The rise of China’s smartphone powerhouses

By

XiaomiIn the past two years, a new breed of smartphone makers has hit the market and has taken it by storm. Leading the pack is Xiaomi but other brands that have come up include Oppo and OnePlus.

How has this happened and are they sustainable as businesses? Or are they just considered to be a flash in the pan?

First up, the most recognisable name – Xiaomi. The company name, made up of the Mandarin words ‘xiao’ (‘small’) and ‘mi’ (‘rice’), is a reflection of its philosophy to work from small things and innovate from within. The term ‘MI’ is also an acronym for the ‘mobile Internet.’

It was founded in 2010 by eight partners including Chinese serial entrepreneur Lei Jun, one of the richest men in China.

Bloomberg recently reported that Xiaomi became the world’s third smartphone vendor after outselling its rivals in China. It now reported has 5.6% of the global smartphone market share, after Samsung at 24.7% an Apple at 12.3%.

Meanwhile, another research firm Canalys stated that the company overtook Samsung as the most shipped smartphone in China.

There are many reasons why the company’s products are so appealing. First and foremost is price. Xiaomi has an interesting market pricing policy in which the company would introduce a new smartphone in China at a certain Renminbi (RMB ) price point.

This price point is then used to guide the pricing in all other markets it brings its smartphones to by simply converting the prevailing RMB pricing to its equivalent currently of a market it brings its product to.

For example, when its Mi 3 was introduced in China, it was priced at about RMB1800. When it came to Malaysia, it was priced at RM889 [RMB1 ~ RM0.50].

Secondly, Xiaomi is able to sell cheap because the company employs a direct-to-consumer model. All its wares are only available online on its Xiaomi.com site and it also does not employ any direct marketing via ads but instead favours social media marketing done on Facebook and its own website.

Speaking to reporters earlier in the year when Xiaomi officially launched in Malaysia, cofounder Bin Lin said Xiaomi doesn’t have a marketing budget and it depends solely on its user community, known as ‘MI Friends,’ to spread the word of its products.

According to Lin, Xiaomi’s business model is based on what he claims is the ‘triathlon business model,’ comprising control over the hardware, software and the services it sells.

When asked whether this business model is viable, given that its products are sold at near-cost price, he said Xiaomi has factored this in and makes money out of other services and products it sells, adjunct to the sale of its smartphones.

“We use the same model that Google and Facebook use. The base services of all these software are free but they make money from other services. And it’s the same with us.

Lastly, consumers feel that they are getting more bang for the buck as Xiaomi still delivers high quality specifications in its smartphones but at a fraction of the price when compared to the likes of Apple or Samsung.

Doable or not?

So how sustainable is this business model for Xiaomi?

Neil Shah, research director at Counterpoint ResearchNeil Shah (pic), research director at Counterpoint Research, says adopting a low-cost strategy and disrupting the market with aggressive pricing is usually a tactical strategy that leads to price wars.

Speaking to Business Circle in an email, this strategy has worked for Xiaomi but it can be copied by existing and newer brands such as OnePlus and Oppo.

“The big difference is that Xiaomi has a business model and a strategy behind this as the company has adopted a ‘Hardware as a Distribution’ model similar to the likes of Amazon, where it is trying to lure consumers into the Mi ecosystem with cheaper hardware.

Shah says Xiaomi unlike others is building a robust Mi ecosystem with applications and services and aims to recoup revenues from selling those Mi experiences as well as other Mi branded products.

While this has worked in China, whether it will work elsewhere is a big factor especially in other markets, he added.

“Xiaomi already HAS more than 65 million users with its customised Mi user interface on their phones. For Xiaomi to generate significant revenues and profits it will need to achieve 100s of millions of users in terms of installed base to scale and recoup back the profits from its software and services strategy.”

The rest of the pack

What about the two other Chinese brands?

Shah says Oppo is one of the subsidiaries of BBK Communication Equipment Corp and that BBK also owns a portion of OnePlus, although the company operates independently from Oppo.

As a company, Shah says Oppo has done reasonably well and has almost doubled its market share in its domestic China market to almost 3% over the last eight quarters.

The key positive for Oppo has been a differentiated smartphone design that is targeted at premium value, where it competes with THE likes of Samsung, HTC and other Chinese players’ most high-tier portfolios, he points out.

From a market standpoint, Shah says it has partnered with physical distributors and is gaining traction in markets particularly India, Thailand, Indonesia and Pakistan.

“But the challenges faced are similar to what other Chinese brands are facing when expanded beyond China, that is the pouring of money into building a brand from scratch, the finding of right distribution partners, the tweaking of cost structures, a building of a robust after-sales service support network which doesn’t happen overnight.”

OnePlus, on the other hand is focused on the “affordable premium” segment where it is giving away a Samsung Galaxy S5 specification device at half the price.

“While OnePlus has a good product and viral marketing and phone distribution strategy, the reach and production ramp up to meet the pent-up demand remains a challenge being a start-up company.

Secondly, the brand and marketing part is taken care of but the actual sales and after sales support strategy will need a lot of work when entering newer markets.

“Overall, there is a growing tail of promising upstart smartphone brands looking to chip away share from likes of Samsungs and HTCs of the world, and over time only the few with robust business models and what value they bring to the table consistently will survive.”

Leave a Comment