Is the Xiaomi Miracle Over?

5 year ago, a samrtphone company were still busy trying to figure out what kind of smartphone you need. Do you need android in it or some other operating system, should the screen be bigger or smaller than 5 inches. Do you need features such as 3D cameras or 3D screens. But Xiaomi decided that your average smartphone is good enough instead business models needs some innovation.

In 2011, the first Xiaomi phone MI 1 was lunched and we didn’t know just how bigger it would be. Before it lunched, xiaomi made a name for itself with it’s excellent customised skin called MI UI. And it could install basically in any popular smartphone. So the MI 1 at the first just seemed to be a vehicle for MI UI. A way for xiaomi to control not just the software but for the first time ever also the hardware experience. Xiaomi turn the chinese smartphone market upside down within just 4 years. It grew from begin a small custom ROM maker to becoming No. 1 in the chinese smartphone market according to sales. It beat our Samsung, Apple and local competitors like Huawei with the insane growth.

At the end of 2014, the investment value of the company was at 46 billion USD making it the world’s most valuable tech startup. Which is especially impressive because we have hardly ever seen hardware companies grow this quickly. Just to compare Nokia’s handset business was bought by MicroSoft that same year for 7.2 billion USD, which is just 15% device value of xiaomi. Xiaomi founder became the 23rd richest person in china and even the former head of Android “Hugo Barra” left google to work for xiaomi. The company and it’s momentum seemed unstoppable. Until 2015 came, the company was reluctant to release sales figures turns out that was because instead of the promised 100 million devices they sold only 70 millions phones. It is nowhere near what people expected from Xiaomi and given that the company isn’t publicly traded. It is pretty hard to get a clear picture of it’s financial performance but analysists seem to agree that 2016 is going to get even worse. In the first quarter of the year 2016, it felt in the third place in china with a 9% decrease in market share. And then 8% fall in second quarter bought it to the fourth place behind way Huawei oppo and even vivo.

The company isn’t failing but someting is clearly gone unexpectedly wrong. And to understand what that is we have to look at what makes Xiaomi successful in the first place. Xiaomi biggest archivement was making really good phones really cheap and this seems to be a common thing now a days with phones like OnePlus, ZTE and the Huaewi. But all of the phones are just replicating the business models that xiaomi invented. Here’s the core concept what they came up with. Apparently manufacturing a high end smartphone usually cost somewhere between 150 to 250 USD. Traditionally flagship phones usually retail for around 600 to 800 USD. That means two third of the selling price actually goes to things like marketing, warehousing and distribution cost or if the companies.

That sounds crazy but if you do the math, it really isn’t. Retailers alone especailly ones with physical sotres can easily add at least 40 to 50% on top of the manifacturing cost. Then those billboards, the tv ads and the 1 or 2 years of warrenty and whatever software update to get the old on paper themselves. Xiaomi found the way to take that overhead and reduce it massively to the point where it sells their flagship phones for around 300 to 400 USD. That means half price which blanks the question “how do they do it”?
Well for a start they get rid of distibutors and sold through their own website. So they can save those 40 50% and the cost of maintaining physical stores. Then they got rid of warehousing cost by selling small quantity in flash sales that are basically always guranteed to sell out. This way they can also avoid stockig up huge quantity of a phone just to find out that the demand isn’t really as big as expected. And finally they also got rid of big expensive ads and simply focused on too much cheaper social media and word of mouth advertisement for their carefully natured community.

So the whole idea was to create phones that are so cheap and so good that tye will create so much hype that the company won’t have to advertise them and won’t have to put them into stores infront of people to buy. But simply let the people come to them and buy those phones. Instead of push marketing, this is pull marketing because the company is not pushing those phone down people’s throats with ads but it is creating something that will pull those people in and it clearly worked. It’s initially xiaomi butchered the compitition until 2 things happened.

2. Companies figured out that copying the xiaomi business model which was at the heart of the success that wasn’t all that hard. Huaewi created its honor brand to complete directly against xiaomi. A bunch of people from Oppo sonic to lunch one plus with a very simillar business model. ZTE good on board with the axe online. Letv lunch their aggressively priced and advertised look all models. Alcatel and Meizu entered the game too and so did every other chinese manufacturer. Xiaomi suddenly got a taste of it’s own medicine and so many companies trying to fight on price. It’s just impossible to be the cheapes or the best value for more than a few days. It’s nearly impossibel to generate enough hype for any products just by being good and cheap.

2. Chinese smartphone market changed dramatically. In the last 2 years, growth has slowed from 62.5% to near complete stop at just 2.5%. Instead it is the average selling parts of the pones that is going higher and higher.

Two years ago the smartphone market in china was very heavily influenced by first-time buyers. Whereas now it’s influenced more by people who upgrading, it is called up-selling and obviously xiaomi’s focus on affordable doesn’t necessarily helped here. Huawei, Oppo and Vivo have all focused on creating a premium brand something aspirational. They are sponsoring the living crap out of every celebrity and TV show and apparantly it is working. People just don’t want value anymore but feeling of luxury the phone isn’t just a tool anymore. It is a lifestyle item and a social statement and xiaomi isn’t doing all too well in this light. So the chinese smartphone market was the main growth engine for xiaomi but obviously it is becoming a very tough one for them. As the company feels this, they are trying to diversing.

Hope it is easy to see why xiaomi is having a tough time. Their previously brilliant business strategy won’t really help them much further and instead the question of whether or not this amazine xiaomi miracle will continue will depend much more on how well they can deal with copycats like OnePlus an LeEco as well as more luxurious brands like Oppo, Huawei and Vivo.