Never had a Chinese domestic phone achieved such dizzying heights of success before Xiaomi came along. The smartphone vendor sold over 61 million phones in China in 2014, beating the immensely popular Samsung and Apple to become the biggest smartphone vendor in the country. It created sales records by selling hundreds of thousands of phones online within minutes. People were quick to claim that Xiaomi was China’s Apple and Lei Jun, founder and CEO of Xiaomi, was given a moniker: ‘Leibs’ which stands for China’s Steve Jobs.
But now Xiaomi is cooling down at a worryingly rapid pace.
The six-year-old company has peaked, analysts say, and the decline has set despite all the impressive tools in its arsenal, such as its unique flash sales and social marketing strategy.
In 2015, Lei announced that Xiaomi would sell 100 million phones that year. But it fell short of its ambitious goal, selling only 71 million, according to International Data Corporation (IDC). And in 2016, the shipment volume has continued to fall. In the first quarter of 2016, it sold 14.8 million handsets, compared to 16.9 million in the previous quarter and 14.9 million in the same period in 2015. As for 2016, so far Xiaomi hasn’t announced any goals.
In the first quarter of 2016, Xiaomi was displaced from the list of the top 5 global smartphone vendors, but in 2014, it was up there: No.3 on the global list and No.1 in China, according to IDC. Except for Apple and Samsung, the other three are Huawei and two relatively lesser-known brands—Oppo and Vivo.
Xiaomi’s position on the rankings differs depending on the methodology adopted by different research agencies. On TrendForce’s list of the top six smartphone vendors by global market share, Xiaomi is still the fifth-largest vendor with a market share of 5.5%, but down from the fourth position in the same period last year.
Now that Xiaomi’s impressive marketing strategy has somehow reached stagnation point and many vendors are selling similar phones, the company seems to be losing its edge.
‘Pigs Can Fly’
Lei Jun, 47, former engineer and president and CEO of Kingsoft, a Chinese version of Microsoft Office, has rich experience in China’s tech industry. He once said: “Even a pig can fly when it is hit by a tornado.” The quote, which became an instant hit with start-ups, meant that anyone can succeed by simply going with the trend of economic and social development.
And perhaps that’s what Xiaomi did.
In the go-go years, Xiaomi thrived on the popularity of e-commerce, social media and smartphones. There was another factor behind its success though: when it first came to the market, it’s feature-packed phones were indeed revolutionary, especially given their ridiculously low price point.
Smartphones started to become ubiquitous in China in 2009. The market had two extremes: high-end brands like Samsung and Apple with prices ranging from RMB 3,000 (~$450) to RMB 5,000 (~$750), and cheap, pirated no-name phones. What was missing was a phone from a decent brand with good quality and affordable pricing for college graduates, blue-collar workers and other low-income people. Something similar was the situation in India as well, Xiaomi’s second largest market. Although some Indian brands had a better recognition among its target audience, their products were repulsively cheap in looks and quality.
And then people discovered Xiaomi. It was chic and trendy. The price tag was low and had its own customized Android-based operation system called MIUI.
Founded in April 2010, Xiaomi quickly developed a cult-like fan following. Once again, something similar happened when Xiaomi first entered the Indian market. It focused on software first, creating an online fan club with hundreds of smartphone-enthusiasts. Using their feedback and suggestions Xiaomi polished MIUI. The fans did their bit too by giving the company free promotion online.
Li Wanqiang, vice-president of Xiaomi, later wrote a book titled The Xiaomi Way, explaining how it formed and engaged what was called its “Mi Fan” community and let them offer suggestions to improve Xiaomi’s products. Xiaomi also created Mi Fan Festivals, where they celebrated and collected opinions and distributed free devices to test. Rapidly incorporating customer feedback became an important part of the Xiaomi model. Lei often says in public that Mi fans are “science geeks without high incomes,” indirectly indicating that their reviews of the phone are professional and credible.
Through those fans, the company receives free promotion online, especially on Sina Weibo, a popular microblogging platform. Word about Xiaomi spread fast. Given its ability to generate word-of-mouth publicity through fans, Xiaomi was able to avoid unnecessary marketing expenditure. It sold its phones in flash sales online, whipping up a frenzy for its latest models. With almost zero spending on marketing and brick-and-mortar stores as well as distributors, it managed to set the price of the RedMi model as low as RMB 899 (~$135)
But gradually others started aping Xiaomi’s model, chipping away at its competitive advantage. And soon people got tired of flash sales and marketing gimmicks. The novelty had worn off.
Jin Di, research manager with IDC China, says that Xiaomi’s sales are falling partly because of market changes and fierce competition. Apart from big foreign brands like Apple and Samsung that have traditionally been popular in China, the market is also seeing strong competition from tech stalwarts like Lenovo, ZTE and Huawei. And now, to add to the mix there are also many smaller brands like Oppo and Vivo that are quickly rising up the popularity charts. The market is getting further fragmented by new players like LeEco, originally an online video company that has jumped headlong into producing smartphones.
