Xiaomi’s Biggest Threat to Their Global Ambition

Part of why I keep an eye on Xiaomi is because, at a high level, I’m curious if their model represents the future of hardware business models for everyone but Apple. I do not encourage anyone to underestimate Chinese hardware companies. There are a number of parallels to the Chinese brands in the future of consumer tech for the next decade to what the Japanese brands were in the past decade or longer. However, Chinese brands in China sell at a near zero margin rate. Yes, you read that right. These companies focus on scale and massive amounts of it. It is one of the reasons they are well positioned to go global. They can achieve significant scale on even low-margin hardware. But they will not survive if they don’t find markets where they can get better margins. Hence, Chinese OEMs’ global ambitions.

This hardware point is only the first part of the story. Companies like Xiaomi realize hardware alone is not a good business for anyone not named Apple. Eventually, all hardware commoditizes and the opportunity to make money moves into things like software or services. As I’ve articulated in why Chinese brands will own the hardware future and Android and the Innovators Dilemma, the dynamic of commodity hardware when built around someone else’s operating system is predictable and inevitable every time. This is why, outside of Apple, when it comes to brands making hardware, I’m interested in business models that don’t depend on hardware margins. Perhaps Xiaomi is the poster child for this dynamic. Amazon as well could be a test case for this model.

However, Xiaomi wants to do something that could risk their global ambition — enter the United States smartphone market. We have no idea when Xiaomi believes the time is right for them to enter this market. However, I believe this single move could threaten their global ambition.

Firstly, the US market is a duopoly when it comes to smartphones. Samsung and Apple control more than 80% of smartphones sold each quarter. I don’t see this changing quite yet. Brands like Huawei and ZTE that employ a similar strategy in concept to Xiaomi and target more price sensitive off-contract customers, still aren’t seeing large, sweeping market share gains in the US. However, Xiaomi has a bit more of a spotlight on them internationally and this is where I think they could see a problem if they fail to succeed in the US market.

To succeed in the US market in any meaningful manner, Xiaomi would have spend quite a bit on branding. Look at the many billions of dollars Samsung had to spend to make a dent and how much Microsoft is spending on their Surface brand yet still seeing little fruit in terms of quarterly sales, Xiaomi would need to spend similar to get anywhere. Given their low-margin structure, I don’t see them spending what is necessary to develop their brand in the US and being successful. With the spotlight on this company, I see a scenario where failure to gain traction in the US market reflects poorly on the international markets. I could see consumers saying, “If US consumers don’t want your product, why should we?” Failure to succeed in this market could cause their brand to take a negative hit and impact their overall global image. Xiaomi knows how key the US market is from a market opportunity standpoint but the whole strategy could backfire.

This scenario assumes they enter the market at full force with smartphones. The smarter thing to do, in my mind, is to start with TVs. Xiaomi makes a pretty decent TV and, if they are willing to be aggressive on price, they could bring some high-quality quantum dot 4k TVs into the US market at very low price points. This could give US consumers more exposure to their brand and products. We know from research that, once a consumer lets a brand into their life and has a positive experience with it, they will consider that brand in the future for other products they make. This is exactly the strategy Apple employed with the iPod and it acted as the gateway to the Apple ecosystem and set the stage for the iPhone.

Xiaomi could essentially start like Vizio and establish their brand with a different product rather than smartphones and then begin testing the waters. I’d imagine a Xiaomi high-quality but low-cost 4K TV would do quite well and help their brand ambitions in the US and at large as well. Given the dynamics in smartphones we see, Xiaomi arguably has a better chance in TVs than smartphones. But I know they have a few other products up their sleeve that we can talk about when those launch as well. They may also be better candidates than smartphones.

The smartphone market is very tricky and I’m honestly not sure Xiaomi understands this from what I gather in talking with them. That is why it is the riskiest proposition given all their options. We will see what direction they take but ultimately the wrong strategy can hurt their global brand ambitions.

