|By TAP Staff| Just over a year ago, China’s Xiaomi was little more than a mid-sized smartphone-maker with an odd name (Xiaomi means “millet”), trailing household brands such as Samsung, Lenovo, Coolpad and others. During the first six months of 2014, however, this four-year old company sold 26m smartphones, propelling it to pole position in the Chinese market. Next year, Lei Jun, its founder and CEO, expects sales to rise to 100m, bringing in revenues of Rmb100bn (US$16bn). But as Xiaomi branches out into India and Indonesia, there is a danger of expanding too far and too quickly.
Mr Jun attributes Xiaomi’s rise in China to its unique product design and unconventional sales strategy, which allowed it to hit a sweet spot between high-end big brands and low-end local competition. The company made its debut in 2010 with the Mi-1 smartphone priced at Rmb2,000 (US$315), around half the price of high-end Android phones. The Mi-1 featured MiUI, a souped-up version of the Android OS with popular built-in apps. The Mi-2, which followed in June 2012 adopted the same high-end low-price strategy with a quad-core CPU and improved display, among other things. By year’s end, Xiaomi had sold over 7m Mi-2s at an average of Rmb1,750 each.
Today, Xiaomi’s main products include Mi-3 and Mi-4 smartphones in the Red Mi series, which target young customers with colourful back covers, dual-SIMs and 4.7-inch display. Xiaomi also sells Red Mi Note, a top-of-line model featuring 8-core CPU, 5.5-inch display and dual cameras. Xiaomi has also tapped into home entertainment market with Mi TV and Mi Box.
As sales increase, so do profits. Xiaomi claims one of the highest margins in the industry at about 20% compared to the norm of single digits. One reason is that Xiaomi sells most of its products on its own website, and manufactures them to order. Production only starts when orders come in, so that the company does not deal with an inventory glut. The flip-side is that customers sometimes wait months for delivery. This hunger-bait strategy actually helped to build customer loyalty, building in high expectations and curiosity, while the low price kept the orders coming in.
In this way, Xiaomi not only struck the right balance between price and product, but also managed to build a desirable brand. The company is not shy about its ambition of becoming the “Apple of China”, looking to the US company for everything from company culture to design philosophy. Mr Lei calls Steve Jobs his icon, copying his clothing and presentation style to appeal to young Chinese buyers.
Mr Lie also wants to infuse what he calls “internet thinking” into every aspect of Xiaomi’s offering, so that everything the company does—sales, marketing, applications, service and products—is online. Typically, Xiaomi announces its new products weeks or months beforehand to raise expectations, then relies on flash sales that last just a few hours. As a result, the new product is sold out quickly, allowing production to begin, and the fact that some customers miss out only add to the aura of exclusivity. They must then wait until the next upgrade to buy.
The other key to Xiaomi’s success is it supports all three operators in China, giving it access to a huge user base. This was not the initial strategy: Xiaomi’s first phones were produced in a co-branding exercise with China Mobile 3G. But now Mi phones offer designs for all three 3G platforms in China so that customers can choose a model based on service plans at affordable price. A recent survey shows Xiaomi has the second highest loyalty ratings in China at 28%, after the iPhone but way ahead of all other brands.
What goes up?
Riding high in China, Xiaomi now has international ambitions. This summer, the company began selling its phones in India and Indonesia where low-cost smartphones are in strong demand. Its Mi-3, for example, sells for Rp14,000 (US$230) in India, with features and performance arguably comparable to Samsung’s Galaxy, which costs twice as much. In Indonesia, Red Mi is set at R1.5m (US$126), a price that should be very attractive to local residents. The low entry costs associated with web-based sales should allow it to keep its offering well-priced.
That said, there are still concerns that Xiaomi may be over-reaching itself, as a new company fighting against established global and local players. In India, for example, Xiaomi has to compete with local companies like Micromax, Karbonn and Lava which target the same customers, but have the upper hand in sales channels and support. Xiaomi must also overcome widely held doubts about Chinese production quality. And while India and Indonesia are not yet at saturation point, smartphone demand may be waning after strong sales in 2012 and 2013.
Even at home in China, the company’s success relies heavily on components over which it has little control, like chips, power units and displays. If pricing or supply changes unexpectedly, that could be a problem. Xiaomi may also have sold itself short by relying mainly on its website; operating via more outlets would give it greater flexibility in price. Moreover, unlike its competitors, Xiaomi only has a few handset models. Although this helps to keep production costs low and margins high, it may affect growth long-term if customers tire of the choices on offer.
There are already signs the halo effect is fading. Despite continuing effort in flashy hardware, stylish design and competitive pricing, the new Mi-4 is not ground-breaking; things like IPS screen and steel trim no longer excite potential buyers. Perhaps the biggest pressure is Xiaomi’s position in the low to mid-market, which is also the focus of many handset-makes for its size and growth potential. Many have more design and sales experience than Xiaomi, which may translate into a better performance-to-price ratio. The danger is that Xiaomi will become a “me-too” brand in a few years’ time.-EIU Industry Briefing
