(Yicai Global) Dec. 2 -- As he had done for the past few years, Xiao Mi devotee Pan Hui opened the official Mi Home WeChat account on his phone to get in line for the long-awaited Mi Note 2 released the next day on Nov 3.
During the release ceremony for the Note 2, released at the same time as the Mi Mix, Lei Jun, the founder of Xiaomi Inc. described the phone as “the mobile from the future.”
The Philippe Starck-designed Mi Mix drew attention for its ceramic body and a screen-to-handset ratio of 91 percent. Its dimensions are similar to those of the iPhone 7 Plus, but Mi Mix’s screen is 23 percent bigger.
To create the fuller screen, the earpiece usually on the front was replaced by a cantilevered piezoceramics acoustic device, which produces sound through resonance.
The reasonably priced 4GB memory and 128GB internal storage version was priced at CNY3,499 (USD517) and the 6GB and 256GB version at CNY3,999, about half the price of an iPhone 7.
The phone stole the show and the presence of actor Tony Leung, their superstar endorser, who hosted the ceremony, drove XiaoMi straight to the top of the topic rankings of Weibo again.
This scene was very familiar to Pan, watching in his dormitory. Three years ago, he also kept his eyes on his computer every Tuesday and refreshed the page of Mi.com again and again, hoping to snag the chance of giving an order for a Mi 2A. Over the past years, Mi fans like Pan directly contributed to Xiaomi’s brand.
Is Xiaomi Still Cool?
Unlike other domestic smartphone manufacturers, Xiaomi forged a close relationship with its users. With close customer contact and its extraordinary cost to performance ratio, Xiaomi sold its products to tens of millions of users by reputation alone without needs of developing its off-line marketing channels and advertising. In the book The Sense of Participation, written by Li Wanqiang, a co-founder of the company, Li summarized Xiaomi’s marketing method by reputation into three elements. These were products (the engine), social media (the accelerator) and user relationship (the relationship chain).
Since the release of Xiaomi smartphones at the end of 2011, the enterprising firm was valued as much as USD45 billion in only four years. In the two months since their release, Xiaomi smartphones achieved a sales volume of CNY550 million with an annual turnover in 2012 of CNY12.6 billion. Afterwards, 2013 saw rapid growth, with the turnover that year almost doubling to CNY33 billion.
In 2014, Lei Jun was in high spirits, describing Xiaomi’s momentum as defined by two “fastest worldwide” plaudits, it achieved a valuation of USD1 billion in the shortest time and a company that achieved a turnover of USD10 billion in the shortest time. “Its growth is almost like a perfect curve,” he said.
However, since this year, the magic of Xiaomi seemed to dissipate. in 2015 Xiaomi took up the leading position among domestic smartphone manufacturers by its market share as 15 percent, IDC data showed.
Nevertheless, in the first three quarters of this year, shipments of Xiaomi fell by 32, 38.4 and 42.3 percent from the same periods last year, respectively. To make matters worse, the average price of their phones was reduced to USD149 in 2015 from USD189 in 2014, indicating the yearly growth potential of Redmi, Xiaomi’s entry-level handset, is oriented to markets with phones priced under CNY1,000.
Formerly loyal Xiaomi customers did not continue to buy their smartphones anymore and new consumers were mainly comprised of low-end user groups sensitive to price and typically such a group has weak brand loyalty.
In Lei’s view, the branding problem of the Redmi is not due to its low price. “Maybe the Redmi name is synonymous with Xiaomi. It is important to separate Xiaomi from other brands, which is our experience from the beginning and our first reflection.
The second reflection is that in my view, we still be spared some effort in product design, for we just expected to achieve large-scale manufacturing. The low price is not what hurts our quality reputation,” Lei said.
Anyway, it has greatly impacted the close relationship between Xiaomi and its users. In Pan’s view, Xiaomi was initially oriented to first-adopters, those who are keen to acquire the latest advances in smartphones as soon as they are released.
This gave people the impression and Xiaomi fans that it is cool to have a Xiaomi smartphone. Xiaomi would update its MIUI, their proprietary version of the Android system weekly, which not only offers new updates to eliminate some bugs, but also offers a forum for users to submit feedback and suggest improvements.
For the Android system, which initially had a poorly-designed user interface, MIUI had a head start then. However, when Xiaomi fans found more and more old people becoming Xiaomi users, they began to feel disappointed with the brand.
Finally, after years of buying Xiaomi phones, former student Pan became an office worker, bought his first iPhone and became an Apple disciple.
In the face of more and more particular users due to constant innovations in the smartphone market, Lei is leaving no stone unturned in his bid to revive the Xiaomi brand.
