So you’ve become the largest smartphone seller in the country, added over 1,000 employees, launched a publicity blitzkrieg with Bollywood A-listers around your new phone, and are probably comfortable at the top spot. What do you do next? If you’d asked a smartphone company, they’d probably say: sell more phones or add megapixels to the camera.
If you ask the Beijing-headquartered Xiaomi, you’d hear something different. Like: “We’re an internet company and not just a smartphone company.” In the company’s IPO prospectus (pdf), founder Lei Jun goes to great lengths to emphasise that Xiaomi is an “innovation-driven internet company.” That’s their shtick and most market watchers don’t give it a second thought.
Xiaomi’s boardroom plans are quietly being rolled out in India, laying the foundation for a much bigger play that might set it up to become one of the largest diversified technology companies in the country. And if Xiaomi’s track record of having come from nowhere to beat Samsung is anything to go by, it has a good chance of getting there.
“You can’t expand beyond a range with just hardware. If you look at India, we’ve reached a stage where now the growth will be in single digits. That’s not going to give the growth kick,” says Faisal Kawoosa, founder and chief analyst at market research firm techARC.
Xiaomi, which listed its stock at the Hong Kong Stock Exchange in July, is currently trading at HK$12.08, nearly 30% below its stock price on the opening day.
A journey that began with 10,000 phones
The Chinese have an obsession with setting world records. So when Xiaomi launched 500 offline stores in India in one go in October, it got another world record to its name. For a brand that has relied mostly on flash sales online, going big offline this way was different. But then, the Indian market is also different and there’s much at stake here for Xiaomi.
Globally, smartphone shipments declined 4.1% in the last quarter of 2018, capping off the “worst year ever” for smartphone shipments, industry tracker IDC said last month. But India hasn’t seen any slowdown. In fact, it is one of the few high-growth markets in the world right now. In 2018, nearly 142.3 million smartphones were shipped in India. That means a growth of 14.5% over the previous year.
Among the smartphone brands that sell in India, Xiaomi has grown the fastest with a 58.6% year-on-year increase in unit sales in 2018 to corner a market share of 28.9%, according to IDC. It has been in the market only four years now but has beat Samsung, which has a market share of 22.4%. India accounts for more than a third of Xiaomi’s smartphone sales globally.
In 2018, Xiaomi India booked a revenue of Rs 23,000 crore ($3.24 billion), a 174% growth over the previous year, selling phones priced at an average of $142.53. Samsung’s mobile phones business in India raked in about Rs 37,349 crore ($4.82 billion) in the same period, up 9% from the year before. The South Korean company’s phones are priced higher, on average upwards of $250.
“We’d only gotten about 10,000 units for our first sale on Flipkart,” recalls Raghu Reddy, head of online sales at Xiaomi India. But about half a million people turned up to buy the Mi 3 phone on Flipkart back in 2014. “That was a start where the company realised that reaching out to customers directly is quite potent,” says Reddy, a former Snapdeal executive.
Between July 2014 and April 2015, Xiaomi only sold on Flipkart. Then it began selling on Amazon and Snapdeal as well. Sometime in 2015, the company said it would shift some manufacturing to India, aligning itself closely with the Indian government’s ‘Make in India’ policy. Under the policy, the government made it easier for companies to manufacture in India and offered tax breaks. In August that year, RedMi 2 Prime started rolling out from a factory in Sri City, a business hub in Andhra Pradesh and just north of Tamil Nadu capital city Chennai.
In 2016, Xiaomi launched the RedMi Note 3 and the RedMi 3S — both selling well above expectations and helping the company cut into the sales of Indian manufacturers such as Micromax and Lava. In 2017, when it looked like the online smartphone market had hit a ceiling of about 100 million shoppers, Xiaomi started selling offline. By the end of the year, 25% of the company’s sales were from offline channels across over a dozen Indian cities.
Here, again, Xiaomi went directly to the retailer, cutting out the distributors in between. It now sells offline in over 40 cities and has more than 4,000 preferred partners who sell Xiaomi phones. It also launched in large format retailers that year with Sangeeta, Poorvika, Croma and Reliance Digital. The third pillar of the company’s offline strategy was launching Mi Home stores, which exclusively sell Xiaomi devices.
The Mi Home stores are central to Xiaomi’s growth in other categories such as power banks, fitness bands, accessories, smart televisions, audio products and so on, where the sales channels aren’t very well defined. “It’s impossible for one channel to do justice if the breadth of product is so high,” says Reddy.
The company now operates about 75 Mi Home stores spread across the top 10 cities in India and wants to get to 100 such stores this year. In October, Xiaomi also launched smaller Mi Stores, about 200-300 square feet retail spaces exclusively selling Xiaomi devices across 500 locations in 200 Indian cities. The plan is to increase this to 5,000 stores by the end of this year.
Xiaomi’s offline strategy has paid off and set the company on a stronger footing as it takes on Samsung in the India market. About 40% of Xiaomi’s sales are now offline.
Xiaomi has also managed to grow fast enough to beat competitors in segments such as wearable bands and smart televisions with aggressively priced products. It is the largest wearable band company in India. It is also the largest seller of smart televisions in the country now.
Is Xiaomi a smartphone company or an internet giant in the making?
If there’s one thing that’s worked for Xiaomi, it is the company’s pricing strategy. Xiaomi founder Lei Jun famously said last year that the company would never make more than 5% margins from its hardware portfolio, aligning the company to its vision of going beyond being a hardware maker.
