Xiaomi’s ‘Me too’ Business Model, is it Scalable?

1

August 13, 2014 by ...

Look, up there, its an Iphone, Ipad, its ….its…a knockoff?

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Xiaomi (pronounced ‘shaow me’ is a Chinese tech company which is roaring across China and now India as well. Due to flash sales and limited supply runs, it creates incredible demand and mystique. Added to this are claims that it sources from the same suppliers as Apple, meaning one essentially gets an Iphone on the cheap.

Initially a China-only phenomenon, Xiaomi is now expanding and getting rave reviews. Even the west has jumped on the bandwagon with Fastcompany going so far as to call Xiaomi one of the most innovative companies in the world.

Based on their analysis of innovation, this seems to me like a stretch. In many respects Xiaomi is more like an Apple ‘mini me’. Lei Jun and Xiaomi do deserve respect, however, but not necessarily for innovation per se. Much of what he has done is repackage business strategies from some of the best in the business, but more on this later.

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The Xiaomi difference, at least in China, is that Lei Jun has leveraged the power of nationalism and mobilized the post 80s one-child policy generation. With their backing he has created a national champ. Of course this message only works in the PRC and is not scalable. It is good enough, however, to finance Xiaomi forays abroad.

The key to further success will be to avoid quality and security pitfalls while offering a reason to buy. Aping Apple will only get him so far, especially with that specific model being copied as we speak. If things do not change, Xiaomi runs the risk of falling into the China trap of selling ‘me too’ products at discounted rates.

Lei Jun’s aping Apple in many ways is par for the course as far as the Chinese cell phone market is concerned. This industry became famous for shanzhai or ‘knockoff’ electronics. To a certain extent Lei Jun is merely being true to the shanzhai nature of the industry.

shanzhai

Background on the Chinese cell phone market

Southern China and Shenzhen have a history of making knock off phones. This goes back to when MediaTek sold a chip which integrated much of the brains in handheld units. In so doing, they enabled the overall price of cell phones to tumble.

Literally thousands of Chinese cellular phone manufacturers latched on to the new kit. For a relatively low price-approx $50k-250k, they could set up a company and start producing cell phones en masse. The demand side was spurred on by an increase in the disposable income enabled by an increase in the Chinese economy. Such growth was further hurried along by China’s entry into the WTO and the build up for the Olympics.

Entering the WTO and hosting the Olympics also brought consumer awareness. Chinese sought out the same goods as the rest of the world was buying. Unfortunately, these customers felt more comfortable with foreign brands.

As is common in China, consumers prefer products produced by international firms and preferably made outside of the PRC. For many of them, however, their champagne taste did not mate with their beer budget and a shanzhai phone was all they could afford. In Shenzhen, producers sprung up to meet that demand.

hiphone

One thing that smaller producers and shanzhai specialists could offer was customizibility. The needs of many consumers did not fit ‘off the rack’ products. Differentiation was precisely what nimble shanzhai phone manufacturers could hope for. Because they produced in shorter runs, these manufacturers would make phones to meet local needs.

The cell phone market ballooned but was essentially fragmented with firms catering to local needs. For example, one shanzhai phone producer included large speakers with better sound quality. This feature was designed for farmers who typically set their phones down as they worked and were oftentimes far away.

Another contributing factor to the market fragmentation was protectionism, which is still alive today. Local leaders are promoted on how well they increase the GDP or wealth of their province or region. More manufacturing means more money and a rise up the political ranks. Consequently, political officials promoted local brands while discriminating against foreign ones, i.e., those from other provinces.

Cellphone cluster

With all that experience in producing handhelds, a cell phone cluster formed in southern China. A cluster is a region which caters to a particular product or industry. It includes those things necessary to survive/thrive and makes doing business there more efficient. Think Hollywood in the movie industry. Shenzhen was thus the shanzhai Hollywood and tech firms flocked there.

Flash forward

Try as they may, smaller Chinese firms failed to grow beyond area players and companies such as Huawei and ZTE dominated the market. They offered a decent phone for a decent price but lacked global appeal and cachet. After all, who gets geeked about buying a phone from this guy?

ren

China lacked a company which spoke for the masses, enter Lei Jun.

