, Sony, and others are oriented the same way. Xiaomi, I feel, may be in a slightly different position due to their relationship with the Shenzhen manufacturing ecosystem. For his TIME column, Tim Bajarin highlights a high level view of our thinking on this ecosystem. The Shenzhen manufacturing ecosystem, known by insiders as CTE (China tech ecosystem) is potentially extremely disruptive, something I will look deeper into for subscribers in the coming weeks. What you need to know for now is their capabilities to make things fast, at high quality, at scale, is increasing at an incredible rate. Using this ecosystem, the connected products Xiaomi can make is nearly limitless. A wide array of smart home and other Internet of Things products are all options for them using this ecosystem. And as Xiaomi is able to keep lowering costs of components even as devices are being made and sold, they increasingly generate more margins with current products in real time using their model.

Many will rightly point out Xiaomi simply can’t make every connected product. This is certainly true. They may not make them all but they want to build around this category whether they make the hardware or not. My guess is the hardware that has a static fit, like routers, TVs, tablets, and power bricks are all related. In no time they will have a smart watch. Connected security cameras, home automation, etc., are all within their ecosystem as I understand it today. What the China tech ecosystem allows Xiaomi to do is quickly get into connected product markets that fit their ecosystem and strategically help drive the lock-in loyalty they seek. When we analyze platforms and ecosystems, we like to use the word “moat.” Companies are trying to build a moat to protect their castle. Xiaomi is building a moat and I believe the combination of the China tech ecosystem and accompanying connected products are part of this moat.

Xiaomi is also looking to enable the third party ecosystem by offering modules and platforms for other connected products companies to utilize. Ben Thompson in his daily email update after the Xiaomi event shared how the module was positioned:

Lei Jun, though, went on to say that this would not be the only way to get devices that can be a part of Xiaomi ecosystem. Instead he announced a new Xiaomi module, available to manufacturers for $3.50 that, if added to their appliances would allow them to be controlled by Xiaomi phones, greatly expanding the ecosystem of devices.

Lei Jun, has gone on record saying Xioami is an internet company. He broadly and loosely uses this term but the core of it is significant. The Internet is clearly an enabler for their connected systems, but even the software and services components of this idea have significance to the kind of connected products Xiaomi can make. Ben Thompson also took this picture, which is not just an image of Xiaomi’s vision but of how they position their products in the ecosystem.


Look where the smart phone is in relation to the cloud, then where the cloud is in relation to other connected products. The cloud sits right in the middle. I bring out this point because the name brands I mentioned earlier, LG, Samsung, Apple, etc., all seem to have varying degrees of difference on this chart and the role of the cloud. All are similar in that the smart phone is the primary endpoint, but the relationship of the cloud seems to differ depending on what cloud means to their ecosystem.

Years ago I used this slide to articulate the concept of the smart phone at the center of a connected products ecosystem. Here is my slide.

Screen Shot 2015-01-18 at 4.35.20 PM

In my slide, I talk through how not all products may be connected to the internet. Some may be more machine-to-machine communication. Meaning, something like a connected door lock may only be able to be connected from a short range wireless solution like ZigBee or Bluetooth. Connected product vendors will ultimately make these decisions but the cloud still plays a holistic role in each platform player’s vision.

Everything I see from Xiaomi related to their cloud solution, apps, services, and connected products beyond phones, still appears to be very China specific. It will be interesting to see how Xiaomi can take this connected product vision and create regionally relevant connected products and services. It seems Xiaomi’s ultimate goal is not to just sell smartphones into other areas like India, Indonesia, Brazil, etc., but more connected products. Yet things like air purifiers aren’t necessary in other markets like they are in China. Ultimately, this is Xiaomi’s challenge. To not only provide localized software and services, but also hardware. The Shenzhen ecosystem is their wild card in this venture but it is no slam dunk.

I said in part 1 of this series Xiaomi is not a smart phone company. I believe as we analyze them as an Internet of Things company we are getting closer to the type of company they are. However, in part three of this series we will analyze them as an internet services company.

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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

2 thoughts on “Understanding Xiaomi Part 2: As an Internet of Things Company”

  1. I’m wondering if, in the West, Amazon might follow a similar path. They also seem to be seeing mobile devices as a gateway to selling more profitable stuff (digital content and real-life goods). I’m wondering if they might try and straddle the line between digital and physical, either via their own connected things, or via partnerships. It seem like a logical step, though expensive ?

    1. Yes, I think they will. I have a report on e-commerce coming soon, explaining why we may be at the tipping point for e-commerce. If, or when, that really does happen, I think it opens the door for Amazon in many new ways to do more in hardware and grow their ecosystem.

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