Xiaomi’s Oversold Global Ambitions, and the Week in Daily Updates

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Xiaomi’s Worldwide Ambitions

Bloomberg BusinessWeek has a fairly rapturous profile of the West’s favorite Chinese technology company:

Xiaomi (pronounced she-yow-mee) is one of the fastest-growing tech companies in the world. It’s the sixth-largest handset maker on earth and No. 3 in China, behind Samsung Electronics and Lenovo Group, according to research firm Canalys. Xiaomi’s recent growth is impressive, and its potential is even greater. In 2013, the company says, it sold 18.7 million smartphones almost entirely from its own website, bringing in $5 billion in revenue…

Xiaomi’s real invention is its business model. It sells online, never in stores, and avoids conventional advertising, devoting only about 1 percent of its revenue to marketing. (By comparison, Samsung earmarks 5.4 percent.) Instead, the company relies on China’s social networks, Weibo and WeChat, and the free press Lei gets as a national tech hero. The money Xiaomi saves on marketing lets it buy top-notch components while keeping retail prices down. The Mi 3 costs 1,699 yuan, or $270; the iPhone in China starts at more than twice that. A Mi 3, or any Xiaomi phone, is a great deal if you’re lucky enough to snag one—the latest models routinely sell out. Xiaomi sells handsets in batches, usually of around 100,000. The first Mi 3 release, the company trumpeted, was bought up in only 86 seconds. It’s the technology equivalent of Air Jordans.

Lei’s newest goal is to take Xiaomi beyond China and into Brazil, Mexico, Russia, Turkey, India, and five countries in Southeast Asia. “The creative economy here continues to rise, entrepreneurship is surging, and our innovation abilities are growing,” Lei said in an e-mail translated from Chinese, since he does not speak or write in English. “We’re the world’s largest consumer market. After several decades of effort, this is the trend. Chinese technology companies are coming to the rest of the world.”

There’s no question Xiaomi’s success has been very impressive, but they deserve a lot more scrutiny than this article delivers. A few points worth raising:

  • Xiaomi is not just forgoing retail and marketing expenditures; they are effectively selling phones at cost, which is what keeps their price low. They claim they will make profits on the sale of accessories and Internet services, but while that sounds good in theory (quite literally: Xiaomi is everyone’s example of a company that will disrupt Apple’s hardware-based profits), I would like to see more evidence that they can compete on the bottom line as well as they do on the top.

  • Xiaomi’s brand is very powerful in China, and they use China’s social networks to their advantage, but the flipside of China effectively having its own Internet ecosystem is that none of that extends outside of the country. If Xiaomi is going to compete effectively outside of China, marketing and retail costs will inevitably increase.

  • Note carefully the countries that Xiaomi is expanding to: the unifying feature of them is weak intellectual property regimes, at least relative to the United States or Europe. That is not an accident. IP costs for smartphones are significant even if you have your own patent portfolio to use in cross-licensing; if you don’t have any relevant IP, like Xiaomi doesn’t, then you can’t cross-license and your IP costs can quickly ruin your cost structure. Unless Xiaomi makes a significant acquisition for IP purposes, they won’t be entering the US or European markets any time soon.

I’ve noted this a few times, but that final point is why Lenovo is the more interesting Chinese manufacturer to watch. Their major rationale for doing the Motorola deal was not the brand or assets, but rather gaining cross-licensing rights to the Motorola patents such that their IP costs remain competitive. Xiaomi is absolutely a contender to be taken seriously in China especially, but Lenovo has much more potential in the West.

The full list of topics covered this week in the Daily Update include:

  • The Computex Contrast
  • Big Screens Dominate
  • Xiaomi’s Global Ambitions
  • Max Levchin and Affirm
  • Amazon Expands Payments
  • Facebook Messenger Poaches Paypal Head
  • Alibaba Buys UCWeb
  • Dropbox Buys Mobile Span
  • Will Microsoft Undercut AWS in Price?
  • Twitter’s World Cup Starter Kits
  • Amazon’s Dangerous Tactics
  • LINE Partners with Salesforce
  • Console Follow-up
  • AppleTV Follow-up
  • Twitter COO Resigns

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  1. There is also an access option for $30 per month/$300 per year which gives you access to me personally to ask about the topic of your choosing, a private message board, and virtual and in-person meetups