Business Hw

20 Jul Business Hw

Xiaomi Mantra

Xiaomi’s rapid rise is changing the smartphone landscape in China, and potentially the world. China rapidly surpassed the United States of America to become the world’s largest smartphone market in 2011. While industry giant Apple’s attention was focused on overtaking industry leader Samsung for the fast-growing China market, Xiaomi burst onto the mobile phone scene catching both giants off guard. In the five years since their founding in 2010, Xiaomi rose to be the world’s third largest smartphone company based on units shipped. South Korea- headquartered Samsung Electronics Co. Ltd. and U.S.-headquartered Apple Inc. are the holders of the first and second spots, respectively.

When founded, Xiaomi’s vision was to develop and sell software for mobile devices using the Android operating system. As the company evolved, Xiaomi grew into a mobile Internet and e-commerce company that contract-manufactures smartphones and compatible devices designed to offer a complete customer experience. Xiaomi, one of China’s relatively few indigenous innovators, has been a major disruptor in China’s lucrative mo- bile telecommunications industry, due in large part to their emphasis on continuous, incremental improvement.

The reputation of Xiaomi’s driven founder, chairman and CEO Lei Jun, a Chinese serial entrepreneur and investor, is that he rarely rests. His reach in China’s high-tech sector is extensive, and his vision for Xiaomi ag- gressive. Lei stands out from many other Chinese IT leaders like Alibaba’s Jack Ma or Lenovo’s Yuanqing Yang; when he founded the company, he had no Western experience and did not speak English. To realize his vision, Lei surrounded himself with a world-class team of Chinese executives—and one prominent Western executive—with collective experience at top foreign IT firms like Google, Microsoft, Motorola, and Yahoo. This executive team complemented Lei and brought attributes that Lei lacked, in addition to considerable world-class IT experience.

Xiaomi was the 2014 leading smartphone vendor by shipments in China and the third largest smartphone manufacturer globally. Lei has come a long way from his youth in Xiantao, Hebei, to the helm of the most highly valued start-up in the world; yet, challenges remain for Lei and for Xiaomi. With more than 18 million handsets sold in China by 2013, and products launched regionally in Taiwan, Hong Kong, Singapore, Malaysia, Philippines, India, and Indonesia, the company contemplated global expansion. Xiaomi had been very successful in China, but how would they fare in the global market? Would Xiaomi need to develop additional capabilities to compete head-to-head with industry giants Apple and Samsung? Given Lei’s extraordinary range of interests and activities, would he have the focus and bandwidth to lead Xiaomi to its future?

Lei Jun, Founder, CEO, and Chairman

Lei was born during the height of China’s Cultural Revolution, in December 1969, in Xiantao, a small city in China’s central Hubei province where his father was a schoolteacher. He attended local primary and secondary schools. Lei earned a Bachelor of Science degree in Computer Engineering in 1991 from Wuhan University, one of the first schools in China to offer Computer Engineering.

Today, billionaire Lei is one of the richest men in China. Often referred to as the Steve Jobs of China, he dresses in simple black shirts and blue jeans emulating Jobs, whom he has admired since his college days. Like Jobs, he has been called a shameless self-promoter and supreme marketer—characteristics that are thought to partially explain his company’s success by Xiaomi’s competition and the media. Described as wonkish by the media and his colleagues, Lei’s technical focus remains intense and consistent. In the spirit of continuous profes- sional improvement, Lei seeks criticism as well as praise. His reputation as a very hard worker propelled him on a dynamic career path from the beginning.

Shortly after graduation, Lei began his career with Kingsoft Corporation Limited, a Chinese office soft- ware developer that creates software similar to Microsoft Office. His talent was recognized early and his career progressed steadily. Although he is often identified as its co-founder, Lei worked for Kingsoft for several years before being appointed CEO in 1998. He remained at their helm and, after repeated attempts, oversaw a suc- cessful initial public offering launch and listing on the Hong Kong Stock Exchange in 2007. Lei resigned from Kingsoft in 2007, reportedly for health reasons associated with the preparation of the company’s Hong Kong Stock Exchange listing. The IPO process had been exhausting. In July 2011, Lei rejoined Kingsoft and has been its chairman since then.

During his time away from Kingsoft, Lei realized that his real dream was to build his own high-tech com- pany. He concluded that timing was critical when starting a new venture, especially in the high-tech industry sector. The mobile Internet industry was taking off. Lei saw an opportunity to pursue his dream by catching the mobile Internet wave. Years later, in a post on Sina Weibo—a social media forum similar to a combination of Twitter and Facebook—in September 2011, he reflected on Xiaomi’s success and commented, “Things get much easier if one jumps on the bandwagon of existing trends…A pig could fly if it finds itself in the eye of a storm.”

