Xiaomi: Fueled by Open Innovation

“We must curb the tendency for greed and win absolute trust from consumers. So we’re now deliberating, I think we may write this into the company charter, that we will not, in perpetuity, exceed a certain number of percentage points in profit on our hardware. Our target is just this one or two percentage points. We want all consumers who buy our products not to hesitate.” Lei Jun, CEO and Founder, Xiaomi [12]

Xiaomi has returned

Xiaomi, a Chinese smartphone maker, had returned its position to 5th largest share in the worldwide smartphone market in 2017. [1] Xiaomi struggled, in 2016, in both domestic and international market and Xiaomi’s smartphone sales dropped almost by 18% YoY [2]; Xiaomi officially refused to disclose their sales result for 2016. [3] Many were surprised by this unprecedented rebound and called Xiaomi a “Chinese Phoenix”. [4]

 

Open Innovation at Xiaomi 

Since insertion in 2010, Xiaomi is well-known for two things; low price products with comparable quality and devoted customers “Mi Fans”. [5]  Xiaomi developed Android-based user interface MIUI for the company’s smartphone products in 2010. Xiaomi set up an Internet forum to receive feedback from customers at the very beginning stage of development. Enthusiastic customers eagerly participated in the development phase by discovering and informing defects, bugs, and possible improvements for MIUI. Ever since Xiaomi has been releasing updated MIUI every Friday at 5 PM, harnessing customers’ ideas. This crowdsourcing of user interface development was crucial for Xiaomi’s success since the company had no brand or reputation. The key users not only helped developing but also had an important role in spreading Xiaomi’s vision and gathering more “Mi Fans”. As a result, in 2011, when Xiaomi first revealed its smartphone, MIUI user base was already 300,000. The active user of MIUI further expanded to 190 million by 2016.  [6] Experimental open innovation of Xiaomi has accomplished its goal to generate “loyalty and brand-“stickiness” among customers”. [4]

 

Investing, Partnership, Ecosystem : Being Everywhere

Xiaomi raised a $1.1 billion funding in 2014 and used it to fuel the company’s growth. Xiaomi vigorously invested in startups. Xiaomi made hundreds of partnership with startups and released all different kind of products under Xiaomi’s name including drones, air purifiers, power banks, scooters, electric fans, smartwatches, TVs and even electric rice cookers. Xiaomi didn’t have manufacturing facilities to produce those products.


Products of Xiaomi’s Ecosystem [7]

Xiaomi, in turn, outsourced manufacturing but involved in the design process of its entire product lineup. Through this process, Xiaomi could deliver various products with the incomparably low price. Many were skeptical about this rapid expansion to non-smartphone industries. Even some claimed unnecessary partnership would ruin Xiaomi’s future given its very narrow margin and blamed the partnership to be a cause of sales dip in 2016. Nonetheless, Xiaomi continued its strategy and made a huge presence at retail business as opposed to its online-only strategy in the past. Now Xiaomi asserts that the company is not a smartphone maker but internet platform provider. Establishing an ecosystem through partnership and outsourcing is one of the important aspects of Xiaomi’s open innovation. In addition, Xiaomi clearly has built its ecosystem based on its Chinese “Mi Fans”.  A synergy between fan-based innovation and on/offline ecosystem made Xiaomi’s valuation $54 billion at the point of IPO; the company’s goal was $100 billion. [8]

 

Sustainable Growth

Xiaomi’s open innovation of MIUI and expanding its product lineup facilitated its rapid growth and turnover in 2017, as well. However, Xiaomi’s lack of originality and plagiarism of IP on hardware are always criticized. Besides, the low quality of the company’s products is always an issue even though some argue that the price matches the quality. To overcome these issues and grow further, Xiaomi should be cautious in selecting partners. Building an ecosystem with partnership could give Xiaomi benefit of cost-effectiveness, but open innovation or outsourcing always entail control problem. Once the company fails to control the quality of the partner’s products, customers―even loyal customers― will turn their back.

Xiaomi should protect and not infringe any intellectual property (IP) to create a global presence. The company is facing multiple lawsuits in not only domestic but also international courts including the U.S. [9][10] Furthermore, Xiaomi should consider the way to incentivize MIUI users who participate development of UX. Sustainable Open Innovation requires a company to compensate the person who brought new idea so that the company would establish a competitive advantage.

