MEE T XIAOMI, RISING ANDROID POWERHOUSE
Chinese smartphone-maker Xiaomi is expanding its operations globally with Singapore as its first international market outside China, Hong Kong and Taiwan. A brand that was little known outside of China three years ago, Xiaomi is now making waves across the mobile industry. We take a look at the humble beginnings of Xiaomi, and trace its growth and achievements over the past three years.
1 Where It All Started
Xiaomi was founded in April 2010 by Lei Jun who assembled a team of seven co-founders. They are Lin Bin, Li Wanqiang, Dr. Zhou Guangping, Huang Jiangqi, Hong Feng, Wang Chuan and Liu De.
The founding team is made up of former employees of Google, Microsoft, Motorola and other major technology companies. It added another valuable member to the team last year in the form of Hugo Barra, who was then-Vice President of Android product management.
Lei set up Xiaomi with the goal to build a smartphone company that could challenge Apple. The members of the founding team were carefully handpicked, with the diverse mix of work experiences and talents proving to be valuable assets for Xiaomi.
As many of its co-founders are experts in engineering, hardware and software development, Xiaomi is, for all intents and purposes, able to build hardware at the speed of software.
Barra describes Xiaomi as “a new kind of company that the world has not seen yet” and actually finds it “quite spectacular” that it has 8 founders with each individual “running a startup within a collection of startups”.
Not many companies can achieve that level of synergy. Software giant Google tried to reinvent mobile hardware with the acquisition of Motorola Mobility, but it was met with little success, eventually selling the company off to Lenovo.
Apple is one of the few companies that does hardware and software well, which is why Xiaomi is sometimes referred to as the “Apple of the East”. However, Xiaomi at its core, is very different from Apple.
Xiaomi began work on MIUI, which started off as a pure software effort to build an alternative ROM for Android. The team approached several manufacturing partners and suppliers such as Qualcomm, Broadcom and Foxconn, eventually releasing their first smartphone, the Mi 1, back in 2011.
2 A Different Business Model
Xiaomi’s driving philosophy is based on the belief that its business should be built on services, and neither hardware nor devices. The nature of the Chinese mobile phone market also played a part in shaping the business model of Xiaomi.
By focusing on services, Xiaomi would hopefully avoid the fate that Lin feels other smartphone makers will face in the near future – declining profit margins from sales of hardware. During the D: Dive Into Mobile Conference in New York last year, Lin stated that “the future of the mobile Internet is really about services”. He feels that smartphones are going through a phase that PCs did twenty years ago when profit margins were huge. With the profit margins of PCs in single digits now, Lin believes the same would happen for smartphones soon.
To build a business on services, Xiaomi needs volume and it seems to know exactly how to achieve that, thanks to two inspirations that helped Lei model Xiaomi after: A traditional Chinese medicine company called Tongrentang, and hot pot chain Hai Di Lao. According to Lei, both companies taught him never to make low quality products for the sake of cost, and the importance of customer service.
Hence, Xiaomi became what we all know it for today – a company that sells its smartphones at low cost, yet offering plenty of bang for the buck. This is in contrast with the approach taken by other Chinese companies that offer lowspec, cheap devices. Its focus on services is also similar to what Amazon is currently doing – selling its Kindle tablets at low prices and earning profits through the sales of e-books.
Lei mentioned in an interview with TechCrunch that the Chinese mobile phone market is more open; consumers can buy and use what they want, hence phone makers do not necessarily need to maintain good relationships with the telcos to sell their devices.
This is different from other countries such as the U.S where telcos hold the upper hand, both determining what devices to push, as well as selling phones at subsidized pricing with contracts. Considering that Xiaomi smartphones have very low price points, consumers can buy them without signing any long-term telco contracts.
“A company that sells its smartphones at low cost, yet offering plenty of bang for the buck.”
3 Market Strategies
To minimize cost to the consumer, Xiaomi also eliminates the middlemen and distributors by selling most of its smartphones online through its website and social networks. For example, Xiaomi announced in December 2012 that it would be selling phones via Sina Weibo, which is China’s top microblogging platform with over 400 million members.