The following day after the release ceremony of the Note 2 and Mi Mix, Lei paid special attention to the comments of the media and Xiaomi users on social media. To disclose that MIX still cannot be mass-produced was already a gamble for Lei.
“For ordinary consumers, as they have become tired of the same phones in the last decade, they are longing to see something different -- that is not something I anticipated,” Lei said.
This year is the third year since Pan’s graduation, who now works for a video website company. When Xiaomi released its first smartphone five years ago, he was studying at China University of Political Science and Law in his sophomore year, and the Mi 1S, with its rather basic specifications was the smartphone of choice for Pan and his girlfriend.
At that time, the MIUI system stood out from various Android phones with their unsatisfying operating system and user experience. To buy a smartphone with advanced performance at an economical price was once the best choice for students.
Changing stylish customized themes for his Xiaomi in his dormitory became a source of pleasure for Pan. After using it for two years, Pan replaced it and upgraded to the Mi 2A, which had a better spec.
The initial magic of Xiaomi resulted in the MIUI interface. It is a set of Android user interfaces specially designed for Chinese mobile users, which is capable of incorporating hundreds of thousands of users’ suggestions in each weekly update.
“At that time, MIUI accumulated hundreds of thousands of seed users. They were the key. When we announced that we were to manufacture smartphones, we received 320,000 orders on our very first day, several times greater than our expectations.
“An annual sales volume as high as 30,000-50,000 at that time was already something amazing,” said Li at a press conference. At that time, smartphones using the Android system were still rare, while domestic companies competent to optimize the immature Android system and make it run smoothly were even rarer, which made Xiaomi stand out significantly.
Cost Performance or Difference?
In 2011, Nokia suddenly announced it was quitting Saipan, giving a significant chance to the Android system. In those days, companies capable of dealing in hardware, operating systems and applications at the same time were very scarce, and Mi was the natural beneficiary then.
“In the shift of fashion of shift from feature-laden phones to smartphones, the timely reaction of Xiaomi enabled it to enjoy this bonus,” Sheng Linghai, the research director for the smartphone industry of Garner, an international research and advisory institution, told CBN Weekly.
Apart from the costs of production, the magic of Xiaomi also lies in the saving on bricks-and-mortar outlets and marketing costs. Moreover, thanks to the online pre-sale model, it minimized inventory risks.
Without these costs, Xiaomi smartphones were sold at a price 330 percent lower than others, which in turn allowed them to drive up their scaled marketing. The expansion in procurement also further decreased the price of components, further contributing to Xiaomi’s reduced costs of production.
“In my view, economical price and high efficiency is the vision for the entire Xiaomi brand, which is also its absolute superiority. We have always been pricing our products by cost consistently over five years,” said Lei.
A Xiaomi insider told CBN Weekly that Xiaomi smartphones were indeed priced according to their costs, a saving which was passed onto the consumer. Such a combination made Xiaomi smartphones almost invincible.
Li wrote of Xiaomi’s marketing model in The Sense of Participation. “The unexpected product and price combination brings powerful marketing potential. Making a breakthrough in a single point is the crux of product design. Being beyond public expectations will bring strong momentum for marketing. If products have no characteristics for creating a buzz and a hot topic on social media, you must popularize your advertisements and employ celebrity endorsement to promote your products, and it is a painful solution.”
Surely, Xiaomi was lucky enough to hitch a lift within Weibo’s growth period. In 2011 when Xiaomi smartphones were released, Weibo also achieved a user total of over 100 million for the first time.
In the first five years of Xiaomi, it was quite rare to see its advertisements in traditional media. In May 2011, Li took on the mission of marketing Xiaomi smartphones. At that time, he worked out a CNY30 million marketing plan that mainly embodied a one-month plan of core billboards nationwide.
General companies would invest two to three percent in marketing, however with a goal of one million handset sales, CNY30 million was already a small amount.
In the event, Xiaomi even saved this CNY30 million. People employed by Li took to Android forums and registered over a hundred accounts, posting advertisements in every day.
After being banned, they would keep posting by using another account. Such a method proved to be most efficient and cheap, and it contributed to Xiaomi’s reputation in forums.
Xiaomi also made significant progress on social platforms like Weibo and WeChat. During Xiaomi’s beginnings, Lei defined three rules for its staff, one of which defined a key technique was to “make friends with Xiaomi fans.”
In 2013, Lei launched the first entry-level Redmi smartphone series amid the soaring sales of the Xiaomi 2. With good intentions, Lei priced the Redmi smartphone at CNY799, much lower than most knockoff phones.
The launch of the Redmi series killed the sales of knockoff phones and to a large extent promoted the progress of the smartphone industry at that time.