 

Future and more

Xiaomi’s stock price dropped sharply after IPO while the company aims to hit 100 million smartphone sales in 2018 and might become the world 4th largest smartphone maker. [11] There could be multiple reasons behind this drop; its razor-thin margin, the overall stagnation of the smartphone market, or even external pressure such as lawsuits and trade war. Nonetheless, Xiaomi will not stop its open innovation strategy. How long can open innovation be sustainable without making any profit? Was open innovation critical to the success of Xiaomi? or was it just because of cheap products? Can this type of open innovation be applicable to different companies and industries?

 

Xiaomi’s stock price since IPO (at October 12) [8]

 

 

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[1] Faulkner, C. (2018). Xiaomi grew more in 2017 than Apple, Samsung and Huawei combined. [online] TechRadar. Available at: https://www.techradar.com/news/xiaomi-grew-more-in-2017-than-apple-samsung-and-huawei-combined.

[2] Russell, J. (2017). Oppo topped China’s smartphone market in 2016, as Apple recorded first annual decline. [online] TechCrunch. Available at: https://techcrunch.com/2017/02/05/oppo-topped-chinas-smartphone-market-in-2016/.

[3] Russell, J. (2017). Xiaomi stops disclosing annual sales figures as CEO admits the company grew too fast. [online] TechCrunch. Available at: https://techcrunch.com/2017/01/11/xiaomi-2016-to-2017/.

[4] Kline, D. (2017). Behind the Fall and Rise of China’s Xiaomi. [online] WIRED. Available at: https://www.wired.com/story/behind-the-fall-and-rise-of-china-xiaomi/.

[5] DONG, J. and ZHANG, Y. (2016). When Customers Become Fans. [online] MIT Sloan Management Review. Available at: https://sloanreview.mit.edu/article/when-customers-become-fans/.

[6] Bhushan, K. (2018). Xiaomi’s MIUI custom ROM now has over 190 million monthly active users. [online] hindustantimes. Available at: https://www.hindustantimes.com/tech/xiaomi-s-miui-custom-rom-now-has-over-190-million-monthly-active-users/story-kMZBkmBhyq1OFf3aAvnH9K.html.

[7] The company’s official website. Available at: https://www.mi.com/us/.

[8] BORAK, M. (2018). Xiaomi shares slide more than 40% since its peak. [online] TechNode. Available at: https://technode.com/2018/10/12/xiaomi-shares-40/.

[9] Jiang, S. (2018). Xiaomi sued for alleged patent infringement ahead of blockbuster IPO. [online] REUTERS. Available at: https://www.reuters.com/article/us-xiaomi-coolpad-lawsuit/xiaomi-sued-for-alleged-patent-infringement-ahead-of-blockbuster-ipo-idUSKBN1IC11L.

[10] SOO, Z. (2015). China’s Xiaomi slapped with patent-infringement suit by Blue Spike in US over upcoming Mi 5, Mi 5 Plus smartphones. [online] South China Morning Post. Available at: https://www.scmp.com/tech/enterprises/article/1889024/chinas-xiaomi-slapped-patent-infringement-suit-blue-spike-us-over.

[11] Russell, J. (2018). Xiaomi looks set to smash its 100M sales target for 2018. [online] TechCrunch. Available at: https://techcrunch.com/2018/10/25/xiaomi-100-million-sales/.

[12] Yang, Y. (2018). Xiaomi’s billionaire founder reveals his formula for success. [online] South China Morning Post. Available at: https://www.scmp.com/tech/article/2140644/xiaomi-ceos-rather-counter-intuitive-success-formula-dont-be.

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8 thoughts on “Xiaomi: Fueled by Open Innovation

  1. To some extent, the business model of Xiaomi is quite similar to Valve. For Valve, users are involved in game modifications on the Steam platform, which became a major source of innovation for Valve. Xiaomi’s fast growth and expansion is largely fueled by its online forum and “Mi Fans” too, and they are able to maximize customers’ life time value through cross-selling. Once a customer buys in Xiaomi’s philosophy, he or she is likely to buy Xiaomi’s other products such as TVs and rice cookers. I wonder, though, to what extent was the innovation at Xiaomi achieved through open innovation? As we can see from the results, their products lack originality and innovation. Are the Mi Fans really contributing to the company’s innovation process?