It also partnered with social networking site Qzone to release the first batch of 100,000 Redmi devices in August 2013. Xiaomi teamed up with instant messaging app WeChat to sell 150,000 units of its flagship Mi 3 smartphone in November 2013. The partnerships with social networking sites and apps helped Xiaomi project itself as a hip and cool company that appeals to the younger generation.
Xiaomi releases its smartphones in limited quantities or batches on these platforms, and the responses are generally overwhelming. Critics pointed out that the company is using scarcity marketing by creating artificial shortages to motivate consumers to buy the phones, but Xiaomi countered by saying these “flash sales” are deployed to gauge consumer reaction.
If the response to a particular model exceeds initial expectations, Xiaomi will increase production of the phones to meet demand. This helps the company keep costs to a minimum while ensuring that there is no surplus.
It is undeniable that such “flash sales” will generate a lot of excitement and media buzz. As Xiaomi begins its global expansion, the strategy of selling phones online may change as there are markets in other regions where sales of devices are mainly driven by in-store sales and subsidized, contract pricing from the telcos.
Direct-selling, reliance on social media, and ‘flash sales” are no doubt savvy marketing strategies, but Lei feels that the most important ingredient in the recipe for success is that “Xiaomi is not selling a product, but an opportunity to participate”.
Lei used Apple’s iOS 7 as an example to show how Xiaomi’s approach is different from its competitors. Apple is famously known for its closed system approach and users had no idea of what to expect in any new software release. Apple believes it can anticipate and know what is best for users.
On the other hand, Xiaomi gives users a say in the development process of its hardware and software. For example, the company encourages its software engineers to engage users in forums to gather feedback on MIUI. Based on the feedback, Xiaomi issues free software updates every Friday for its users.
According to Lei, two features of the voice recording app on Xiaomi phones are contributed by a group of Chinese journalists. The journalists suggested that the app should continue to record even if an incoming call comes through, and the phone be switched to silent mode when the app is in use. Following their input, Xiaomi made these changes to the app.
User participation not only helps Xiaomi build a loyal fanbase, it also helps cut down development costs as MIUI is constantly refined with features that users actually want and use. In comparison, other phone makers invest huge amount of funds, time and efforts to develop features that may turn out to be not practical or irrelevant for users.
4 Breaking into The Global Market
With a goal of selling 40 million phones this year, Xiaomi has to expand its market reach globally. Its first international stop is Singapore, where the company has started selling the Redmi smartphone since late February.
Singapore is an important test for Xiaomi as the market is considered small. The country has a population smaller than Hong Kong at 5.3 million, but with a similar smartphone penetration rate similar of 87% based on a Nielsen report in September 2013.
Like the U.S., the Singapore market is still largely driven by on-contract, subsidized devices. It’s too early to determine whether Xiaomi can replicate its success in Singapore by selling its phones directly to consumers. The concept of buying unsubsidized phones hasn’t taken off, although there are signs that it is picking up, as the recent launch of the $318 Motorola Moto G showed.
As a Chinese company, Xiaomi cannot escape the perception of Chinese products as knockoffs of popular brands. Many Chinese companies have tried to break into international markets with little success, except for Huawei and Lenovo. Whether or not Xiaomi’s growing cult status and social media strategies can alleviate this remains to be seen.
Xiaomi’s emphasis on building high quality, high performance products at cost has not gone unnoticed. During a panel interview at Xiaomi’s headquarters in January, Apple’s cofounder Steve Wozniak proclaimed that Xiaomi makes excellent products good enough to break into the U.S market. Apparently, he has been using a Mi 3 and grew a liking for the device.
Moving into new markets may pose a challenge for Xiaomi when it comes to maintaining its focus on customer service and gathering feedback from different markets. Even though Xiaomi has done a pretty good job on its home turf, managing the needs of different markets simultaneously is a totally different ball game, and one that can strain the resources of a company with over 3,000 employees.
“Singapore is an important test for Xiaomi as the market is considered small.”