Lei once talked about his product strategy for Xiaomi was to make a “single-point breakthrough” at first and then to develop products for iterative upgrades. To some extent, the Redmi series took the path of destructive innovation -- to gain a firm foothold in low-end markets, then start its own improvement cycle and finally meet the needs of higher-level users.
Pan thought he would always be a loyal fan of Xiaomi phones. He still remembers the joy and success brought by Xiaomi during his college years but this freshness only lasted three years.
After the launch of the Xiaomi phone series, most manufacturers of Android phones started to make improvements. They lowered their phone prices by reducing intermediate links through cooperation with e-commerce operators and focused on software differentiation.
In a short time, the Xiaomi model became the object of close study among its competitors, one of which was Huawei, now China’s largest smartphone maker, which rose as a result. A Huawei phone user, BG president Yu Chengdong, realized that Xiaomi’s way of marketing smartphones based online would subvert the norm and have an impact on traditional smartphone manufacturing and marketing models.
Later, Huawei’s internet phone brand GLORY was launched in the shadow of Xiaomi, aping its operation, trading and service models. For example, Huawei lowered the prices for the GLORY series by 30 percent from the original pricing and squeezed marketing costs based on its own e-commerce channels and third party e-commerce channels for the lowest price.
Due to the surge in shipments, traditional channel operators were willing to use a lower rebate to get a faster flow of goods and speed up turnover.
However, cost-effectiveness plunged Xiaomi and other competitors into difficulties. Users were too concerned about the price and hardware configuration, leading to a decline in recognition among smartphone brands.
However, the launch of the Redmi phone series further enhanced the brand differentiation of Xiaomi. The low price and high cost-effectiveness of Redmi phones attracted a rapidly growing user base. The current sales figure of more than 100 million smartphones has also significantly expanded the user base of MIUI.
It once helped the sales of Xiaomi smart phones rise steeply among the global top three but its negative aspects were slowly revealed later.
“We failed to effectively differentiate the brands Xiaomi and Redmi,” said Lei. However, Huawei, Xiaomi’s most direct rival, avoided this risk in a timely fashion. In 2013, Huawei's dual-brand strategy was officially introduced. Huawei’s Glory 3C series was priced as low as Redmi but the Huawei P6 series was high-priced with high quality and low specifications.
Xiaomi did not realize that the most important issue the company faced at that time was how to meet demand. All along, Xiaomi was accused of marketing by creating a hunger for their product.
Xiaomi phones were always in short supply, which gave rise to annoying touts but also inadvertently helped pave offline sales channels for Xiaomi.
In fact, Xiaomi never intended to employ this type of marketing. The truth was that Xiaomi’s supply chain failed to keep up with demand. From the beginning of 2014, Lei spent quite a long time re-organizing Xiaomi’s supply chain. In May last year, Xiaomi phones achieved a monthly output of 6.9 million. After the production capacity problem was solved, the scarcity of products was reduced, then this offline channel disappeared instantly.
Xiaomi once won good recognition with its cost-effectiveness. With the gradual rise of its competitors who kept launching more competitive products, like the Huawei P series and Mate series, Xiaomi gradually lost its popularity both in growing speed and social media buzz. This decline in recognition had a direct impact on Xiaomi’s sales.
In the past, Xiaomi users were mainly concentrated in first- and second-tier cities where the e-commerce model runs smoothly. E-commerce platforms and logistics systems have developed rapidly in recent years, accounting for about 20 percent of all goods sales now. When the era of rapidly changing smartphones came to third-, fourth- and fifth-tier cities, consumers who had never owned a smartphone turned to retail stores, not the internet.
In truth, it is also very difficult for Xiaomi to get back to selling via offline channels. From the perspective of traditional marketing channel operators, they always resent online smartphone brands. To put it simply, if only CNY9 is earned by selling a smartphone, it is not enough to make up their labor costs.
“Xiaomi’s weakness was always there, but we failed to adequately estimate the changing speed of the market. The available time for us was not as long as we imagined,” said Lei. A 200 percent sales growth rate for three consecutive years made Xiaomi hit a ceiling in online sales rapidly and Xiaomi began to seek a strong model for offline sales.
In 2016, in the spring, at Xiaomi’s new product release conference held on Feb. 24, Lei announced that the new Xiaomi 4S would be launched for sale exclusively at Suning, a popular chain of electrical outlets.
The 4S was a product Xiaomi specifically designed for offline channel sales. After all, if big profits were given to such big retail chain stores, it would be very difficult for Xiaomi to expand markets by using their channels.
Later, Xiaomi customized their Redmi Pro phones for China Mobile. Priced at over CNY1,400, it is available for sale at CNY1,999 with the higher specifications.
