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Behind the fall and rise of China's Xiaomi


A year ago, the Chinese smartphone manufacturer Xiaomi (sha-oh-me) had fallen from the most valuable unicorn in the world to a "unicorporativo". Sales plummeted in 2016, pushing the company from first to fifth among Chinese smartphone manufacturers. No company had returned from such a serious injury in the trench warfare of the global smartphone business.

Today, Xiaomi is called a "Chinese phoenix". The company has grown so fast last year that the research firm Strategy Analytics says that Xiaomi could overtake Oppo, Huawei and Apple in the next year to become the second largest smartphone provider in the world, behind Samsung. Executives are considering an initial public offering in 201

8, which could be among the most valuable of all time.

The reappearance has made Xiaomi a symbol of China's entrepreneurial dynamism. Every day more than 10,000 new companies start in China: there are seven new Chinese companies that are born every minute. In the USA On the other hand, the formation of startups has fallen by 36 percent in the last 10 years, to approximately 1,000 per day. It is no longer a nation of "imitators", China today leads the USA. UU In key technology sectors, such as mobile payments, and is increasingly competitive in advanced microchips and artificial intelligence. Xiaomi is one of the best examples of this business vigor.

How do you explain the company's unprecedented turnaround? Is Xiaomi's renewed success sustainable or will it weaken under the relentless marginal pressures of the phone business? And can Xiaomi do what no Chinese cell phone manufacturer has done? To ruin the US market successfully?

To find the answers to these questions, we have to return to the 2015-2016 Xiaomi debacle, which saw smartphone sales fall to a rumored 41 million in 2016, from the 70 million reported a year earlier. Xiaomi's billionaire founder, Lei Jun, sometimes called "China's Steve Jobs," blamed the depression on the supply chain problems associated with the company's rapid growth. This forced Xiaomi to withdraw from several foreign markets, including Brazil and Indonesia. There were also organizational problems, which led to the restructuring of smart phone hardware, R & D, the supply chain and quality management teams. But perhaps the biggest source of Xiaomi's problems was its exclusive dependence on online sales, which did not allow it to reach millions of less tech-savvy customers in the smaller cities of China and rural areas. Rivals Oppo and Vivo capitalized on Xiaomi's absence by cementing sales partnerships with retailers in those areas.

In a classic case of "turning a bad thing into a good thing", however, Xiaomi used her almost fatal stumble to create a radical new business model. With sales bouncing and the company expanding globally, it's worth examining the inner workings of that unusual model and how it helped fuel the company's remarkable resurgence.

Like many companies in the Internet era, Xiaomi had initially relied on a double business model selling hardware products and online services. Most of the revenue comes from the sale of affordable phones and smart TVs, which serve as platforms for Xiaomi's online services. Hardware products have very thin profit margins, so most of Xiaomi's earnings come from online services. These include hundreds of thousands of hours of movies and shows, available a la carte or with a monthly fee of $ 7.50, as well as games and other offers. Xiaomi even operates a cost-effective online service that offers small loans to users of Xiaomi phones examined with the help of a sophisticated artificial intelligence engine to assess solvency.

Ecosystem strategy

After Xiaomi's setback, company executives concluded that they needed a third stage of their business model: off-line retail stores. But they wanted the stores to go beyond selling phones to forging sustainable links with customers. Their solution: create an ecosystem of about 100 startups as partners to provide Xiaomi with other Internet-related home and technology products that attract customers to their stores.

Xiaomi Senior Vice President Wang Xiang, who used to run the Qualcomm business in China, explained how ecosystem strategy drives traffic when we were sitting in his office: "Buying a phone or TV is a low frequency event. Do you sometimes need to go back to the store? "he said. "But what if you also need a Bluetooth speaker, a rice cooker with Internet access or the first affordable air purifier in China, and each of these products is not only the best in its class, but it costs less than the products existing in that category? Our ecosystem even offers customers new unusual products that they never knew existed, so they keep coming back to Xiaomi's Home Store to see what we have. "

Lei Jun, CEO of Xiaomi, speaks during the launch of the company's Mi Mix 2 smartphone.

Giulia Marchi / Bloomberg / Getty Images

Wang says the strategy aims to reduce the "pain points" for Chinese consumers. He points out air pollution, a serious problem in China. Quality air purifiers cost approximately $ 500, he says. So Xiaomi funded a startup with an air pollution expert, who offers help with design and manufacturing, access to its supply chain and lessons from its own low-cost operating efficiency. The result: the Mi Air Purifier 2, which sells for $ 105. It is connected to smartphones, which allows users to control the air in their homes and receive alerts when the filter needs changes.

