Will Xiaomi's Rise to the Top of the Chinese Smartphone Market Last?

Xiaomi is riding high right now, and for good reason. The Chinese smartphone maker has executed on its strategy extremely well in recent years, but history shows that the odds are against it.

Aug 6, 2014 at 12:00PM

A year ago, no one knew what Xiaomi was. Nowadays, anyone who pays any attention to the smartphone market has heard of Xiaomi's meteoric rise to the top of the enormous Chinese smartphone market.

In fact, market researcher Canalys just listed Xiaomi the No. 1 smartphone vendor in the Middle Kingdom after the company shipped 15 million units in the second quarter. That was enough to unseat Samsung, which shipped 13.2 million units.

China Smartphone Units Canalys

Source: Canalys.

How did Xiaomi accomplish so much so quickly? More important, where is the company headed?

How Xiaomi got here
Xiaomi has taken strategic cues (and personnel) from several Western companies. Xiaomi takes product design and marketing lessons from Apple (NASDAQ:AAPL). It uses a razor-blade model with hardware like Amazon.com (NASDAQ:AMZN), and even poached high-level Android exec Hugo Barra from Google (NASDAQ:GOOG)(NASDAQ:GOOGL).

Xiaomi's product marketing pages are clear copycats of Apple's. Founder Lei Jun dresses like Steve Jobs at product unveilings and even borrowed Apple's famous "One More Thing" at the company's Mi4 smartphone launch last month. Xiaomi makes quality products that resemble iPhones.

Mi

Mi4. Source: Xiaomi.

At the same time, Xiaomi sells its products at affordable prices. The company prefers to sell hardware close to cost, with the intent of making money on content and services after the initial sale. That has long been Amazon's historical hardware strategy (before its Fire Phone).

Quality devices at affordable prices? Sounds like a recipe for success.

Where Xiaomi goes from here
Without a doubt, Xiaomi is riding high right now for all the right reasons. However, success in the smartphone market is notoriously difficult to sustain, and fortunes change hands very easily. That's especially true within the Android camp, as most hardware vendors have a hard time differentiating themselves from the competition and end up becoming commoditized.

Samsung has tried very hard to create new proprietary apps and services as a way to set itself apart from the Android crowd, with limited success. The South Korean conglomerate remains the largest handset maker in the world by volume, but it has recently acknowledged being squeezed by Chinese rivals at the low end and by Apple at the high end.

It's also worth noting that hardware OEMs generally have a poor track record in creating profitable content and services platforms, especially those with low up-front margins. There are many operational expenses associated with running platforms, and that money has to come from somewhere. That puts even more pressure on Xiaomi to offer its content and services profitably, because otherwise it's just a matter of time before it falls from grace.

Xiaomi has catered very well to China's smartphone market with localized content and optimizations. Xiaomi's Android-based MIUI interface now has an estimated installed base of 50 million, up from 30 million at the end of 2013.

Xiaomi consumers spend a lot of time using entertainment apps (five times as much as iOS users), which is where Xiaomi has focused its app efforts. Beyond apps, Xiaomi also offers a theme store, a social gaming platform, cloud storage services, a messaging app, and a browser.

The company says it generates approximately $5 million in revenue per month from MIUI. That translates into $60 million in annual revenue from Xiaomi's primary profit center, even as the company was recently valued at $10 billion.

The plot thickens
Late last year, Xiaomi launched an e-book store in China, leveraging its 2012 acquisition of Duokan. Just a few months ago, Xiaomi invested $200 million in Xunlei, which operates video streaming site Kankan. Content is king, and Xiaomi knows it.

Xiaomi hired Hugo Barra away from Google primarily to lead international expansion. The company launched in Singapore earlier this year, followed by Malaysia a couple months later. Also on the expansion to-do list are India, Thailand, Vietnam, Russia, Brazil, and Mexico, among others. The challenge with expanding abroad profitably will be localizing MIUI in these markets, which is easier said than done. MIUI is available on other Android devices beyond Xiaomi's own products, which will help its scalability.

Xiaomi is an undeniable success story, and the company has executed its strategy extremely well. It could very well continue on this trajectory and remain a dominant player in the cutthroat smartphone market. But if history offers any lessons (which it usually does), it's that the odds are against Xiaomi in the long run.

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers