Business Lessons by ‘Thrift’ Producers: A Case Study on the Fortunes of Xiaomi

A quick Google search on ‘best smartphones under 15000’ will tell you all about the motivation that went behind this study. The big question is – how is the Chinese electronics giant, Xiaomi, managing to deliver such low-cost devices anyway without much compromise on deliverables?

The company’s core strategy can be defines as that riding on cost leadership, as corroborated by Founder and CEO Jei Lun’s statement, “high-quality technology doesn’t need to cost a fortune’. Xiaomi, or Mi (which stands for Mobile Internet by the way) as it is often referred to due to its logo, operates on a model built on three pillars- smartphones, internet services, and smart hardware based on Internet of Things (IoT).  The company has a strong presence in the cloud space with Mi Cloud, smart hardware with a variety of items like Mi ACs, Wi-Fi routers, air purifiers and even metal carry-on luggage. Besides, Mi.com is also one of China’s leading e-commerce websites. The common thread in all these verticals is that Xiaomi makes reasonably fair profits in each of these verticals, a fact that distinctly jars in the face of the fact that the business line of Mi smartphones operates on paper-thin margins!

The Business Approach:

Before returning to our question on the low-cost developing of Xiaomi smartphones there is one primary factor that needs to be taken into account-  that of the company’s business approach.

One of the world’s leading companies and Xiaomi’s lead competitor, Apple Inc. follows the approach of innovation and delivery in third party apps and services like iTunes, iCloud, iTV etc., that provide thinner profit margins to the company but help it generate sales for highly priced Apple hardware like iPhones, Mac etc. Xiaomi, however, follows an approach quite the reverse of Apple- it relies on its extremely affordable smartphone series to generate business for its other products in ‘lifestyle’ hardware, and services like cloud, entertainment and more. So while Apple banks on its low profit apps and services to bring in sales of high-profit items, Xiaomi does the exact opposite and still manages to be a net profiteer. Specifically in the Indian context, since Xiaomi has managed to deliver to the masses cutting edge technology smartphones at such low prices, it is not such a far-fetched dream for the company to take on Apple as its sole rival due to the huge amounts of business Xiaomi can generate owing to volume effect!

On the other hand, one line of similarity between the Apple approach and that of Xiaomi’s (called the Mi Way at times), is that both companies are at different points on the path leading their consumers in an integrated ecosystem of the company’s products and services. Both Mi and Apple have their own series of smart home and consumer use devices and internet services that the companies want their clients to absorb in; and they are channeling brand loyalty and ease of operation for achieving that. 

According to the Ansoff Growth Matrix framework, Xiaomi is effectively using all 4 strategies- market penetration, product development, market development and diversification for its growth story.

The Question of Costs:

Returning to the question of low cost smartphones, a few factors have truly worked wonders for the company to effectively boost sales of its phones, and hence boost growth of the company given its heavy reliance on smartphones for growth of other verticals. Firstly, local manufacturing and value addition help Xiaomi avoid a lot of transport, duty and other overhead costs that topple rivals like Apple. As of now Xiaomi has a total of six manufacturing units in India, and announcement is due for an additional one. If claims are to be believed nearly 95% of the phones are manufactured in India itself, and the company is also trying to get circuit boards to be made here. Adding on to this is Xiaomi’s remarkable supply chain partnerships that help it attain last mile advantage.

Secondly, for a long time now, the company has been operating on the online-only model, though now physical stores are also cropping up. Ask any Mi phone user and chances are that he/she too bought one on a flash-sale. Such flash-sales have aided Mi not only in minimizing costs associated with in-store retail but also helped it develop effectively on the word-of-mouth marketing means it swears on. Moreover, like one of Mi’s spokespersons had said, longer average selling time of the phones also greatly affect the company’s costs because models sold in a flash-sale today are not taken off the sale podium. Older versions (and their modified versions) remain available for sale and as component costs decrease with suppliers, it makes it easier for the company to realize profits out of them.

Thirdly, innovative business approach again takes the limelight when evaluating Xiaomi. The company is heavily invested in building its army of “Mi Fans”, a community who give it rapid feedback and ideas via interactive forums. Users spend at least 4.5 hours on their Xiaomi devices, which creates opportunities to monetize, not to mention the brand development and word-of-mouth marketing.

The company went public on Hong Kong Stock Exchange in 2018 and much of the revenue generated from its IPO, like its profits, is invested in research and development for technology building for the company to get it maximum profits. Some while back, Xiaomi also tried to bring its own processor Rifle to replace the Qualcomm Snapdragon processor that is essentially expensive, but a clear position on whether or not that seemed viable in bringing down costs is not available.

Is Growth Infinite?

Like all other companies disrupting the existing market to bring about something new, the winds of friction are amass for Xiaomi as well. Among the practical limitations to infinite growth of Xiaomi in India, a few of them that I have identified are as follows.