The purifier was a blockbuster. "In two months we were the top sellers of air purifiers in China," Wang says. "And that's how we solved the 'pain point' in air purifiers."

The company adopted a similar approach with the fitness bands, designing an aerodynamic device with a battery life of almost 60 days that solved the "painful point" of having to recharge the bands every few days. Xiaomi is now the world's largest seller of fitness bands, ahead of Fitbit and Apple. The same goes for Xiaomi's award-winning power banks, which provide more charges than their rivals at a lower price; Xiaomi is also the world leader in sales in this category.

All of its ecosystem products, from pillows to air purifiers, and from rice cookers to portable Bluetooth 4.0 speakers, aim to solve "pain points" similar to those of price per performance. customers. The products are cheap, but they are not designed or manufactured at a low price. They have won more than 100 international design awards.

The strategy has its critics. "When we started with this new model, many people said that we were not a focused company," Wang acknowledged. "They said that we are like a supermarket or a department store, that we sell everything and, therefore, we do not focus on anything." You're a smart phone company, "they argued." Why do you make rice cookers? Why do you make batteries or pens or luggage? Are you crazy? "But it's not crazy. It works very well for us. "

Some analysts remain unconvinced: Bloomberg columnist Gadfly and Xiaomi skeptic Tim Culpan says:" Xiaomi public relations executives like to tell stories about Xiaomi's broad product portfolio. the signature, which includes exercise bands and air filters, and talk about some ecosystem effect that justifies Xiaomi not being seen as another device manufacturer. I do not buy it. Add the word & # 39; connected & # 39; to a range of appliances is not a smart home, even Apple has not achieved that trick yet. "

Still, it's hard to argue with Xiaomi numbers." Strategy Analytics says that Xiaomi's phone shipments soared 91 percent in the third quarter, in a market that grows only 5 percent per year across the board. Analysts say that Xiaomi's revenue could reach 110 billion yuan or $ 17 billion this year.

A big driver of the increase in sales is the Xiaomi Mi Mix phone, which was the first phone No bevel when it debuted in October 2016. Chief Financial Officer Shou Zi Chew explained the engineering challenge. "To get rid of the front of the phone and replace it with an edge-to-edge screen, we first had to replace the speaker," he said. "To do this, we put a piece of ceramic behind the touch panel that vibrates the sound in his ear." Then Xiaomi used ultrasound instead of a proximity sensor to measure the distance between the face of the user urn and the phone, and contracted the front-facing camera at a point in the bottom corner of the phone. In September, Xiaomi introduced the Mi Mix 2.

The Xiaomi Mi Mix 2 smartphone is on display

Giulia Marchi / Bloomberg / Getty Images

Xiaomi's "pain point" products have created a base of passionate fans at home and abroad. The user interface of the company's Mi phone (called MIUI), the Android-based operating system that runs on Xiaomi smartphones, now has 300 million users activated. According to Shou, those users spend about five hours a day on their phones, which helps explain the close fervor to Comic-Con of the Mi Fan clubs around the world.

The company leverages its fan base to support the business. For example, Xiaomi asks users to suggest new features and then allows them to vote every week to incorporate them into the operating system. Every Friday at 5 p.m. M., Beijing Time, Xiaomi issues an update of MIUI that includes the most popular new features.

The Xiaomi Way

Shou remembered a case last year when a user said he had got drunk one night he could not find the flashlight app on his phone to locate his keys. Could Xiaomi enable it with a long fingerprint sensor pressure? Other fans loved the idea, and now it's part of the Mi user interface. This round-trip system may seem like a small change in the construction of a global business. But it makes customers feel interested in Xiaomi, as if the company belongs to them.

So there you have it. "The Xiaomi Way" is a kind of democratized business model that is based on a passionate base of user followers to co-design the user interface of the phone and evangelize the products developed by a network of new partners. For Xiaomi executives, the result is a "Costco" loyalty and marketability rating among clients.

