Terry Gou has always taken pride in his ability to spot rising stars. In 1995, when Michael Dell was visiting China, the chairman of Foxconn, today the world’s largest contract manufacturer, plundered his contacts book for the chance to meet the 30-year-old American. At that point, Dell’s computer firm hadn’t become a top-five producer. But Gou says that he knew that Dell was destined for great things, and as he was set to leave for the airport, he offered the PC firm’s founder a lift in his car. On the way, Gou made an unscheduled stop to show off his factory. The Texan was so impressed that Foxconn later became one of Dell’s biggest suppliers (and with similarly astute foresight Gou may have had premonitions about the computer firm’s waning appeal, when he again picked a winner by shifting to Apple about a decade ago, lessening Foxconn’s reliance on Dell).
But did Gou lose his touch when he overlooked the rise of Xiaomi, a start-up run by tycoon Lei Jun and now one of the biggest tech stories in China? He later confided to staff that missing out on Xiaomi was his “biggest regret,” says Southern Metropolis Daily, although Gou did partially correct the mistake by paying Lei a personal visit last year. As a consequence Foxconn now makes smartphones and other tech gadgets for Xiaomi.
And with Xiaomi now taking its business global, Gou will be hoping that the relationship with Lei pays future dividends too.
Founded by Lei just four years ago, Xiaomi has won millions of Chinese smartphone customers by providing handsets with high-end specifications at low prices. Last year the Beijing-based firm sold nearly 19 million smartphones, compared with 7.2 million the year before. It has set sales targets of 60 million units for this year and 100 million in 2015.
A recent funding round valued the firm at $10 billion, more than Microsoft paid for Nokia’s handset unit. Much of that is predicated on Xiaomi’s impressive growth. At the end of last year, Xiaomi held a 6% market share in China, rendering it the sixth largest producer of handsets in the country, says research firm IDC. To put that in perspective, Apple’s iPhone held a 7% market share.
And Xiaomi now produces much more than handsets. Routers, smart TVs and set-top boxes, cloud storage services and a messaging app are among its offerings, while the company has also recently debuted a tablet computer – called the MiPad – to challenge Apple’s iPad. The tablet, which is priced at Rmb1,499 ($242) for the 16GB version, was so popular that the first 50,000 units sold out in the first five minutes after it was launched.
“I believe the Xiaomi tablet will become the best Android tablet,” Lei proclaimed triumphantly.
This week, he also unveiled the highly anticipated Mi4, Xiaomi’s latest smartphone. The device looks “distinctly iPhone-esque,” says TechCrunch. The specs are top-notch too – and especially so for the price. For example it packs a quad-core Qualcomm Snapdragon processor. This also features in Samsung’s Galaxy S5, but at $322 the Mi4 is considerably cheaper…
It’s not just about hardware
While Xiaomi has a reputation for aggressive pricing, it is the software that sets its smartphones apart from other low-cost producers.
To keep customers loyal, the company offers its own version of Android, called Miui. Fans can help design Miui with feedback and some of their suggestions have been incorporated into updated versions of the operating system, which get released every Friday. The forum discussing Miui has more than 10 million registered users, and gets 100,000 daily posts. The business model has helped Xiaomi not only retain customers, but spread buzz about its new products, and reduce some of its research and development spending.
With Miui as its base, Xiaomi has also crafted a vast ecosystem around the handset in which users can play games and install apps. “Cellphones are really just like PCs were 20 years ago,” the company’s co-founder Lin Bin said at a business conference last year. “They generated big profit margins in the beginning. But those margins are in the single digits now. The same thing is beginning to happen to smartphones. So rather than focus on devices where margins will decline, we’re focusing on services.”
“This is the first time we’ve seen an Android smartphone catch up to the iPhone’s most important engagement metric – and exceed it,” a flabbergasted Flurry reports.
Watch out, Samsung
Xiaomi is already selling in Taiwan, Hong Kong and Singapore, but it wants to grow its business further afield. Lin told the Financial Times recently that the smartphone maker would invest heavily in India as part of its wider expansion into the world’s larger developing economies, including Brazil and Indonesia – where product launches are planned later this year.