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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

5 thoughts on “Xiaomi’s Biggest Threat to Their Global Ambition”

  1. I have always struggled to understand Xiaomi and the innovations that it brings. I think there are quite a few. The ones that often get attention are a) the ability to sell decent phones at low prices, b) the business model of earning profits at the service layer. In addition to these, c) Xiaomi has also innovated in marketing and distribution through their famous flash sales, and almost exclusively online distribution model. I often feel that their innovations in marketing and distribution have not been fully appreciated by the tech circles.

    Hence I challenge the assumption that Xiaomi would have to spend Samsung-ish marketing dollars to succeed in the US. Instead of relying on expensive commercials, I can see Xiaomi trying out an Internet-Focused marketing campaign that would target the demographic that doesn’t watch TV anyway. If that were the case, then selling 4K TVs as a market penetration strategy doesn’t make too much sense. They might also do more promotional collaborations with brands or celebrities associated with customers in their early 20s.

    I really can’t say much more because I lack sufficient knowledge of how Xiaomi succeeded in China to begin with. I respect Xiaomi for their marketing and distribution innovations, in much the same way as I respect DELL for their logistics innovations. I hope that Xiaomi realises this enough so that they pursue a new and innovative approach to enter the US market, an approach that neither Apple nor Samsung have ever done.

    To enter something as strong and established as the US market, I believe that you have to ride on the wave of a strong trend and innovation. You cannot brute force your way in because the incumbents are so strong. I believe that the innovation that Xiaomi has on their side, and that might also work in developed countries, is in marketing and distribution.

    1. I’m not even sure Xiaomi is making that much money off services/content; they seem happy to switch back to Google’s for all markets where they can.

      As a Western buyer, Xiaomi’s products are a very interesting deal: rock-bottom prices ( $140 for a Redmi Note 2: 5.5″ 1080p, 2GB/16GB/SD, 13mpixels, 4G, http://www.cnet.com/products/xiaomi-redmi-note-2/ ), good features and quality, and good support. Services don’t even come into the equation, the devices sell themselves.

      I’d follow you on the Dell analogy, probably Lenovo too. They know their place as an OEM, structure themselves to be happy with low margins, build loyalty be being consistently a good buy, and are probably waiting for both the high-overhead wannabe premium and the shoddy-quality “let’s make a quick buck” competition to die its natural death. Since Western IT firms have lost the ability to compete as OEMs, their long-term competition is Lenovo and Huawei, maybe Asus. There’s probably room and niches for all of them.

      1. I agree that the specs for Xiaomi’s products are impressive and it would seem that the products would sell for themselves. In practice though, it often doesn’t work out that way. It’s complicated.

        The competition that Xiaomi is up against is not wannabe premium, shoddy-quality OEMs or Western IT firms; it’s up against Apple, Samsung and LG. It’s a tough fight and I don’t think the willingness to forgo profits alone will win it for Xiaomi.

        1. I’m not so sure Xiaomi competes vs top brands. I’m sure they don’t compete *solely* against them via the Redmi economic line, but even at the high end, I’d be curious to see switching stats both ways. Does anyone get a $30 Mi Band 1S instead of a $350-$infinity iWatch ? a $70 Mi Box instead of a $200 aTV ? a $400 Mi Note (their most expensive model it seems) instead of a $850 (64GB like the Mi Note) iP6+ ? (smaller models are $260 vs $650).

          And it’s not so much willingness to forgo profit, it’s ability to generate profit at lower prices.

          1. If we’re talking specifically about the US market, then as of now, the low-end market seems to be very small. Unless Xiaomi does something to expand that, then it will have no choice but to target the high end. That is what I mean when I say Xiaomi will have to compete with Samsung.

            Also, regarding Xiaomi’s ability to manufacture good phones at low prices, it would be very interesting to understand why this is so. Xiaomi does not have exclusive access to the Shenzhen ecosystem and their scale for high-end components cannot compete with Samsung. Hence I do not expect their standard cost of production to be significantly lower than Samsung. If they do indeed have a cost advantage, then it is probably due to either their business model, or the cheapness of their marketing and distribution model. These are things that we lack information for, but they are vital pieces of the puzzle if we want to know the sustainability and disruptiveness of Xiaomi.

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