Lei’s entrepreneurialism has been a consistent theme since his graduation from college. While at Kingsoft, Lei founded Joyo.com in 2000, an online bookstore company that was subsequently acquired by Amazon in 2007. From 2007 to 2010, Lei invested in various tech start-ups, including UCWeb—purchased by Alibaba in 2014—where he served as chairman and president of what became China’s largest mobile browser company.

In addition to his entrepreneurial activity, Lei is an investor who pursues three key areas for investment— the mobile Internet, e-commence, and social networks. He is a co-founder, founding partner, and chairman of the Shunwei Fund, a venture capital firm that specializes in incubation, early to mid-stage, and growth capital investments in a variety of information technology-related high-tech industries. Lei also co-founded VANCL Limited, an online apparel and accessories company; and YY Inc., a communications and social media platform where he serves as chairman.

Lei is sought after as a consultant in the mobile Internet industry for his vision expertise. He served as a director and chairman of Cheetah Mobile Inc., a Chinese firm specializing in Internet security, beginning in October 2010. Lei is an investment advisor for Taiwanese Hotung Investment Holdings Limited, a venture capital fund that invests primarily within Greater China. He also served as a director of 2020 ChinaCap Acquirco, Inc., a hedge fund, and is an advisory board member at the Great Wall Club, an organization that provides profes- sional services to leaders in China’s mobile Internet industry.

Xiaomi, Inc.

Xiaomi disrupted the smartphone industry in China through a combination of innovative marketing and dis- tribution practices; dynamic and pragmatic supply chain management; flexible manufacturing; and ambitious staffing practices focused on attracting and retaining world-class executive talent. From Lei’s founding vision to develop and sell software for mobile devices using the Android operating system, the Beijing-based Xiaomi quickly evolved into a smartphone juggernaut.

In 2011, unit sales of all Xiaomi smartphone models stood at 3.52 million. In 2012, Xiaomi sold 7 million units. Xiaomi far exceeded its unit sales target of 15 million units for all its models by selling 18.7 million units in 2013. Xiaomi’s unit sales of all its models more than tripled in 2014 as unit sales reached 61.1 million. Xiaomi’s evolution has been rapid, savvy, and calculated. (See Tables 1 and 2 for details on China’s smartphone shipments.)

The Xiaomi Executive Team

Lei did not achieve this success alone. He surrounded himself with a world-class team of Chinese former executives, who previously worked at multinational high-tech firms, like Lin Bin from Google, and others from Microsoft and Motorola, and a deep bench of technical experts eager to grow with the company. Lei recruited Hugo Barra, formerly vice-president of Android Product Management at Google, to oversee global operations. Lei is quick to give credit to the team who, for the most part, have been with him since the beginning. (See Table 3.)

Xiaomi Early Days

Xiaomi began with firmware—software that provides control, monitoring, and data manipulation in devices such as digital cameras and mobile phones. Their MIUI firmware was developed and launched in August 2010. MIUI is a customized ROM—read only memory. (See Exhibit 1 for a picture of the MIUI skin.) During the rise of Android smartphones, firmware developers across the world debated what features were important and what needed to be added to a smartphone. The varied preferences among the community gave rise to different versions of Android. One such Android firmware was MIUI (pronounced as Me-You-I) developed by Xiaomi. MIUI, a custom Android ROM, was developed for the specific needs of Chinese users. However, the ROM found fans all around the world for two reasons. One, MIUI simplified the Android interface in terms of the application drawer, notification bar, and camera functionality. Two, the interface of MIUI was similar to that of an Apple iPhone without the iOS and a high price tag. This meant that Android users could have the flexibility of Android while enjoying the simplistic aesthetics of iOS. These two points enabled MIUI to gain traction and attention among those in the international Android community. On the other hand, MIUI was criticized for imitating features from Apple’s iOS and Samsung’s TouchWiz UI (user interface).

Table 3. Xiaomi Executive Team

• Mr. Bin Lin graduated from Sun Yat-sen University in 1990, where he obtained an Electronic Engineering degree. He received his Master’s Degree in Computer Science at Drexel University in 1992. Soon after, he joined Microsoft, where he worked as Lead Project Engineer, Senior Development Manager of MSRA, and Engineering Director of MSRA. Mr. Lin also contributed to the R&D of Microsoft products, including Windows Vista and IE 8. In 2006, he joined Google as the Vice President of the Google China Institute of Engineering and the Engineering Director of Google Global. He was in charge of building and managing Google China’s Mobile Search and the Android App Localization teams.