To add to the confusion, the smartphone market is decelerating in China. Data from IDC shows that the year-on-year growth of smartphone shipments was 62.5% in 2013 and the figure dropped to 2.5% in 2015.
Apart from market changes, there are also problems with Xiaomi’s own product quality, differentiation and strategy. The phone now is no different from others on offer in the market: it has no special features or technology.
Since 2012, when Xiaomi released the Mi3, many users complained that the phone constantly restarts by itself. And the Mi 4c, released in 2015, has received complaints on the Mi fan’s online forum, with users saying it would suddenly halt operation, and after several months, the speed would become very slow. This year people complained that the screen of Xiaomi’s latest model, the Mi5, easily bends and breaks. We’ve had reports of Mi5, Mi 4i, Mi 4c and the Mi Band 2 erupting in flames or hurting the user in some way.
But because Xiaomi has always been cheap and had been ‘scarce’ for a long time, people still say that the phone has a good “price/performance ratio”.
The Changing Strategy
While Xiaomi was focusing on selling online, its competitors, Huawei, Oppo and Vivo were doing the opposite: expanding their retail footprint through stores and distributors. As a result, they have gradually gained ground.
Xiaomi has failed to reach people in lower-tier cities and towns while its competitors have expanded far and wide.
Both Oppo and Vivo, with similar features and pricing as Xiaomi, have forged tight relationships with retailers and distributors. Apart from their own stores, they also contract local selling agents, through whom they keep close ties with phone retailers and electronic appliances stores. By the end of 2015, people could buy Oppo phones in 200,000 stores nationwide and Vivo also covered over 200 cities.
Despite more Chinese people preferring to shop online, 74% of phones were still sold through brick-and-mortar stores in 2015, which shouldn’t be surprising. There’s a certain appeal to holding your next potential smartphone in your hand and making up your mind.
Just recently, Xiaomi has teamed up with China Unicom and its phones will be sold in over 4,800 China Unicom retail outlets nationwide. Xiaomi is also producing a Redmi 3X, especially customized for China Unicom, and priced at RMB 899.
Currently around 60% of Xiaomi’s phones are sold online and 40% through retailers. To catch up, Xiaomi is expanding cooperation with mobile retailers and electronic appliance stores and also increasing the number of Mi Homes, its own stores, from 20 to 50. An internal document revealed by Reuters says that Xiaomi aims to sell 58 million handsets in 2016 through offline stores, double the number it sold through offline channels in 2015.
This expansion won’t be easy for Xiaomi.
Due to their low price and wafer-thin margins, salespeople don’t find it lucrative to promote Xiaomi phones to customers.
On the other hand, Huawei, Oppo and Vivo have both expensive and cheaper phones through which sales people make a higher commission and thus have an incentive to push their phones.
The year 2014 was an exception though. At that time, Xiaomi was riding the popularity wave. If you tried to buy a Xiaomi phone online, it would almost always be out of stock. Local phone stores had a lot of Xiaomi phones in stock, which they had obtained from either big scalpers or distributors. And they would sell the Xiaomi Mi4, which cost RMB 1,499 (~$225) online, for a whopping RMB 2,400 (~$360).
Phone stores were willing to promote and sell Xiaomi when it was scarce, now that Xiaomi has stopped using the tactic of “hungry marketing” (creating demand by reducing the number of phones sold, hence making the phone scarce and more desirable) and everyone can buy it online, retailers have lost their incentive to sell Xiaomi, as they cannot sell the phone at a higher price anymore.
What’s more, selling offline means Xiaomi will lose the cost advantage it got by bypassing distribution costs.
Other than distribution costs, Xiaomi has to spend money on expanding its own stores, sales training and so on. Expanding the offline market is possible, but it will then totally change its business model and marketing strategy, and it’s not going to make money, working offline makes it just a regular smartphone vendor.
However, Xiaomi might have one more trick up its sleeve: it doesn’t want to be a smartphone maker only. “In the past five years, Xiaomi has been laying the foundation of its ecosystem and now it’s almost complete,” Lei said in an interview with the 21st Century Business Herald, a Chinese publication. By investing in many start-ups that produce smart home appliances, Xiaomi is trying to build an ecosystem: one that can connect with and control everything in the house using one interface—the Xiaomi phone. Xiaomi is placing big bets on The Internet of Things (IoT), a network of internet-enabled devices widely heralded as the future of technology and human life.
A Fragile Ecosystem?