  2. It is surprising that Xiaomi would rely on open innovation to develop their products given that “the company had no brand or reputation”. In stark contrast to Xiaomi, Apple explicitly refuses to solicit customer feedback for product design, opting instead to dictate what users want. Apple’s brand and reputation were founded on Steve Jobs’s unwillingness to cater to the masses and his decision to set trends in a top-down manner. I am doubtful that Xiaomi’s decision to crowd-source their product development strategy can translate into any sort of consistent brand or reputation. While open innovation may allow Xiaomi to develop products quickly, I wonder if this method of design results in a muddled company vision and strategy. I also imagine that this may contribute to a lack of cohesion when it comes to marketing Xiaomi’s products.

  3. I love the idea of crowdsourcing innovation from a pool of dedicated customers. At the very heart of Design Thinking is to empathize with the end-users to truly understand their pain points and hence, unmet needs. By involving Xiaomi fans in the innovation process, the end product is far more congruent than any other product that could be dreamed up in a vacuum without user input. I think a salient question here is whether Xiaomi is able to keep up with the Mi fans’ collective imagination!

  4. The use of open source is quite interesting here and I wonder where the main benefit comes from. Is it from the companies ability to build better products based on input from their following? Or is it based on the open source nature encouraging and building up a large “fan base” which has translated to a large customer base?

    On the IP point, it’s concerning to see they are facing lawsuits in many geographies. Given its rapid diversification and expansion into industries beyond smart phones, it is not surprising that they have been challenged to adequately monitor and control that products coming through their platform are not built on protected IP. I imagine that in the search for rapid growth, they’re okay with taking on these lawsuits, believing that slower growth with tighter controls would ultimately be more costly for them.

  5. Open innovation seems to be ingrained in Xiaomi’s identity since they built their first products based on Mi fans’ feedback. I think my main concern about their entrance into markets for other products would be whether those innovations would actually result in sales. Consumers may feel engaged and excited by the prospect of participating in the company’s product development process, but they may not actually end up purchasing those products especially if their quality is poorer than other brands. Additionally, what customers demand may sometimes not be congruent with the image or purposes that the brand wants to work towards.

  6. Really fascinating and well-researched paper! It’s interesting how a hard-ware company could crowd-source ideas and garner such a large consumer interest before it even launched or became a brand. I do however wonder, how the company applies the filter on this pipeline of ideas to develop really differentiated and congruent products. I would also question ways in which Xiaomi could engage or incentivize their users for the ideas they contribute to avoid legal issues.

  7. Fantastic article!! When I think about opensource innovation, Xiaomi immediately came to my mind. With Xiaomi’s “MI ecosystem”, it was able to build an empire based on connected hardwares. Xiaomi’s effort was largely overlooked by the world, especially the western world, evidenced by the comments above who expressed surprise. I think you asked very insightful and thought provoking at the end. How sustainable is Xiaomi’s model remains to be seen. However, I do believe there’s a network effect around Xiaomi’s products.

  8. Really interesting article and I learned a lot! To add to one of the previous comments, it’s a bit of a myth that Apple doesn’t do customer research. While the popular narrative is that Apple told customers what they should want, in reality Steve Jobs talked to customers relentlessly. He stood inside Apple stores, listening to customer reactions, questioning how people perceived the products, listening for unmet needs. Jobs and others at Apple did constant customer research to influence product design.
    Xiaomi’s approach of buying a plethora of startups could somewhat be called a form of open innovation. By investing in a wide variety of disparate industries, Xiaomi is incorporating new ideas, new technology, and new people. I question the longer term business viability of this strategy — while incorporating new technologies and exposure to new ideas is good, it isn’t clear to me that casting a wide net across many product categories is the right approach. Does that lead to a lack of focus and a scrambled org? Should Xiaomi instead focus on the core smartphone business and continue to use open innovation to improve that vertical?

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