• Mr. Wanqiang Li is currently head of the Mi.com e-commerce team. In 2010, Mr. Li co-founded Xiaomi where he led both the MIUI and Mi.com teams. Mr. Li has made a significant contribution to software and hardware design, development, marketing, and other departments at Xiaomi. Since 2012, Mr. Li has been in charge of the e-commerce Management, Operations, and Marketing teams. Mr. Li is also the creator of popular Internet keywords such as “mobile phone geek,” “F code,” and “Mi Fan Festival.” In 2000, Mr. Li joined Kingsoft and co-founded their UIUX Design Center. He served at Kingsoft in various positions as the General Manager of Kingsoft Dictionary, Chief Designer of UI department, Director of Design Center, and Director of Internet Content. Mr. Li has also played a key role in developing many well-known software projects, including Kingsoft Antivirus, Kingsoft Dictionary, and WPS Office. He is also considered one of the earliest UI and HCI experts in China.

• Dr. Guangping Zhou is the director of Xiaomi’s Mi-Phone Team, and obtained his PhD from Georgia Tech University in 1991. He was the Chief of Hardware R&D of Motorola’s best-selling model “Ming” series. In 1995, he joined Motorola as a core expert engineer and returned to China to establish the R&D Center for Motorola China in 1999. During his career at Motorola, Dr. Zhou served as Senior Director of the Motorola Beijing R&D Center, Chief Engineer and Director of the R&D Center of Motorola Personal Communication Department, Vice Chairman of the Mobile Patent Committee in Motorola China Research Academy, and the Vice Chairman of Cellphone Quality Control in Motorola Asia-Pacific.

• Mr. Jiangji Wong leads the Mi Wi-Fi and Mi Could teams. He graduated from Purdue University and worked for Microsoft from 1997 to 2010. While serving as the Director of Development at the Microsoft China Academy of Engineering, he oversaw the development of products such as the high-performance analysis system of Microsoft’s business server, B2B systems, Biztalk auto-logistics distribution system, Windows Mobile (China), Windows Phone 7 Multimedia, Internet Explorer, and Instant Messenger.

• Mr. Feng Hong leads the MIUI division at Xiaomi. He graduated from Shanghai Jiao Tong University, where he obtained a computer science and engineering degree. He continued his academic career at Purdue University, where he received a Master’s Degree in Computer Science. From 2001 to 2005, Mr. Hong worked at Siebel and then joined Google as Senior Software Engineer in 2006. While at Google Headquarters, Mr. Hong oversaw Google Calendar, Google Maps, and Google 3D Street View. From 2006 to 2010, he worked as Senior Product Manager of Google China and led the Google China team to develop a series of localized products like Google Music and Google Pinyin Input.

• Mr. De Liu leads Xiaomi’s Industrial Design and Ecosystem development programs. He graduated with a Master’s Degree in Industrial Design from Art Center College of Design located in California, USA, where he is one of only 20 Chinese students to receive a diploma during the institution’s 80-year history. Mr. Liu returned to China to establish the Industrial Design Department at Beijing University of Technology, where he served as the department’s dean.

• Mr. Tong Chen leads Xiaomi’s Content Investment and Operations. He holds multiple degrees: an MBA from China Europe International Business School; a Master’s degree in Journalism from Renmin University of China; a Master’s degree in Communications from Beijing Institute of Technology; and a Bachelor’s degree in Electrical Engineering from Beijing University of Technology. Mr. Chen participated in the founding of a Sina subsidiary company in 1997 before joining Sina in 1998 as Executive Vice-President of Sina Corp and Chief Editor of sina.com.

• Mr. Hugo Barra is responsible for Xiaomi’s Global Division and is in charge of the company’s products and operations in all markets outside of Mainland China. Before joining Xiaomi in 2013, Hugo Barra was Vice President of Android Product Management at Google. Prior to joining the Android team, he worked for Google in London as Director of Product Management for Mobile, a role he had since joining the company in 2008. Hugo is a graduate of Massachusetts Institute of Technology, with Bachelor and Master’s degrees in Computer Science, Electrical Engineering, and Management Science.

MIUI was made for China. It quickly gained popular- ity among the Chinese users who primarily had inexpensive Android phones until then. Chinese users preferred the integration with local apps such as Sina Weibo and Chinese language options. Early on, emphasis was placed on MIUI to be able to run on multiple devices. MIUI continues to push firmware updates to phones that are no longer supported by their parent companies. For example, Samsung Galaxy S2 has received the latest Android firmware through MIUI rather than from Samsung. This has enabled Xiaomi to pursue longer life cycles for their own devices later on.

