Xiaomi Rethink

No so long ago, it was trendy to argue that Xiaomi was the next Apple, or at least a disrupter to the traditional hardware-based vendor model of which Samsung was the main incumbent. 

However, we now see Xiaomi losing market share, even in their home market of China. What happened?

The main arguments around Xiaomi were;

  1. They copy Apple and since Apple is a very aspirational brand, the Chinese flocked to Xiaomi. 
  2. They sell good quality and performance smartphones for a very affordable price. 
  3. They have a distinct UI, which makes their phones look much closer to Apple than their competitors. Furthermore, their UI is good and differentiates their products in a positive way. 
  4. They monetise on services, and that is why they can afford to not make profits on hardware. 

Most pundits were unanimously positive about the prospects for Xiaomi, at least in their home market. So what went wrong, or putting the blame on the pundit’s side, how did they get their predictions so wrong?

Fortune reported that 

Xiaomi, facing flattening revenues, launched efforts to bounce back with the opening of new retail outlets across China

IDC reported that;

In the past, Xiaomi started the trend of selling its phones online and other vendors soon followed suit and created their own online brand. After vendors witnessed OPPO’s success with its R9, they also started riding on the trend of hiring celebrity endorsers to represent their brand and appeal more to the young crowd.

Now, since I’ve started this post by hinting that the pundits were wrong, I have no intention of taking Fortune’s and IDC’s reports at face value. However, it is still notable how the argument has completely moved away from the software and services angle, and is now completely about marketing. 

The way it looks now is;

  1. Anybody can copy Apple given China’s hardware prowess. 
  2. Any major Chinese vendor can make good phones at affordable prices. 
  3. Distinct UI was not really a differentiator. 
  4. Services didn’t generate nearly enough revenue to allow Xiaomi to sell their phones at meaningfully lower prices. They made their profits on hardware
  5. Xiaomi’s strength was actually in their marketing tactics. However, like many other marketing stunts, it was just a fad. Losing their marketing power means losing almost everything. 

In general, tech pundits have a strong tendency to underestimate sales & marketing, and how it defines undifferentiated markets more forcefully than any new features can. Silicon Valley pundits assumed that services-based features and business models would define the smartphone market after hardware maturation. This is was not the case. It is likely that sales, marketing & distribution will be much more powerful.