Man of the people

Leveraging the nationalistic nature of the post-80s generation, he played up the shanzhai image. ‘Don’t compare us to Apple’ became the party line as he and his mimicked the Cupertino giant to near perfection. It was this that makes Lei Jun unique and Xiaomi, a compelling company. Not only did Lei Jun recognize the need for a Chinese icon and voice, but he actively cultivated it. He was shanzhai’ing the best and was proud to do so. To the anti-western, anti-establishment generation, Lei Jun offered a home grown solution.

Picture a Chinese businessman or politician and ‘charming’ is not what comes to mind. In fact, adjectives such as ‘stiff’, ‘confused’ and ‘frail’ are more likely.

nose pic nose pic too

One of the thing that Chinese liked about the current leader Xi Jinping was that he would not be dwarfed by western leaders by all of his predecessors since Mao.

mini

In a face-based country, image is everything. By aping Jobs, Lei Jun positioned himself as a capable geek who was comfortable in the limelight.

This mini-Steve serves another purpose as well. It eliminates the need for Lei Jun to create an image, a personae to sell. Corporate heads must sell not only their products but themselves too. It is all part of the process of creating a trusted brand. This process takes time and energy of course, which is why it was more efficient to mimic Jobs in the first place.

To many in the west his style was unimaginative and off putting. To those in China it was anything but. This is what western media gets wrong about Lei Jun and his appeal, in China at least. He offers the Chinese a chance to be proud. And by extension, Xiaomi creates a value proposition that foreign firms can never match. As I said, this may do him little good abroad or may enhance the Lei Jun enigma.

Xiaomi’s business model

In order to dispel the Xiaomi innovation myth, one merely needs to study the facts. Lei Jun’s firm is essentially a mashup of successful business models. Take a look…

Xiaomi offers Cribbed from

blue light

Flash sales- Kmart via the Blue Light special

Distribution model- Dell- began with an online only presence

Products, presentation and CEO- Apple

Product ecosystem- Apple Itunes- a perennial cash cow

Customizable OS- Linux-

Looking at the above, it becomes obvious that none of these is a game changer. In fact, all of them are easily replicable, a thing that Smartisia is doing right now. That Chinese firm is cloning the Apple clone, or at least trying to do so.

The thing that Smartisia lacks, however, is that post-80s appeal as described above. To many in China, Smartisia offers no reason to buy. With Xiaomi embedded in their psyche and walletshare, why change now?

Lei Jun said that one day Steve Jobs would die, and he would be there to carry on the torch. From where I am sitting, many Chinese would agree with that.

Although Xioami has quality issues, a thing that most non-Chinese do not know, it pushes forward. Selling thousands of units in seconds, and fouling online ordering systems in India has done little to dampen the desire for an ‘Almost Iphone.’

Is it scalable?

The real question is how scalable such a business model can be. Sure Lei Jun has great traction and phones are selling like hot cakes, but for how long?

As I mentioned, quality is a concern, at least in China where Xiaomi leads cell phone manufacturers in customer complaints. Some might dismiss this as number two on that list is non other than Apple itself. What they would fail to realize is that Xiaomi is but a few years old. Apple phones have been sold in the PRC forever. It would make sense that due to sheer volume and age of units that Apple would have more disaffected customers, but they do not.

Xiaomi, like China, would like to move up the manufacturing ladder into high-end goods. Based on what they have shown thus far, Xiaomi misses the mark. Lei Jun’s kit receives rave review, but then again, consider the market. People are more willing to forgive quality lapses in a $200 phone than one that sells for three times as much. Perhaps this can be best understood by a colleague of mine who explained their Xiaomi purchase to me like this. ‘I bought the phone because it was cheap, and I was curious. Unfortunately, it quit working after a year. Initially, I was a little upset but not too much. I can throw it away and buy another. It cost one-third of the price of an Iphone so I can buy three and still be even. After all, most people get a new Apple phone every couple of years.’

In many respects the Xiaomi fad seems like just that, a fad. A Chinese firm grabbing ink but soon to taper off. Lacking a value proposition which is globally scalable, it must up its game or resign itself to a life of mid level success. Of course this could all prove to be folly if Xiaomi reinvents itself.

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One thought on “Xiaomi’s ‘Me too’ Business Model, is it Scalable?

  1. […] speaking, made-in-China goods do not confer face on their users. They usually have marginal quality and sold on the cheap. Chinese like to appear worldly and […]

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