Beginning in 2013, Xiaomi decided to discontinue Google services on their devices in China and promoted the usage of their proprietary cloud services (MiCloud), paid themes (MiThemes), and paid games—one of the fastest growing IT sectors in Asia. To facilitate adaptation of these services, Xiaomi developed a virtual currency called MiCredits that can be redeemed in their online stores to access their value added services.

Inspired by the Walmart and Apple business models, Xiaomi provides the market with high-quality, customer- responsive, low-cost smartphones and extraordinary customer service. They offer high-end Android devices using many of the same components from the same vendors as industry lead- ers Samsung and Apple. They do this at very attractive price points. Xiaomi has earned the reputation as the smartphone manufacturer that enables almost everyone to own a smart- phone with high-end specifications due to its affordable prices and willingness to earn thin margins.

Xiaomi Smartphone Journey

In 2011, Xiaomi expanded its offering with the launch of its first smartphone, MiOne.1 Chinese consumers liked the MiOne so much that Xiaomi received 500,000 pre-orders in the first 36 hours they were available online. The company’s product portfolio currently includes two product families, the smartphone family and smarthome family, which offer a range of related mobile phones and consumer electronics that connect to the Internet in addition to mobile applications.

Xiaomi’s smartphones are sold unlocked and all run on the Android-based ROM with a custom MIUI skin. Xiaomi smartphones are competitively priced at roughly half the price of an unlocked Samsung smartphone or iPhone. Since 2011, Xiaomi has released a new flagship smartphone annually. The 64GB Mi Note Pro is the most expensive smartphone in Xiaomi’s portfolio with a price of $489. Apple’s comparable phone, 64GB iPhone 6, is priced at roughly $980 when sold unlocked.

Xiaomi’s smartphones range from those with high-end specifications, such as its Mi 4—somewhat compa- rable to Apple’s iPhone 6 and Samsung Galaxy S6—to smartphones with basic features like its low-cost Redmi brand, which are comparable to the features of phones like the Lenovo A7000 and the LG G3.

Although Xiaomi smartphones are sold at different price points based on their specifications, the pricing of all their phones is very competitive. An unlocked Mi 4 sells for $299.99, while an unlocked iPhone 6 starts at $649 and an unlocked Samsung Galaxy S6 sells from $629.99. (See Appendix 1 for detailed descriptions of Xiaomi products.) Xiaomi is China’s most popular smartphone brand in a crowded and hypercompetitive local market. (See Table 4 for a description of Xiaomi’s local Chinese competitors.) They rely extensively on social marketing to at- tract and serve customers and to drive their product improvement and enhancement process. Xiaomi uses social media hubs and fan communities—populated with Mi Fans—where they create a cool culture using a just for fans motto to both fuel marketing and guide product development.

Top-Selling Chinese Smartphone Brands 2015

• Xiaomi: The top smartphone brand in China.

• Huawei: Huawei is a well-respected global telecommunications equipment manufacturer that competes with Cisco

for a share of the telecommunications equipment market. This company is the biggest smartphone manufacturer. Although smartphones are not its flagship product, Huawei was regarded as the second best Chinese smartphone brand in 2014.

• Meizu: The third best Chinese smartphone brand, Meizu launched the Meizu MX4 and the Meizu MX4 Pro in 2014. Meizu smartphones are well known for their quality construction and high-end specifications at mid-range prices. Meizu has a well-respected music app and a Meizu fan base that helps propel this brand to higher heights.

• Oppo: Oppo is considered the fourth best Chinese smartphone brand. In 2014, it developed the first motorized rotating camera and the world’s slimmest smartphone, which measured 4.85mm in thickness. Its flagship brand for 2014, Find 7, runs on an Android 4.3 operating system, has a 1440p display, and a Snapdragon processor.

• OnePlus: OnePlusOne is the flagship smartphone for fifth place OnePlus. This smartphone possesses high-end specifications, a stylish design, durability, and is sold unlocked at less than half the price of other high-end smartphones. The approximate selling price is $299. The smartphone’s operating system is either Android 5.0.2 OxygenOS or Cynogenmod. OnePlus built a strong following through an exclusive marketing strategy: consumers could only purchase the smartphone if they received an invitation to do so.

• Zopo: Zopo, in sixth place, is a high-quality smartphone manufacturer but does not have the consumer following of better-known Chinese brands. As a result of this, the outlook for this company in such a highly competitive market is not very promising.

• Elephone: In seventh place, Elephone targets the low end of the smartphone market by the production of inexpensive phones. However, they manufacture low-cost phones with good specifications. So, the future prospects for this brand look quite bright. (See Exhibit 2.)