Xiaomi’s products are always priced based on material cost, without the amortization of channel costs, research and development costs and die-making costs. Although only a 10 percent gross profit margin was added to the material cost, it was quickly discovered by consumers.
Over the past five years, the development of domestic smartphones made the cost of a smartphone known to consumers. For this, Lei was widely criticized after the release of the Redmi Pro. “For other manufacturers, they gained a profit margin of over 20 percent but for us, a profit margin of 10 percent is unforgivable,” Lei said and admitted he felt very confused.
For Xiaomi, it must clarify its interests with operators and distributors to successfully move to offline channel sales. Lei is faced with the hard work of persuasion. Since Xiaomi products have almost no profit margin, using other companies is very difficult.
“Smartphone brands sold online are characterized by the spread of word-of-mouth recommendations, no third-party channels and less marketing investment. However, their public users are more likely to be affected by brands with high recognition, not just the price factor. Xiaomi’s problem is the lack of a loyal retail channel network to sell products for it,” commented Sheng Linhai.
In 2015, Xiaomi completed 70 million shipments, 10 million less than their target, and this number is falling continuously. In the first quarter of this year, China's smartphone consumers began to turn to Huawei and OPPO brands which have strong channels, while Xiaomi’s sales volume suffered a year on year decline of 32 percent, IDC data showed.
This means that even if more than 40 million Redmi phones were sold, Xiaomi is still unable to bring much profit to channel operators if it moves to offline sales, and thus it is unable to establish an effective network.
From this point, Xiaomi’s magic began to fade away.
Is Xiaomi’s Ecosystem Another Magic Performance?
Despite the dissipation of Xiaomi's allure in the smartphone arena, the company seems to have successfully transferred the magic to another area, the Internet of Things. In the first half of 2013, Lei began to discuss with his co-founder Liu De whether a new challenge was approaching. They were optimistic about the field of IOT which aims to make all hardware intelligently interconnected and all things to have a digital interface.
At that time, more than 2000 smartphone engineers were employed by the company but gathering a talent pool became an unresolved problem. "It is impossible for us to understand everything. The intelligent hardware business is already emerging, so by the time we organize our own team, it is likely that after we manage to recruit the talents, other teams will have already made inventions. Later, we considered to establish an organization, find the right person to do this thing by investing in some emerging startups, and help them to become medium-sized companies with the platform advantage of Xiaomi, to be a link in the chain." said Liu.
This idea was proposed at the beginning of the year. After three months of preparation, Xiaomi launched their ecosystem project in Aug. 2013. Liu, who was responsible for the industrial design of the smartphone, was assigned to the project, and selected the best from emerging small firms and small teams.
The company locked on to those who shared Xiaomi’s values. From the second year, Xiaomi began to focus on some medium-sized start-up companies and helped them become players in the industry by taking advantage of Xiaomi’s influence.
At that time, Liu’s team only had three investment managers, so every day they had to visit at least ten groups of intelligent hardware makers. Liu required the team members to be quick to respond and diligent in operating the project because time was of the essence.
Meng Fandi, the founder of Soocare Toothbrush was one of the manufacturers to be impressed by the speed and quality of Xiaomi’s operations. A few days after agreeing to cooperate, Liu Xinyu, the Xiaomi ecosystem’s director, introduced a German executive from toothbrush manufacturers Oral-B to him. "For the whole day, we went through the supply chain, including the place where we were able to improve. At that time, I thought that Xiaomi was not merely a marketing company or a swindling company as others said. The staff of the company were very serious about the product, which made me consider Xiaomi to be very reliable," Meng Fandi told First Financial Weekly.
During the first two years of the ecosystem, Xiaomi would invest in a company every 15 days. Now the team has expanded to 135 people, established a product manager group, an IT department, a supply chain department, a quality control department and a marketing department.
It has also completed a variety of tasks including project investment, supply chain endorsement, centralized purchasing, project control, quality control, market promotion and research among others. Every employee in the department is the contact person for a company in the ecosystem’s chain. The team currently controls more than 60 companies under the umbrella title "X mi."
In the opinion of Zhao Zhongwei, COO of Ninebot, manufacturers of hoverboards, Xiaomi brought more convenience to his ride-on electric vehicle company. "With the endorsement of Xiaomi, we enhanced the quality of our supplier’s selection. In addition, the endorsement of Xiaomi makes payment methods more flexible. Previously, the sales of our products were not impressive and consumers needed to first pay the full price to buy our products. But now, the hoverboard can be taken prior to the payment or by installments, which indicates a decline in hidden costs," Zhao said.
From this point, Liu slowed down investment in other companies. During the past two years, Xiaomi has invested in only 28 companies. After several years of accumulation, Xiaomi has invested in almost every possible direction and has worked out a complete set of ecosystems.