In India – where it began selling smartphones this week – it is replicating its distribution strategy in China. Xiaomi will only sell its phones online, via a partnership with Flipkart, India’s largest e-commerce site by revenues. That means it will bypass the smaller retail stores favoured by many other mobile companies. In doing so it hopes to keep prices down. It has also hired local engineers to develop mobile internet services specially for Indian consumers.
“India will be the first market where we put in a significant effort to launch our services with a local flavour,” says Hugo Barra, Xiaomi’s vice president for global operations (and who Lei poached from Google last September).
That’s bad news for Samsung. The South Korean giant is the biggest seller of smartphones in India, mainly supplying low-to-mid-end handsets. The battle at the low-end is brutal; Samsung claims that its quarterly profit dropped 24% from a year ago owing to intense competition for cheaper phones. Analysts reckon that Samsung could be squeezed further if Xiaomi’s expansion into India is a success. “Samsung’s low-end phones may cost about the same, but they’re not as powerful. And if the trend of cheap, powerful devices in emerging markets continues, Samsung is going to see its market share and profit growth dwindle even more,” Business Insider warns.
It’s not all smooth sailing…
The Chinese handset company has had problems with some of its overseas expansion plans. For example, Barra says it has delayed the launch of the Mi3 in Indonesia and Brazil due to a “long and painful device-certification process”. In these countries it could take as long as six months to get products certified for sale, Barra says.
At home, some are sceptical about Xiaomi’s hopes of international domination. China Enterprise News says part of the company’s success in China is down to Lei’s personal charisma. Lei is sometimes touted as “China’s Steve Jobs”. Like the Apple founder, he has a cult following – mostly young, male and gadget-obsessed – and he seems to invite the comparison by wearing black shirts and jeans, Jobs-style, at product launches. At this week’s launch, he even showed a “one more thing…” slide, something Jobs used to do when he had a surprise announcement during keynote speeches.
Rather unconvincingly Lei says he wants to distance Xiaomi from the Cupertino-based tech giant – his firm is not just “China’s Apple but the world’s Xiaomi”, he claims – but few analysts believe that Lei’s personality will produce a similar halo effect on sales outside China, or generate the firm as much free publicity.
Sahil Muhan Gupta, a columnist for India Today, a magazine, acknowledges as much. “Xiaomi is quite an unknown entity in India. Yes, it’s called the Apple of China outside India, but its absence from traditional retail channels will be a challenge. It’s not a well-known brand like a Motorola that it’s products will do well just by word of mouth,” he warned.
How important is the export plan?
By selling phones barely above cost, Xiaomi is trying to use its hardware to generate sales from accessories, apps, games and other add-ons. That business model also means that it needs to build a signficant user base for its handsets in order to monetise its services business.
In the first half of the year, Xiaomi had sold 26.1 million phones, primarily in China. That had already surpassed the total number for last year, although it was less than half its 60 million target for the full year, says Economic Observer. This suggests that maintaining supercharged growth hinges on sales in overseas markets like India and Indonesia. With the delays in certification in some of these markets, there’s a chance that Xiaomi may miss its sales targets (although the company told Sohu IT, a portal, that it has been profitable since last year).
CBN also reckons that Xiaomi’s cost advantages in China are starting to erode, especially as domestic producers like Huawei and ZTE have started to churn out high-performance gadgets that rival Xiaomi’s. “Low-cost high performance is no longer unique to Xiaomi,” the newspaper declares.
“Delivering great value for money has long been Xiaomi’s strength. But the problem is that there are always going to be companies that can compete at even lower prices. And the cheaper it goes, the more competition it faces,” says Wang Yanhui, secretary general of the Mobile China Alliance.
If the early welcome for the Mi3 in India is anything to go by though, Xiaomi’s growth spurt may have have some way to run yet. Demand for the Mi3 handset, which only went on sale on Wednesday, was so strong that the traffic seems to have crashed Flipkart, its online distributor. By that stage, the e-commerce site had taken 100,000 pre-orders for the $232 phone, the local media reported.
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