• Lenovo: Lenovo, in eighth place, is known for producing reasonably good products, including smartphones, but the company does not create marketing hype for its smartphones, nor does it develop cutting-edge phones. It is a worldwide player in the smartphone market.

• ZTE: ZTE is in ninth place. Founded in 1985, the Shenzhen-

based manufacturer is China’s largest publicly traded

telecommunications equipment company, listed on the Hong

Kong and Shenzhen stock exchanges. ZTE is committed to

research and development, having been recognized by the

International Data Group as one of China’s top 10 competitive

brands and the most innovatively competitive brand among the top 10 holders. ZTE has been recognized by the World Intellectual Property Office as one of the world’s largest originators of technology patents. They spend 10 percent of their annual revenue on research and development, with research centers in China, France, and India. ZTE has a reputation for making quality, affordable, and customized phones.

• UMI: UMI, in tenth place, is known for delivering quality metal smartphones. They have positioned themselves at the high end of the market, and analysts expect them to become much more popular in 2015.

Xiaomi sells online directly to customers from their own website, avoiding potentially brand-diluting partnerships with distributors, retailers, and network operators whenever possible. They have a flagship brick- and-mortar store in Shanghai that is similar to Apple’s flagship store in the same city, and they have 18 physical retail locations in their distribution chain. Given Xiaomi’s tight control over distribution in China from their website, they can more tightly control market entry and exit timing for their products. In addition, they have developed a more intimate understanding of customer and Mi Fan tastes and preferences in an industry that is increasingly like the fashion industry. With regional expansion, Xiaomi has found it necessary to partner with retailers in other countries; for example, they have done so in India where they have retail partnerships.

As noted above, Lei places significant importance on timing. Since its inception, Xiaomi has released the latest model of its flagship device, the Mi phone, in the months of August, July, and October, whereas Apple is known for launching its latest model of the iPhone in the winter in China, except for the release of the iPhone 6 and iPhone 6 Plus in October 2014. Furthermore, Mi phone releases have not occurred in the same quarter as the iPhone releases in China (see Table 5). This practice raises two interesting questions: is Xiaomi’s success in China the result of its smartphone launch timing? And, can Xiaomi compete head-to-head with Apple in China by releasing its latest model smartphone at, or about, the same time as Apple launches its new version of the iPhone in China?

Xiaomi Smartphone Product Family Expansion

Xiaomi diversified its offerings by having two product families: smartphone products and smarthome products. Xiaomi’s smartphone products (see Ap- pendix 1) comprise smartphones, tablets, and wearables. After resounding success in China with its smartphone portfolio, Xiaomi launched a tablet, the Mi Pad, on May 15, 2014. The introductory prices of the Mi Pad 16GB and the Mi Pad 64GB were competitively set at $243 and $276, respectively. The design is somewhat similar to that of the iPad mini in terms of the cover that wraps around the side and is visible from the front (see Exhibit 3). However, the Mi Pad’s cover is made of plastic, unlike the iPad’s metal finish, which makes the Mi Pad difficult to hold. The Mi Pad outperforms the comparably priced Samsung Galaxy Tab 4 as it has a 2048×1536 screen resolution, while the Samsung Galaxy Tab 4 screen has only a 1280×800 resolution. Google’s Nexus 7 is a comparable tablet with the Mi Pad in terms of screen and price.

Mi Pad negative reviews include: the lack of a themes store and a global positioning system; no 3G or 4G capability; difficulty holding it due to the plastic finish; and its rapid heating up during use. Mi Pad sales were sluggish as only 550,000 units had shipped by the end of September 2014. By way of comparison, at the end of September 2014, Samsung had shipped 9.9 million units, Asus Teck had shipped 3.5 million units, and Lenovo had shipped 3 million units.2

Two months after the May 2014 release of the Mi Pad, Xiaomi launched the Mi Band, a low-cost activity and sleep tracker, and began selling them in China in August 2014. There are mixed perceptions about the Mi Band. Positive perceptions include its highly competitive price at $15; reasonably accurate tracking of activity and sleep; and a long-lasting battery. On the other hand, the Mi Band is criticized for lacking a screen; unorigi- nality, given the ability of smartphone apps to track activity and sleep; early signs of wear and tear; and difficulty signing up for the Mi Fit app. Xiaomi shipped one million Mi Band units in China between August 18, 2014, and November 28, 2014.3 In a single day during this period, the Chinese tech giant sold 103,000 units of the Mi Band.4 By comparison, 3.3 million fitness bands and activity trackers were sold between April 2013 and March 2014 in the United States. Can Xiaomi resolve the kinks in its Mi Pad and Mi Band so that they are held in the same high regard as its smartphones? Does Xiaomi need to be successful across all three platforms in order to remain a formidable competitor of Samsung, Apple, Huawei, and Lenovo in the long haul?