Firstly, resource constraint is a challenge most technology companies are struggling with in one form or the other. Mi is a leader brand in smartphones among Indian masses for which low price forms a major reason. However, availability of components and quality promises are factors that may in the future lead to Xiaomi hiking prices. For instance, on a comparison of Redmi Note 8 Pro with Samsung M30 (yes Samsung is now slowly recovering after the near-fadeout Mi caused it), we see that whereas the latter is priced around INR 13,000, the former is costlier by 2000. A possible explanation is that Mi has now switched to usage of Lithium Polymer batteries over formerly used Lithium Ion batteries (which M30 uses too). LP batteries are traditionally costlier than LI batteries but an explanation of Xiaomi’s usage of these is to be found in the fact that the company is trying to prevent further damage to its name from the cases of battery explosion that occurred when LI batteries were in use. If the company has to avoid quality compromises like these in the future as well. It is likely that Mi will be faced with price hikes often in the future.

The second constraint is also closely linked to Mi’s quality promises. Android software updates are a common and necessary feature of the phones. What differentiates Xiaomi’s cost structure relating to updates is that they can impose more than normal costs on the company. Android updates are a costly affair for all original equipment makers, given the costs of coding and chipping; but they are more so for Mi since its MIUI phones offer customized User Interface (UI) that are often better than other existing UIs also. Additionally, sometimes app developers stop supporting older versions of software and for Mi that could easily paralyze its model of selling older handsets. Working out updates for these customized versions has the potential of spiraling up working costs of the Chinese electronics company, and thereby potentially restricting its growth.

Business lessons learnt and conclusions drawn

1. A sustainable business model never goes out of fashion: The price advantage that Xiaomi offers to its consumers is perhaps what will pave the way for their acquisition of larger market share. While by no means does the company cut corners on upgrading its technology or product innovation, what Xiaomi has got right, right from the beginning is that the price illusion trumps them all. Low prices for a product that delivers efficiently and competitively is one trend that has survived a long time and has no intentions of backing down. By operating on seemingly paper thing margins and simultaneously penetrating the market deeper, Xiaomi has cracked a pretty much fool-proof formula at profit making that will stay intact for a while to come.
2. Front-facing end: One of the most crucial aspects of Xiaomi’s consumer interaction is consumer-centricity. The Chinese company has created an entire ecosystem for loyalists to thrive in, including their range of products from cloud services to smart home devices. And with the material ecosystem in place, it also ensures that consumers feel and believe in the product too. The entire concept of Mi Fans, the company’s brand image, promotional posts such as one Mr. Jain uploads of the employees and customers- all culminate into a visually appealing and materially satisfying experience.

Interestingly, Xiaomi shares these above two features with the technology giant, Amazon Inc., whose founder CEO Jeff Bezos has often been quoted about the same in his explanation of the ’14 leadership principles of Amazon’. The two companies have defined what ‘keeping a tab on competitors but paying “attention” to consumers’ as a successful strategy looks like.

• Getting the economics of consumer behavior right: The sales and marketing division of Xiaomi has set the right precedent. In flash-sales of the newest models of the company are closely observed, we are led to the realization that the company has effectively channeled the theory of less is more to its advantage. The display of lesser options, in lesser varieties and for lesser time periods saves consumers the excessive choice problem and has actually proven to increase sales. Another salient feature where the company sets precedent is its optimization on monopolistic competition market structure. The smartphone market is a dynamic one, where rivals are constantly upgrading features thus making their products as competitive as the rest while retaining their brand’s unique image. With that in mind we need to see how the company’s 2019 partnership with Samsung to launch the latter’ 108MP mobile image sensor, touted to compete against DSLR photographs. Without having to engage in a price or even non-price competition, the company managed to sell itself to consumers of Samsung which are higher in number. And that too without antagonizing any Samsung loyalist!
• Timing matters most: In what is not mentioned above in the article, Xiaomi with all its strategies and models in place, has a lot to learn about timing its decisions. This perhaps is again another example the company seems to serve to the world. Despite being investors’ blue-eyed boy, Xiaomi’s IPO in January 2018 tanked as the company was valued at a mere $54 million, about half of what was expected six months prior to it. A lot of explanations have been offered- the ongoing trade war between the USA and China, its ‘triathlon’ model (yes!), and even its policy of offering differentiated voting rights to shareholders. For a company as highly valued and with all plans of venturing into the American market, choosing a time almost clashing with major developments in its home country and targeted market was nothing but a big, huge timing error. The company’s listing on the Hong Kong Stock Exchange was just a side-effect of this very blunder, but multiplied it losses more. Moreover, investor skepticism about a smartphone company venturing into successful internet service provision was the final blow. Without running the hazard of claiming that this skepticism was wrong-founded, the only claim that needs to be made is that the company should have chosen a different time to declare its commitment for the new vertical and with a stronger case to put forward. The two biggest lessons Xiaomi’s case gave the business world- timing is a stronger variable than business analysts deem it to be; and that timing is a far easier aspect to factor in than analysts deem it to be!

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