Xiaomi: China’s Threat to Apple

Xiaomi’s long-anticipated IPO is expected to be valued at $100 billion – quadruple of Alibaba’s record breaking offering of $25 billion three years ago. What’s Xiaomi’s secret to success?

Founded in 2010 as a lean startup to sell smartphones at cheap prices over the internet, in merely 4 years, Xiaomi overtook Samsung by volume and became the largest smartphone vendor in China. In 2014, it was considered as the top three unicorns in China along with Didi and Uber, according to CB Insights. Despite the fierce competition in China’s low-price mobile phone market, Xiaomi maintained its strong position and surpassed its sales target by 18% in 2017.

 

I think the most critical reason to Xiaomi’s amazing success is its great alignment between value creation and value capture through an effective operating model.

1) Sell smartphone with high quality, but at low prices

Many might wonder how Xiaomi manages to sell high-end phones at rock-bottom prices, which it claims to be just above cost. What Xiaomi has done, is as follows:

  • Procurement: To lower procurement cost and shorten its process, Xiaomi takes components from other companies (for example, the Mi3 comes with a Sony camera, Sharp/LG display and a Philips flash). Once these components are ready, they’re shipped to Shenzhen – the biggest port near Hong Kong and are assembled in a local factory.
  • Just-in-time supply chain management: Xiaomi’s manufacturing is completely dynamic based on orders. Once Xiaomi receives a particular number of orders, only then will they begin procuring the components at a large scale for production.
  • Inventory: Since demand drives the manufacturing process, there’s no surplus raw material to be managed. Also, by employing the direct to consumer approach, inventory cost has been kept at a minimum.

By ensuring the effective reduction of costs, Xiaomi was able to maintain a competitive price, typically at 20%-30% of the price of a Samsung or Apple smartphone with similar specifications.

By delivering high-quality products to its buyers, it has won over a legion of loyal fans to test new features and drum up enthusiasm for the company. Hence, Xiaomi was able to keep each model on the market only up to 18 months, while it makes money by charging for services and accessories that accompany each new model.

 

2) Offer superior software system, comparing to typical low-priced smartphone competitors

Xiaomi powers their phones through a customized android operating system called MIUI. Unlike other companies, Xiaomi lets users help make decisions on the customization and additional features that will go into the next MIUI release. Unlike other Chinese mobile manufactures, Xiaomi spared no R&D expense on upgrading its software system, in order to provide better customer experience.

 

3) Emphasis on digital presence

Xiaomi does not have a single factory or physical store, a radical departure from the traditional operating model utilized by other major manufacturers in the smartphone space. Xiaomi employs a unique model that differentiates itself in every phase of the customer journey. Unlike a traditional company that relies on brand and product marketing to build awareness, Xiaomi uses the power of crowd sourcing and online communities to create awareness of its products and at the same time ensuring that the products built are what customers really want. Also, xiaomi solely conducts its sales through its e-commerce site. At the same time, it puts only limited quantity of phones for sale. In a sense, all new models are sold in limited volumes as “batch sales”, which strongly drives consumer fervor and inculcates built-up demand.

 

4) More than a smartphone

Xiaomi has gradually moved into a new era of technological innovation. They make products ranging from power banks to wearables to air and water purifiers. With hundreds of products sold on its e-commerce website, it is helping create a connected lifestyle for consumers.

More importantly, Xiaomi sees its smart devices as gateaways for mobile entertainment services, which would represent recurring revenues in the future. Xiaomi wants to create an ecosystem of apps available from its smartphones.  Therefore, Xiaomi decided to invest in video content development by taking a participation in Youku Tudou (online streaming company).

 

 

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2 thoughts on “Xiaomi: China’s Threat to Apple

  1. Thanks for sharing your post on Xiaomi. While visiting China over winter break, my cell phone broke and I quickly needed to buy a new phone. I struggled to speak Chinese with a friendly local, but eventually communicated that I needed to buy a cheap, but good cell phone. Once she understood my question, she immediately pointed me to Xiaomi. I’m not sure if the store concept is new, but Xiaomi was operating a small retail store with an Apple store vibe to it. The phone itself cost just over $100 USD with no service plan or contract subsidies and worked just as well as any other Android device I’ve owned over the years. Your article helped explain why Xiaomi is able to deliver such a product at low cost, but makes me wonder if this competitive advantage is sustainable and if Xiomi will expand into other products besides phones?

    1. Xiaomi actually has the largest smart appliances product line in the world, including air purifier, water filter, vacuum robot, tv set-top, etc. All of them are internet connected and can be controlled using app or their smart speaker. I think their phone will be their revenue generator in future but their smart appliances will be the profit generator. There is a strong network effect in the home IoT and appliances world.

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