Mi Fans and Xiaomi’s Innovation Pipeline

Mi Fans contribute both to Xiaomi’s research and development and to its marketing efforts through regular face- to-face events held for Mi Fans to meet and promote Xiaomi products. The loyalty of some Mi Fans goes as far as enthusiasts shaving their hair into the shape of Xiaomi’s company logo, and composing and performing songs about the company. This user following has grown organically. It is not pervasive outside of China.

Xiaomi’s innovation is based on intense customer engagement and market probing. While their hardware has a relatively long life cycle, they update software weekly based on contributions from their loyal Mi Fan base. Mi Fans participate on Xiaomi’s user forum by posting ideas and suggestions for additions and improvements to the design and features of the MIUI ROM and its hardware. Xiaomi’s practice is to contain inventory levels, promote online sales and flash sales, and rely on Mi Fans to spread the word about the benefits of its product portfolio.

Xiaomi’s product managers are known for closely monitoring their user forum for comments, and for presenting their Mi Fans’ ideas to Xiaomi’s engineers. If the idea is considered a good one, then it is quickly in- corporated. It is then released as part of the weekly update, regularly scheduled for Tuesday at noon, Beijing time.

For a start-up, Xiaomi employs a large number of people—about 4,300 in all. They have 1,500 people work- ing in their call center, and another 1,500 engaged in e-commerce and after-sales service. The remaining 1,300 are involved in R&D, focused on smartphone hardware design, user interface (UI) and software development, television and set-top boxes, and router design. Xiaomi does not rely on ODMs (original design manufacturers); they rely on their own engineering team with deep technical knowledge sufficient to enable them to handpick appropriate components for its smartphones from those publicly available.5 Internal chip design is done in tight partnership with Qualcomm. Xiaomi’s engineers work side-by-side with Qualcomm engineers inside Qualcomm’s offices in San Diego, California.

Despite their R&D efforts, Xiaomi has been criticized for lacking a platform like Apple’s iOS. A platform is the operating system and hardware that conforms to a set of standards. Open standards are publicly available— often with limitations on their usage through licensing and other restrictions—that enable software developers to develop software applications for the platform. Platforms do not provide direct benefit to the customer; rather, they enable the development of software applications that do provide benefit to the customer. New standards-based interfaces and open interfaces allow software applications to run on multiple platforms. Some criticize Xiaomi because its lack of an open platform impedes the development of software applications that could increase the value of their smartphones for customers.

Xiaomi’s Supply Chain Dynamics

Xiaomi’s manufacturing model is similar to Dell’s; it is based on customer demand. Xiaomi’s customers place their orders online and, once there are sufficient orders, Xiaomi purchases components from its global suppliers. Since they order components after users have placed their order, Xiaomi does not have to manage excess inventory.

In the early days, original equipment manufacturing (OEM) firms were not willing to collaborate with Xiaomi to help them meet optimal production levels. Demand for Xiaomi’s smartphones often outstripped supply, and Xiaomi was not able to manufacture smartphones fast enough. This led competitors to claim that Xiaomi created artificial scarcity to boost their popularity. The company claims otherwise.

More recently, Xiaomi has forged strong partnerships with OEM firms Inventec Appliances and Foxconn (in India and Brazil)—Taiwanese OEM firms used throughout the industry by giants like Apple, as well as by smaller, less well-known companies.6

Xiaomi shortens its procurement process and lowers its costs by sourcing most of their phone’s electronic components from countries within the Asia-Pacific region, including batteries from Thailand, the screen from Sharp, and the camera from Sony. These components are then shipped to a central location, Shenzhen, China, where they are assembled in a local foundry.

Assembled phones are then shipped to warehouses located in several locations throughout China and de- livered to customers shortly after they arrive in the warehouse. To reduce the cost of shipping, Xiaomi located their warehouses near other big e-commerce companies and collaborates with these on warehouse management and shipping. This practice lowers their cost and speeds customer delivery.

Upon arrival in the warehouse, one team receives and inspects the smartphones. A second team packs the smartphone and accessories for delivery to the customer. Industry experts estimate that this rapid inventory turnover rate leads to 80 percent less inventory in the warehouse than competitors with more traditional inven- tory management. The warehouses stock replacement batteries and accessories.

