Chinese companies are best known for replicating products from the West or Japan. However, the trend is fast changing as they build the Baidu’s, Alibaba’s and now Xiamoi. Xiamoi really caught our attention as they have no ordinary business model but have started executing on the vision – “Devices & Services” akin to that of Steve Ballmer, former CEO of Microsoft. Key executive team members have either worked Google / Microsoft.
Xiaomi claims to bring the most advanced smart devices with affordable prices to customers, and highlights the core competitiveness of offering great value-for-money, both for Mi-series and Redmi-series, at different price segments.
Xiamoi’s e-commerce Exclusive Model
Xiaomi pioneered its e-commerce exclusive direct sales model with nearly zero off-line presence initially (vs 30% sales from off-line now) and it offers appealing product specification at an affordable price. Xiaomi spends little on advertisements but rather promotes its products via internet and word of mouth from online community to offline community. Normally, for other Brands marketing expenses form 6-12% of revenue for traditional smartphone brands, and then a further 25-30% retailer/ distribution markup. Xiaomi’s costs are much lower than that, based on reported data. China marketing is largely via the internet – there is little advertisement other than in certain export markets. For Xiamoi, distributor markup is likely much lower as well, as 57% of sales are made directly online, and 12% through eTailers, as per IDC
Constantly Evolving / Improved Product Cycle
Xiaomi has been criticized for intentionally creating scarcity value with a perception of high demand via flash sales (i.e. limited offering per sales window. Xiaomi has responded that 1) it intentionally manufactures in small batches in order to swiftly refine and improve its products in response to user feedback and 2) the initial volume is capped by capacity constraint from supply chain – e.g. only 1.0-1.5mn Mi4 per month could be produced in the first 3 months due to complications of new casing manufacturing.
Xiamoi’s Android MIUI the Differentiator MIUI is a highly customized re-designed Android ROM with focus on ease-to-use (particularly optimized for Chinese users’ behaviors), open for customizations (such as themes), consistent weekly upgrade with new features (more than 200 versions have been released according to the company) and performance optimization. Notably, “geeks” as well as some normal users are attracted by MIUI’s integrated features, such as memory management, blacklist, data traffic monitor, identification of suspicious incoming calls, incoming call recording, etc.
Xiamoi.Com e-Commerce Business
According to IDC, Xiaomi.com accounts for 57% of its total sales channels. Assuming this ratio remains unchanged for the full year 2014, the total Gross Merchandise Volume (GMV) on Xiaomi.com could amount to ~Rmb40bn, which would see Xiaomi.com rank #3 in all ecommerce in China, just second to Alibaba and JD.
Xiamoi’s Pricing Model & Business Strategy to Stay Profitable
Xiaomi runs a unique pricing strategy – it launches at a much lower price point versus comparable models, or much higher specification versus models with similar price points. Yet it very rarely cuts prices in the first 6 months, typically just once a year or on special occasions (such as Nov 11 consumer sales) – in a way similar to Apple. This compares to other brands which typically cut prices by 5-8% per quarter, and probably even faster in recent quarters due to heavy competition. The volume pattern is also highly interesting – the initial ramp is usually slow, but rising much faster when it comes to second or third quarter into launch, which indicates that some consumers are willing to wait.
Chairman Lei, at the end of Oct-14, also confirmed that the cumulative sales volume of best seller model – Redmi – had amounted to 25mn. With huge volume and relatively visible demand, Xiaomi could aggressively negotiate with component vendors for volume discounts – for example, multiple domestic camera module vendors have attributed their low margins in 1H14 to having to offer lower ASPs to Xiaomi.
Xiamoi in our Analysis has a margin of just 8% on the Hardware with potential monetization opportunity from internet / content services. We also note Xiaomi has a more youthful audience with a higher likelihood of online consumption. You can read more on the entire eco-system of Xiamoi Devices & Services here.
Finally, we encourage Indian Internet & Mobile Startups to study such Business Models and then evolve rather than “Me Too” attitude of raising capital and failing miserably without innovation.