If you look at Xiaomi’s online store, you will find a variety of products: a set-top box, a fitness tracker, a wifi router, an air purifier, a rice cooker as well as many other smart home appliances. The latest product to join this curious mix is a drone. At the price of RMB 2,499, Xiaomi’s drone is a lot cheaper than market leader DJI, which has 11 different types of drones and an annual sales volume of over RMB 3 billion (~$450,887). At the launch event, Xiaomi’s drone suddenly fell down mid-flight, much to the embarrassment of the company. Although Xiaomi explained it away saying that it was an “auto landing” caused by low battery, many people found the product, with only 28 patents untrustworthy, especially after the launch debacle. In contrast, DJI has over 200 technology patents.
As for the set-top box and wifi routers, Liu De, co-founder of Xiaomi, told Caixin magazine that they did not “achieve the success we expected.”
Xiaomi’s ecosystem is still pretty much a work-in-progress. But it is already showing signs of weakness. Ultimately the question is: will the strategy work?
“Building an ecosystem makes sense, but there have to be enough number of users, at least 300 million, to hold the terminal, in this case the smartphone, to form an ecosystem. Because the point of an ecosystem is to have large enough amount of family and house-related data, based on which the company could provide and sell value-added services,” says Yin Sheng, former associate editor of Forbes China and a well-known expert on China’s tech industry, who started to question Xiaomi’s business model and valuation three years ago.
If Xiaomi cannot sell its phones well, any new concept it boasts about will not work.
There are two major problems with Xiaomi. One, Xiaomi did not focus on making a good phone and without consolidating its position in the smartphone industry, it impatiently expanded into other areas.
The other is its low market positioning. People who buy Xiaomi are low income people like college students and blue collar workers. They are not loyal buyers. Once they have money, they will move to brands like Apple and Samsung.
So far Xiaomi Note pro is the company’s most expensive phone. It’s price fell from RMB 3299 (~$495)to RMB 2499 (~$375) in a short period after two subsequent cost reductions. While the company has boasted of the sales records of the low-end RedMi which has sold over 25 million phones, it never publicized the sales volume of Xiaomi Notepro.
These low-income buyers of Xiaomi have no purchasing power to buy the other products Xiaomi is selling.
Although Xiaomi’s online store has many smart home products that are developed by start-ups which Xiaomi has invested in, they’re often not the leading names in their industry. If Xiaomi’s brand gets tarnished due to some reason, these products can easily pull out and operate under their own brand names and sell on other e-commerce platforms.
Although Xiaomi claims to earn money through software services rather than devices, in 2015 its software revenue also fell short. It set a goal of making $1 billion through its internet services like online games and financial services, but it turns it could make only $564 million, Reuters reported.
So far it cannot rely on its software revenues alone, it’s still a company making money through hardware.
Can Other Markets Save Xiaomi?
From IBTimes :
Back in December 2014 one of the reasons Milner was so confident about Xiaomi’s potential to double in value was the fact that it only sold smartphones in a handful of Asian countries. The calculation was that once Xiaomi launched its smartphones in western Europe and the United States, it would become a global player.
However, the problem is that Xiaomi simply does not have the patent portfolio to enter these markets. Long accused of copying hardware and features of established players like Apple and Samsung, Xiaomi is completely unprepared to enter a more mature market, where it would immediately face a volley of patent lawsuits, stymieing any chance it has of establishing itself as a major player.
Even in India, its second-biggest market, it has faced sales bans for infringing Ericsson’s patents. And despite signing patent licensing deals with Microsoft and Qualcomm, it is still unprepared to make the leap into these bigger markets.
So a big obstacle faced by Xiaomi is the lack of patents. Without patents it cannot sell online in the US, Australia and other developed countries.. But the company has realized that. In 2015 end, it had over 2,000 patents. In March 2016, it bought 332 patents from Intel and more recently it bought 1,500 patents from Microsoft.
Xiaomi still has a chance to make it big, but it has to think clearly about what its differentiation is. The methods it has used to become big in China won’t work effectively in overseas market, where it will face even fiercer competition.
Big telecommunications vendors like Huawei and ZTE have been doing business in Africa for years and in India, there are many local brands, as well as Oppo and Vivo that have higher-end phones.
It will have similar problems as in the domestic market. Without knowhow, it still cannot get recognition in the long term even if it manages to sell a lot in a short time.
Steve Millward wrote on the Tech in Asia blog, “Xiaomi is in deep s**t”, and it is not very hard to see why. Xiaomi’s future right now is volatile, despite all the brand recognition it has got in the tech-world, Xiaomi still has no access to the masses outside China and the strategy feels all over the place as it pivots from a ‘content, apps and services’ driven ecosystem with the smartphone at the centre, to a hardware-based ‘connected everything ecosystem’. When such well established brands and rulers once, of the feature phones market like Nokia could fall, when the company behind the first popular smartphone Blackberry can be forced out of the market, almost, Xiaomi is still a very new company and its roots aren’t as deep.
According to David Gilbert of IBTimes :
This all suggests that rather than being known as the “Apple of the East”, Xiaomi may soon be known as the “Blackberry of the East.”