While their phone models change, they are essentially the same device, mostly using the same compo- nents. This has enabled Xiaomi to negotiate component cost decreases over time. Their strategic partnerships with suppliers, coupled with managing longer product life cycles than are typical in the industry, give Xiaomi tighter control of their supply chain and margins that are big enough to allow them to keep customer prices low. To make longer life cycles work, Xiaomi maintains software updates, spare parts, and other services longer than their competitors.7

Xiaomi’s Global Expansion

Xiaomi supplies about 5 percent of the world’s smartphones. Xiaomi’s initial expansion outside of China was into neighboring locations—Taiwan and Hong Kong. This was followed by expansion into Southeast Asia—Singapore, Malaysia, and India. Their largest market outside of China is India where they sold over 3 million smartphones between July 2014 and September 2015. Xiaomi claims to have made significant contribution to the growth of online sales in this industry. Online phone sales are between 20 and 25 percent of all Indian sales. To support their integration into the Indian market, they began manufacturing through their supply chain partner, OEM Foxconn, in late 2015.8 This move enabled them to replicate the business model they use in China.

In Singapore and Malaysia, Xiaomi partnered with Uber to piggyback sales on the Uber website. Customers pre-order Xiaomi phones on Uber’s site and have their order delivered by Uber—a distribution approach that works well in Singapore and Malaysia. Expansion into Indonesia—another big emerging market—Thailand, and Vietnam are on the horizon. Once they have mastered these Asian markets, expansion into the more developed East Asian markets could be next.

Xiaomi’s first expansion outside of Asia was into Brazil where they manufacture and sell products. Brazil’s smartphone market is about half the size of India’s, but it is the fourth fastest growing market in the world. Once again, they partnered with OEM Foxconn to manufacture their phones in Brazil. Xiaomi introduced the use of online sales, an uncommon practice in Brazil. They are confident that they will propel the industry to achieve online sales penetration rates similar to India’s. Xiaomi is selling smartphones at half the price of their competitors’ offerings, and Brazil is a price-sensitive market. Xiaomi has not announced intentions for additional expansion in Latin America, but they anticipate entering Africa in early 2016. They have not announced plans for similar expansion into the USA and Europe, where the sales and marketing fundamentals are very different. Unlike emerging markets, telecommunications service providers subsidize most smartphone sales in the saturated developed markets.

Xiaomi’s Structure and Financing

Xiaomi Corporation, the parent company of the Xiaomi group of companies, was incorporated in the Cayman Islands. This is the company in which investors obtain shares, and is similar to the structure of Alibaba Group Holding Limited, which is also incorporated in the Cayman Islands and is listed on the New York Stock Ex- change. Xiaomi H.K. Limited is a subsidiary of Xiaomi Inc. and is the shareholder in Xiaomi Inc., the company that sells and distributes handsets. (See Exhibit 4 for a diagram of their corporate structure.) Xiaomi’s co-founders are Lei Bin, Li Wangqiang, Zhou Guangping, Wong Jiangji, Hong Feng, Wang Chuan, and Liu De.

Xiaomi’s first round of funding, Series A, was concluded

on December 1, 2010, and amounted to $41 million with in-

vestments made by QiMing Venture Partners and Morningside

Group. A year later, on December 27, 2011, the series B fund-

ing attracted $90 million from Qualcomm Ventures, an affiliate

of Qualcomm, a major mobile phone processor developer. Six

months later on June 26, 2012, Xiaomi’s series C funding resulted

in an investment of $216 million by undisclosed investors. In

August 2013, Xiaomi’s series D funding amount was undisclosed.

Series E funding garnered $1.1 billion from investments made by

DST Global (founded by Yuri Milner, a Russian entrepreneur and

venture capitalist), HOPU Investment Management Company,

and GIC. Ratan N. Tata made the most recent investment in

Xiaomi at an undisclosed amount. This funding was completed on April 27, 2015.9

In May 2015, Xiaomi’s mantra rang true when Xiaomi Corp., its parent company, was valued at $46.0 billion. This round of funding will support Xiaomi’s global expansion aspirations. The company has quashed rampant IPO rumors given this recent round of funding and their strong cash position. Within just five years, Xiaomi Corp. moved up to the top spot as the highest valued private company worldwide. The others in the top five are Uber, Snapchat, Palantir, and Flipkart, respectively.10

Xiaomi’s Competitive Landscape in China

Competition in China’s smartphone industry is intense. From 2009 to 2013, revenue for the smartphone manu- facturing industry in China grew at an average annual rate of 53.9 percent, and revenue was forecasted to grow 21.2 percent to total $68.9 billion in 2014. Increased consumer demand for third and fourth generation smart- phones and greater exports were identified as the main drivers for the upsurge. Other significant drivers included the continued sophistication of the market’s 3G and 4G technology. To this end, China Mobile, China Telecom, and China Unicom—China’s dominant telecommunications service providers—obtained 4G licenses towards the end of 2013. Further, Chinese smartphone manufacturers were attuned to consumers’ price sensitivity, and responded with highly competitive pricing to the extent that their offerings are often less than half the price of products from established foreign players. Lastly, the extensive range of smartphones available in the Chinese market is another contributor to industry growth.

