Most smartphone users in Western countries decide between Apple and Samsung, some may take Chinese newcomer Huawei into consideration. Mobile giant Xiaomi from China is widely unknown in our hemisphere. However, the company was the fourth-largest smartphone manufacturer worldwide at the end of 2017. It only sold 35% of Apple’s shipment volume, but growth rates of 96% are impressive. After a barnstorming market entry in 2011, a deep crisis followed in 2016. A drastic change of business model led to a resurge during the last two years. Xiaomi is now aiming at becoming the most important digital ecosystem. Its hardware – sold at a very competitive price – and equipped with a community App, is the optimal basis for expanding digital reach fast and selling digital services.
iq! analyzes the company’s strategic approach and the radical adjustments to it.
Xiaomi rises to threat Apple and Samsung
After Xiaomi’s founder Lei Jun announced the company’s first smartphone Mi-1, the first batch of 400.000 units was sold out within one and a half days. Back then, Xiaomi sold only Online. Its low cost structures made very low unit prices possible. Xiaomi had no expenses related to stores and relied on word-of-mouth recommendations rather than expensive advertising. In 2014, only after three years of existence, Xiaomi became the third-largest smartphone manufacturer worldwide without leaving Asia. It’s initial business model of low prices in combination with good quality and design had proved to be a tremendous success.
The harsh setback
Unfortunately, the initial boom did not last. The mobile star began facing problems in organization and supply chain which befalls many fast growing companies. Sub-contractors had delivery issues, recruiting efforts worked too slow. Online was the perfect channel for younger and urban target groups but failed to reach more remote urban areas where physical retail is still predominant. Xiaomi’s shipment figures declined and the market position deteriorated.
Top 5 Smartphone Manufacturers, Q4 2017
Source: IDC Worldwide
The strategic stroke of genius
However, Xiaomi managed to answer the crisis with major strategic adjustments. The company opened a series of stores (called “Mi Stores”) and added an important contact point to the customer to its sales portfolio. It added a row of products to its offer and invested heavily in start-ups which are active in the field of smart home and consumer electronics. The corporation claims to target customer “pain points” with its solutions. It sells for example the leading air purifier in China to tackle the widespread pollution issue, a rice cooker and a vacuum cleaner robot at very competitive prices.
Every product sold is equipped with the MIUI Firmware and a community App. It adds to the digital reach of the company. Since the margins of software and services are much more interesting than those of hardware sales, Xiaomi aims at becoming one of the leading ecosystems in the digital world. The Mi stores attract people very successfully and the broad portfolio pushes sales. Customers are actively integrated in the optimization of products and influence for example the content of the weekly updates of the Mobile phone software. The Xiaomi community has currently around 300 Mio. members.
Overview Xiaomi’s product Portfolio
Source: iq! Management Consulting
Xiaomi proved by its radical reaction to a crisis, how powerful an agile definition of a business model can be. The speed of investments and product launches is breathtaking. Sales figures and Design Awards prove the concept. Nevertheless, Xiaomi adapted its business model primarily to the preferences and behaviour of an Asian target group. During the upcoming expansion to Western countries the company will face a bunch of new problems. In the US and Europe, most mobile phones are sold via telecom operators. Xiaomi is not experienced with this sales channel and has to build a distribution network. Customers in these countries are very attached to brands like Apple. It is uncertain if Xiaomi’s policy of minimum advertising will work.
Nevertheless, Xiaomi’s approach to digital markets stays very convincing. It will be very interesting to watch if the digital reach built will pay off and attractive digital service sales will soar. .