“India is very price-sensitive and nearly (every) customer review of the Xiaomi phone will say that it is good for the price,” says Vijay Raj, a Bengaluru-based blogger and reviewer.
It’s not just about making cheap phones. There’s also something very clever at play here. As this Harvard Business Review article points out, Xiaomi keeps its models in the market for longer than other phone makers. So when component prices fall, Xiaomi makes a profit. Six months ago, it posted a $2.1 billion profit for its first quarter of business as a publicly traded company. Reddy sums it up neatly: “Price it as aggressively as you can and let it run through the course.”
Until about last year, the company would launch one generation of the phone every year. “But now the pace of innovations is faster so you see a mid-cycle upgrade in 6-9 months as well,” says Reddy. In 2018, for instance, Xiaomi launched a mid-cycle upgrade for RedMi Note 5 Pro and called it the RedMi Note 6 Pro. “We operate at the same price throughout the lifecycle unlike other brands, which keep constantly dropping prices,” says Reddy.
For a company born in 2010 and which grew at a time when iconic brands including Motorola and Nokia were caught in a death spiral, the biggest moat against the commoditization of hardware was to treat hardware as just that: a commodity. That meant focussing on the software and services layer to bring in additional revenues. To that end, Xiaomi has built a strong advertising business and a portfolio of over 200 smart connected devices.
This year, besides launching new product categories, the company is likely to go all in India in at least three new areas it dabbled in earlier: fintech; advertising (which is already a money spinner for the company); and gaming.
In December, Xiaomi got approvals to launch MiPay, a payment service. Xiaomi has also been dabbling in MiCredit, a lending platform for its users. “Both are beta stage now. It’s still super small scale but they will eventually become big,” says Reddy.
MiPay is Xiaomi’s payments app built on top of India’s unified payments interface, which lets users transfer money to others easily. The company has tied up with PayU and ICICI Bank to launch the app. The idea is to integrate the app with messaging, contacts and the camera to facilitate easier payments.
“This will not make them money but will help them build a user profile. The end game could be to roll out credit and other financial products like insurance,” says Nikhil Kumar, founder of yet to be launched fintech startup and formerly a volunteer at Indian software products think-tank iSpirt.
With Mi Credit, the idea is to advance instant loans to Xiaomi users. The company has partnered with KreditBee, a payday lending company, to offer loans of Rs 1,000 to Rs 1 lakh. KreditBee is owned by KrazyBee, which has raised about $13 million in capital from Chinese microlending firm Fenqile, advertising network Yeahmobile, and Xiaomi’s venture capital arm Shunwei Capital. Xiaomi has also hired dozens of finance professionals who have experience working at banks.
For Xiaomi to build a fintech play, it would have to up its game in product development because distribution may not hand it a unique advantage when rivals like Google, PhonePe and Paytm are heavily funded and are early movers.
Xiaomi’s strongest business in internet services is its advertising business. In the quarter ended September, Xiaomi posted a 49.1% year-on-year growth in revenue at RMB 50.8 billion ($7.6 billion) and a net profit of RMB 2.9 billion ($430 million). Of this revenue, about RMB 4.7 billion came from internet services, which include advertising (RMB 3.2 billion), online games (RMB .7 billion), and other value-added services (RMB .8 billion). On average, Xiaomi makes about RMB 21.1 each from 224.4 million users worldwide. In internet services, the company makes a margin of about 68%, whereas in hardware, its gross margin is 7.1%.
In January, Xiaomi launched Survival Game, modelled on the likes of PubG and Fortnite that are already popular in India. These games are some of the top grossing apps on Google Play store. Xiaomi is also in the process of hiring an operations lead to head its new games vertical.
The cornerstone of Xiaomi’s internet services play is its operating system — MIUI. “Hardware is our bread and butter but we’re also a software company,” says Reddy. “The idea is to see how do we make the operating system layer to drive greater customer loyalty and revenue/profitability that propels the entire ecosystem.”
The company has tweaked the Android-based operating system over the years to incorporate many typically Indian features. “They always wanted to be the best customisation of the Android operating system. Now there are too many players and every phone behaves the same,” says Raj.
As per one estimate, Xiaomi’s MIUI has about 70 million monthly active users. That makes it a powerful distribution platform. “They would want to explore what we can do to make additional dollars of it,” says Kawoosa of techARC. Xiaomi is making Rs 40-45 per user per month, he says.
MIUI was one of the earliest smartphone operating system to support the use of onboard infrared blaster to control appliances at home. It also introduced nifty features that make it easier for users to copy one-time passwords for online transactions and for formatting train booking confirmation messages to prominently display the PNR number. Xiaomi also let users configure two WhatsApp numbers on the same phone to drive a loyal user base.
Xiaomi, overall, has a portfolio of more than 200 products — ranging from a pen to a soap dispenser to keyboards and laptops — that it has developed through its “ecosystem partners.” Most of these aren’t sold in India yet. The company wants to get as many smart devices as possible connected through a common Internet of Things platform it calls the Mi Home app. The main categories in India are currently phones, televisions, power banks, audio, wearables and air purifiers. In September, Xiaomi launched a home security camera.
“In India, that journey is just beginning,” says Reddy. “It won’t be fair for me to tell you what we’re going to launch but the idea is to see what are the markets we can disrupt.”
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