The escalating growth in this industry is reflected by the increase in the manufacture of smartphones from 1.3 million units in 2003 to approximately 488.6 million units in 2014. Current industry distribution channels are telecommunication operators, e-commerce, electronic retailers, mobile phone stores, and domestic agents. Apple and Samsung entered into strategic alliances with telecommunication operators to sell their phones. Apple has a distribution partnership with China Telecom and China Unicom. Samsung distributes its phones through China Mobile and China Telecom. Apple also sells via brick-and-mortar stores and through large agents. On the other hand, Samsung uses domestic agents in addition to phone carriers. Xiaomi has mastered the use of an e-commerce platform as the primary vehicle to build its brand and record very high sales. Apple’s parity with Samsung was the result of their distribution deal with China Mobile that enabled them to make inroads in China that were once believed to be impossible. Historically, Apple’s brand simply did not hold the same cache as Chinese smartphone makers.

The industry is quite fragmented, as seen above in the exhibit showing the top ten Chinese smartphone makers. The outlook is that as e-commerce reduces barriers to entry, the entry of new Chinese players will con- tinue, thereby intensifying competition and potentially lowering already cutthroat pricing. Notably, in 2013 industry profitability stood at approximately 3.4 percent of turnover.

Telecommunications operators are in a controlling position in the Chinese market because they provide subsidies to low-end smartphone producers. This helps lower prices further as smartphones become a common feature in third- and fourth-tier Chinese cities.11 Thus, the opportunity for greater profit margins seems to lie in high-end smartphones to meet the needs of the nation’s growing middle class. Analysts anticipate that local players will position themselves in the high-end product portfolio.

According to estimates, China’s smartphone users total 520 million, which dwarfs the total United States population. As a result of the market size and Chinese consumers’ affinity for technology and social media, nu- merous Chinese smartphone brands have entered the market over the last five years. These Chinese smartphone manufacturers are showing their technological prowess among global players to the extent that some of the top smartphone manufacturers worldwide are Chinese brands, such as Huawei, Lenovo, and Xiaomi.

Five-Year Industry Outlook

According to the International Data Corporation, growth has slowed in China’s smartphone market as shipments fell to 98.8 million units in the first quarter of 2015, an 8 percent decrease in shipments from 2014 levels. This is the first time since 2010 that there was a reduction in Chinese smartphone shipments year over year. This drop is an indicator of the Chinese market’s maturity, comparable to those of the markets in Australia, Japan, and the United States.

Nevertheless, the first quarter of 2015 saw Apple Inc. rise to the top as the number one smartphone manu- facturer in China—a rise attributed to Chinese consumers’ affinity for the large screens of the iPhone 6 and iPhone 6 Plus. Xiaomi came in second place due, in large part, to intense competition from other smartphone makers of low-end to mid-range handsets. Huawei maintained its number three position due to strong demand for its mid-range phones.

Generally, there is volatility in terms of different vendors leading the market as Samsung, Lenovo, and Xiaomi each held the top spot at least once in 2014. In this regard, Chinese consumers have not shown a strong brand preference for smartphones as consumers do in the more developed markets, such as the United Kingdom, Japan, and the United States.

Looking to Xiaomi’s Future

1. The rise of this indigenous competitor threatens Apple and Samsung’s market share in a very important growth market, China. However, when talking about the future, Lei comments, “We’re just a young company and in a fragile position.” What will it take for Xiaomi to mature and achieve Lei’s ambitious growth goals? Is Xiaomi really fragile? There are many points to ponder. What does the rapid ascent of Xiaomi mean for Apple and Samsung in China and globally? What does it mean for the industry? Will Apple and Samsung block Xiaomi’s global expansion? Should Xiaomi be more concerned about local rivals than foreign competitors? What obstacles will Xiaomi face as it continues to pursue international expansion? Winning in the future will depend on the answers to these questions. Questions: 1. What are the major factors that contributed to Xiaomi becoming a leading smartphone company in the PRC?

2. What does Xiaomi’s rapid ascent mean for Apple and Samsung in China and globally? How are Apple and Samsung likely to react? What capabilities would Xiaomi need to develop to compete head-to-head with industry giants Apple and Samsung?

3. Should Xiaomi focus on competing with Apple and Samsung, or should they be more focused on competition with local Chinese rivals?

4. Xiaomi has been successful in China, but how will they fare in the global market? What obstacles are they likely to face? What capabilities will they need to develop to expand globally?