Xiaomi: Quality smartphones for the poor

Xiaomi is so good at its game that it has displaced Samsung and Apple as the number one smartphone manufacturer in China, at least by shipment. Margins are low, but this company is riding high in profits, nonetheless, a tribute to the power of acumen and business volume. Globally, Xiaomi is now the world’s third-largest […]

Xiaomi is so good at its game that it has displaced Samsung and Apple as the number one smartphone manufacturer in China, at least by shipment. Margins are low, but this company is riding high in profits, nonetheless, a tribute to the power of acumen and business volume. Globally, Xiaomi is now the world’s third-largest smartphone maker, after Samsung and Apple. Xiaomi’s ability to squeeze out so much profit while selling at rock-bottom prices is attributed to inexpensive but highly effective marketing.
Xiaomi was valued at $ 4 billion in 2012, $10 billion in 2013, and now $40 billion. The latter amount is about 40 times the company’s $1 billion projected earnings (out of a sales figure of $13 billion) for this year. At peak performance in 2010, Apple’s stock traded at 34 times its earnings. With the projected valuation figure for Xiaomi, the company would be more valuable than SONY by a factor of two, and will be worth 2.5 times Lenovo.
Xiaomi has stormed the Chinese smartphone market, apparently attacking its competitors on the blind side. It offers its phones at rock-bottom prices, often selling out new models in minutes online. It has moved into India, with equally impressive results, and is also heading to Indonesia, Mexico, Brazil, and other countries that fit Xiaomi’s (rather pragmatic) concept of a target market. The targeted countries (China, India, Indonesia, and so on) have the populations and appreciate good technology, only that they cannot afford it. To illustrate, Xiaomi’s top-of-the-line smartphone model, Mi4, has specs which are only slightly inferior to those of iPhone, but the phone barely costs half of iPhone. Redmi, Xiaomi’s lower-end version, sells for $99, which is half of what you’ll get with a comparable phone from Samsung. (Apple is not into very-low-end phones.) Redmi sells for about a quarter of iPhone 6, which sells for $800 in China.
Xiaomi’s smartphones run on a version of Google’s Android operating system, but the enthusiasm at Xiaomi is that at Apple, given the excitement that the company generates among consumers. For this reason, some people refer to Xiaomi as the “Apple of China.”
Let’s take a quick look at Xiaomi’s business model, to appreciate the company’s dramatic rise. Of note is the company’s low-cost strategy, which the company takes very seriously. Mr. Hugo Barra, a vice president at Xiaomi says “We fundamentally believe that when it costs you $200 to make something, you shouldn’t be selling it for $600.” Xiaomi’s prospecting approach makes sense: it looks for markets where the prices of competitors’ smartphones constitute are a larger part of a consumer’s income. According to Mr. Barra, “those markets are where Xiaomi’s model of selling smartphones at near the cost of production works especially well.” Also, instead of using third-party retailers, the company sells directly to consumers via its website, thereby eliminating the “middle man.” While Xiaomi’s more established competitors spend heavily on TV commercials and other traditional types of advising, the company’s marketing has focused on social media and online forums where users could post comments/complaints as well as make requests. The value of words of mouth by Xiaomi’s loyal fans cannot be underestimated in a country with over 600 million people. Xiaomi is also very responsive to online customers’ suggestions, quickly modifying its software to address customers’ issues. (Needless to say that many other Chinese handset manufacturers have now started to focus more on online marketing and the use of social media.)
Xiaomi also makes money by charging for services and accessories that accompany its phones. It helps Xiaomi that it can rely on raving fans to test new features and drum up enthusiasm for the company’s products. Note that Xiaomi, like other phone manufacturers, does generate income from pre-loading apps into its phones. (Xiaomi is estimated to have 70 million users.)
Xiaomi’s rivals and critics use intellectual property (IP) infringement arguments to attack the company. They say Xiaomi doesn’t respect IP issues, and that the company does not have enough IP to strike cross-licensing patent deals with other smartphone manufacturers. As pointed out by Daisuke Wakabayashi in the 28 October 2014 issue of The Wall Street Journal, when Jony Ive, a respected British-born senior vice president of design at Apple was asked about Xiaomi and how some smartphone designs seem to resemble the iPhone, without mentioning Xiaomi, the usually soft-spoken Mr. Ive was quoted to have said “it was theft” and had referred to IP infringement as “lazy.” In his company’s defense, Mr. Barra contended that there was no such thing as completely unique design language in the smartphone industry, and suggested that Apple’s iPhone 6 takes a chapter from designs by HTC. Mr. Barra also pointed out that what Apple did was no different from what Xiaomi did. “This idea of building upon great ideas and putting a twist on it is what we do,” Mr. Barra said. Others see IP infringement by Xiaomi as a reason why the company will not be able to expand to the West, where the applicable laws are heavily enforced.
The takeaway from this article is that Xiaomi, a barely four-year old company, is rising beyond leaps and bounds, displacing Samsung and Apple to be the largest smartphone manufacturer in China, and the world’s third-largest. “Haters” abound!