Explosive Growth

Xiaomi has beat Apple in China, but can it win over the rest of the world?

October 17, 2013
October 17, 2013

Quartz begins a series today profiling companies around the world experiencing explosive growth. 

Lei Jun walks on to the stage like a young Steve Jobs. It’s September in Beijing and the founder of one of China’s scrappiest smartphone brands, Xiaomi, is about to unveil its flagship Mi-3 phone. This model uses one of the fastest processors on the market, retails at just over $300 and already has legions of fans.

On the surface, Xiaomi seems to have a lot in common with Apple. Phones are slickly designed, sell out within minutes and have a cult-like following. Lei even wears jeans.

But Xiaomi’s strategy is actually the antithesis of Apple—partly the secret of its success. Apple makes fat margins off hardware and services, while Xiaomi is barely selling its phones above cost. Apple’s budget model, the 5C sells for almost $500 more than Xiaomi’s latest model in China.  To reduce costs even more, Xiaomi sells its phones almost exclusively online and the company has increased its sales projection from 15 million to 20 million before the year is through.

Xiaomi’s MIUI operating system is also more open bar than walled garden, which means that any Android device can run its OS and get access to Xiaomi’s store of apps, services and games. Xiaomi recently announced that more than 20 million users had downloaded its operating system and the store has had more than 1 billion downloads.

Indeed, Xiaomi has made its mark on in China’s much-coveted mobile market in a relatively short amount of time. The company is only three years old, yet in the last quarter it shipped more smartphones in China than Apple. The gap was close, with Xiaomi racking up 4.4 million phones versus Apple’s 4.3 million, but the figures still put Xiaomi in sixth place when ranked by the number of phones sold.

Tap image to zoom
Xiaomi’s cheap and cheerful phones.(Courtesy of Xiaomi)

And it is clear the company has its eye on the market beyond China.

Its recent decision to hire away Google’s former vice president of Android product management, Hugo Barra, suggests Xiaomi’s future may be elsewhere—even as it keeps breaking from the Apple formula.

Blogging about his first week in the job, even ex-Googler Barra was struck by the pace:

…it’s been a pretty intense journey so far.

The Chinese tech ecosystem moves at breakneck speed. I’ve never seen such fierce competition and such impassioned desire to build things fast. There’s a pervasive entrepreneurial spirit in companies both small and big.

Hiring Barra could give Xiaomi an edge when it comes to raising the company’s profile internationally, as well as when it comes to dealing with local carriers and regulators. “That could be an important part of the growth strategy, but they’ll also need to deliver on the other part of the strategy for this to work,” says Morning Star analyst Dan Su.

That other part is made up of content and phones. Cheap hardware and an open OS helped Xiaomi build a critical mass of users who it hopes to hook in with Xiaomi’s content and make it king. Once it has built a sticky online store, the company will be able to deliver the same content through any device.

Or at least that’s the plan.

“If they’re putting Xiaomi content services on non-Xiaomi devices, it’s very smart,” says Rajeev Chand, managing director and head of research for Rutberg, an investment bank. Why this strategy works: It maximizes Xiaomi’s customer base and so maximizes its money-making potential. It also puts Xiaomi in a strong position when negotiating content and attracting developers.  All in all, Chand says it’s a “drastically different,” approach to that of its competitors Samsung and Lenovo, which are trying to make money from devices while bundling and under-selling content.

Xiamoi has been valued at $10 billion. Other evidence of explosive growth: if you compare the first half of 2013 with the whole of last year, it’s sold almost double the number of handsets and made double the money.

Although its fledgling roots are in smartphones, Xiaomi has spent 2013 trying to multi-screen, move into people’s homes and disrupt another coveted market—television. In April, Xiamoi started selling a set-top box. It added a 3D Smart TV for under $500 to its product line in September. There have even been rumors of a tablet.

In the post-mobile era, Chand says, “you want to be with the consumer throughout the journey.”

But it’s Xiaomi’s recent high-profile hire that helped catapult it into mainstream tech buzz. In an interview with All Things D, Barra said Xiaomi represented “a once-in-a-lifetime opportunity, truly a dream job, this idea of building a global company which could be as significant as Google, from the ground up.”

He added:

There is no question the phone business is very low margin today, but they want to get to a place where they can sell the device at cost and then sell high-margin services to make that phone experience even better.

The company’s already started to sell its wares in Hong Kong and Taiwan, but Lei and his co-founder, another ex-Googler Lin Bin, are hoping that Barra’s international contacts and expertise will really kick off the expansion.

In developing markets, Xiaomi’s quality-to-price ratio makes most sense. That’s why analysts predict it will start with its Asian neighbors first, namely places like Malaysia, Vietnam and Thailand, where the opening price point is attractive compared to the competition.

That said, its international aspirations will prove to be a challenge.

First off, the content that Xiamoi has staked its reputation on is local to China, where Google’s online store, Google Play, has a weak presence. Creating a sticky online store in parts of the world where Google Play is strong, will be difficult, especially in countries which put a premium on brand-recognition, like European countries or the US. Second, there aren’t many precedents of domestic Chinese firms expanding beyond China, nor does the company have anywhere near the marketing resources of Apple. In countries where Lei’s magic doesn’t translate, that will count for a lot. With domestic success certain, what’s really at stake now is whether China can become a global contender.

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