I glimpsed the loyalty in the Rainbow City shopping center, in the Haidian district of Beijing, when the crowd arrived at lunchtime. neighboring telephone stores. The Samsung store did not have a single customer on any of the three days I visited. The Huawei store attracted only one or two customers each time it passed by. But Xiaomi's Home Store had 40 to 60 customers perusing the products at each visit, with lines at the check-in desk often three to four deep.
"Xiaomi has good value for money and good design," said a 35-year-old man. "But you have to use the Xiaomi application to control all the products, and that's not always convenient."

CFO Shou states that Xiaomi brand loyalty among customers generates high retail sales per square meter. My Home Store in the Rainbow City shopping center occupies 150 square meters of commercial space of the 100,000 square meters of the shopping center. That's 0.15 percent of the commercial area of ​​the mall; But according to Shou, Mi Home Store absorbs 7 percent of the mall's sales.

Despite Xiaomi's unprecedented success over the past year, some observers urge caution on whether the company's already thin hardware profit margins are sustainable in the long term. term against aggressive Chinese and global competition, and can continue to finance other companies of the company.

"Xiaomi can get a large scale in their phones and some other products, but it is difficult to earn a lot of money and be highly profitable in commodities hardware products like these, even in China," says the managing partner of a US firm of venture capital that he previously invested in several Chinese startups. "They are in a very competitive business, and while they are clearly more than just a manufacturer of low-cost devices, are they really capable of becoming a leader in innovation?"

The venture capitalist says that Xiaomi may be on track to be one of the most valuable companies in the world, "but first you have to win in your valuation."
Then there are concerns about the Chinese government, which has recently moved to acquire minority investments and board seats in several Chinese Internet companies as a way to get a "bigger voice" in its decisions. "How do we know that Xiaomi can avoid confronting the invisible and opaque rules of the current leadership, or the leadership that will follow the current administration?" Asks the venture capitalist.

Wang, the first vice president, recognizes that Xiaomi faces many challenges. Among the most prominent: the global expansion, especially in the US high-risk market, which Wang believes will occur "in 2019", but some think it can come before. "This is a very attractive market for us," he said. "My ultimate goal is to be a strong player in the US market."

Xiaomi employees stand at the Note 3 counter during a launch event in Beijing in September.

Giulia Marchi / Bloomberg / Getty Images

Wang knows that American customers have high expectations for service, and that most phones in the US UU They are sold through telecommunications companies, an arena in which Xiaomi has no experience. "So surely we'll have to work with at least one carrier, and hopefully with all of them if we can." This will require a lot of engineering resources for a company with barely 14,000 employees. Each provider has its own requirements for telephones to work in their network. "We will probably have to choose a carrier first and make it successful," says Wang. "Then the other operators will come to us and we will have more resources to meet their requirements."

Xiaomi is probably not the first self-made Chinese company to sell phones in the US UU Huawei confirmed this week that it plans to sell phones in the US. UU In 2018.

Before testing the EE. UU., Xiaomi is expanding in Western Europe, most recently in Spain, where it started selling phones last month. To successfully expand internationally, Xiaomi must secure global intellectual property rights over the components used in its products, including the patented wireless, video and audio technologies used in smartphones. Without this intellectual property protection, Xiaomi could be hampered by costly lawsuits, and potentially find their products excluded from various markets, as they were for a time in India, thanks to a lawsuit filed by Ericsson in 2014.

Xiaomi learned of that experience, and has been building its portfolio of approximately 5,700 patents since then, mostly generated internally, some acquired from companies such as Microsoft and Nokia. If Xiaomi does not "prop up" with the necessary patent protection for when it launches in the US. UU., Apple or another great smartphone player will be eagerly waiting to slap the company with a billion-dollar patent suit.

Meanwhile, as Xiaomi continues to expand beyond China, now it sells products in 60 countries, including Indonesia, which was previously abandoned, the company seeks other initiatives. Having invested $ 4 billion in its ecosystem of Chinese partners, Xiaomi says it will now invest $ 1 billion in building similar alliances with 100 new companies in India, its largest market outside of China. Xiaomi also announced last month a broad strategic partnership with Chinese search giant Baidu to jointly develop conversational AI products for the Internet of Things (IoT) market. And it is planning to expand its retail networks both at home and abroad to a total of more than 2,000 branded Mi Home Stores in 2019.

No one at Xiaomi believes success is assured. "This is the wrong industry to relax," admitted global boss Wang. "The competition is very fierce, you can not relax, you can not sleep, and if you do, you keep an eye open. weeks, when I return I will have lost the business. "

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