It’s time for Xiaomi to step outside China

Founded in 2010, China’s leading smartphone maker was born of a belief that quality technology needn’t cost a fortune. It has been a short, sweet trip to the top; in the space of five years, Xiaomi has been crowned the country’s leading mobile vender, and only Apple and Samsung can boast a greater presence on the world stage. “In every conceivable benchmark, it’s almost unprecedented in terms of its speed of growth”, said Yuri Milner, an investor speaking to Bloomberg about the company’s December-time funding round.

“Xiaomi grew at an unprecedented rate, achieving more than 200 percent annual growth level in every quarter last year as it went on to become one of the top three leading brands in its home market”, said Neil Shah, Research Director of Devices and Ecosystems at Counterpoint Research. “However, the Chinese brand reached its peak shipments in Q4 last year in its domestic market.”

Recently the ‘Apple of China’ (tipped to reach a $100bn market cap by Milner) has fallen on hard times, and there are signs its hold on the market might be slipping.

Cited time and again as a shining example of what can be achieved with the right vision at the right time, many analysts are – for the first time – speculating that Xiaomi’s spell in the limelight is coming to an end. Perhaps the only Chinese company with the credentials to become the country’s first global consumer brand, its success depends on an ability to push on with the next phase of its growth story.

China mobile
Xiaomi was given a shot of momentum in 2012 when the Chinese smartphone market overtook the US’ to become the largest in the world, racking up 208 million units and accounting for a 21 percent share of the global market. Since then, no other country has come close, and, in a period when US and European markets have struggled with stalling sales, demand in China has skyrocketed. Smartphone sales in 2013 crossed the one billion mark, and climbed higher still in 2014, though signs started to emerge earlier this year that growth was beginning to fade.

“China has reached saturation – its phone market is essentially driven by replacement, with fewer first-time buyers”, said Anshul Gupta, Research Director at Gartner, writing in a press release. “Beyond the lower-end phone segment, the appeal of premium smartphones will be key for vendors to attract upgrades and to maintain or grow their market share in China.”

IDC statistics, meanwhile, indicated smartphone shipments in the first quarter were down four percent on the previous year, and suffered their first annual contraction in six years.

In this same quarter, Xiaomi slipped to second place behind Apple in terms of China sales, and smartphone sales for the first half of the year reached a disappointing 34.7 million, less than half the company’s annual forecast. Squeezed by competitors in the low to mid-range segment, the company’s report card eluded to the possibility that its dominance could be wearing thin.

The need for expansion
If it truly is to improve its standing, not just in China but internationally, Xiaomi must go far beyond emerging smartphone markets and make good on its potential as a global electronics brand. Plans to broach India and Brazil are in motion, and look on course to boost growth in the immediate future, but in order to compete alongside the likes of Apple and Samsung, Xiaomi must explore opportunities other than mobile.

“India and [South East] Asia are the fastest-growing [smartphone markets] in the world at present, so they will make for some of the easiest gains for Xiaomi”, said James Moar, Research Analyst at Juniper Research. “They are also the ones most driven by social media, which plays into Xiaomi’s current strategy. With Latin America tabled as the next area of expansion, Xiaomi doesn’t need to enter the fray of markets like North America and Europe – particularly when companies like ZTE and Huawei, who are trying similar ‘marketing-lite’ strategies (grassroots brand engagement, sport sponsorship deals, etc) aren’t getting stellar results. Xiaomi is certainly looking to these markets, particularly Europe, but they clearly aren’t in any rush.”

In contrast to its closest rivals, Xiaomi spends very little on advertising, chooses not to employ brick-and-mortar stores, and sells its devices at wafer thin margins – a far cry from Apple, which is famed for its showroom-style retail strategy and big-budget advertising. Xiaomi cannot simply be slapped with the copycat tag; it has gotten into the number-three position not because it has emulated the higher end of the market, but because it has capitalised on the underserved lower end.

However, now that the mobile opportunity in China – and internationally – is less, the company must build on its existing strengths and explore alternative ways to expand its product portfolio, and perhaps even consider that most unspeakable of strategies: an IPO.

Already, the company lists tablets, headphones, fitness bands and TV products on its online marketplace, and by supplementing its mobile business with non-core products, Xiaomi can bring a greater range of consumers on board. Questions remain about whether the company can replicate its success elsewhere, but steady sales in countries and categories other than the familiar could do a great deal to reassure investors about its credentials long-term.

“Xiaomi entered India – the next big mobile phone market – last year, but the overall smartphone volume contributions are miniscule to maintain higher growth at a global level”, said Shah. “As a result, slowness to expand outside China effectively, coupled with slowing growth in China, with intensifying competition from other domestic players, has stunted Xiaomi’s growth this year. We are seeing a long tail of ‘me too’ players adopting the ‘Xiaomian’ go-to-market strategy of e-commerce plus low-cost guerrilla marketing, and they are taking the limelight away from Xiaomi.”

“Emerging markets still present many growth opportunities, but they require different skill sets for Xiaomi to be successful”, added CK Lu, Principal Research Analyst at Gartner. “[Its Mi brand] ecosystem is very Chinese-centric and it has to be localised to demonstrate value for consumers in emerging markets. Brand and channel building at [a local level] remain challenging for any Chinese vendors when expanding overseas.”

As a low margin business, it’s doubly important that Xiaomi takes seriously the prospect of one day becoming a diversified electronics company, and perhaps even the option of going public to that end. There is room for both Xiaomi and Apple in China, though the former’s low margin strategy might not do for those on higher incomes in mature economies. If its ambitions truly are as big as sources at the company say, expect the Chinese focus and wafer thin margins to fade as time wears on.

“Xiaomi sees markets beyond the smartphone as a way to extend its brand presence into new regions before beginning a full smartphone presence, and it also makes sense from a software point of view”, said Moar. “Xiaomi’s current revenue relies on monetising software, and so they will likely not want to ship phones to North America and Europe sporting Google Services. Getting users to buy hardware that connects to Xiaomi apps lays the groundwork for a fuller Xiaomi-based software experience further down the road. This means the introduction of a competing app store to Google Play (for example) would be less of a shock to the system for consumers who already know the brand and are familiar with the brand’s services.”

Already, local competitors Huawei, Vivo and Oppo are encroaching on Xiaomi’s leadership in the affordable smartphone space – indication enough that the company’s ambitions should lie elsewhere. True, Xiaomi’s success is due in great part to the neglected lower end of the market, but its future lies with pastures and products new. As the company continues to build its presence in countries away from China, and in products and services other than mobile, expect to see a new and improved brand that stands up to – and alongside even – the established titans of the industry.