November 26, 2014 by ...
Xiaomi grew from a thought to the third biggest cell phone company in just over three years. They avoided the heavy lifting by killing sales in the Chinese market. With nearly 1 billion people purchasing handsets here, a company could literally survive on purely Chinese sales. Xiaomi’s intention was to grow internationally and problems soon arose. Lacking adequate support due to flawed supplier relations strategies, Xiaomi must now put the breaks on expansion plans.
Mediatek, the company that made Xiaomi possible
Ever heard of Mediatek? They make chipsets for cell phones. Had it not been for them, low price companies such as Xiaomi would not have been possible.
In the early 2000’s China had hoards of cell phone companies. These small players cribbed pieces together and made user specific phones. Most were Shanzhai or knockoffs produced with a specific need in mind.
These phones were not profitable due to the rigors and expertise required to solder disparate components and wrap them all in a handphone body.
And then came Mediatek
Mediatek changed all that by building a chip on a chip architecture which meant no soldering nor machining was necessary. Anyone with a minimal investment could start selling phones. All that was required was boards, case, Mediatek guts, a display and machine to assemble it all and you were in business.
Mediatek’s innovation gave rise to the 100+ Chinese cell phone suppliers who lacked funds and expertise to produce prior to this event. This low cost solution enqbled anyone to enter the cellphone wars.
Xiaomi and Mediatek, the good old days
Like most small cell phone shops, Xiaomi relied heavily on Mediatek, tech. It provided a good bang for the buck and Xiaomi was hooked. This worked well for both firms and Xiaomi became red hot.
Chasing the quality curve, however, Xiaomi soon ditched Mediatek for Qualcomm, which was seen as a move to higher quality by their customers. This angered Mediatek who were suddenly seen as the supplier of choice for Shanzhai and low end players.
Xiaomi and Leadcore
The move by Xiaomi made business sense but not friends. They followed this up by announcing they were investing in Leadcore, a chip supplier. This Chinese firm would be the last step. Xiaomi would ostensibly own its chip supplier and reduce costs drastically.
Now lets review. Xiaomi starts low end with hood quality and then pops up to a higher end supplier to fend off quality concerns because they had received more customer complaints than any other firm. Alienating Mediatek seemed logical, only if Xiaomi could find something better and not burn a bridge in the process. They only accomplished half that goal. They got better gear, but angered an industry giant.
On to Leadcore
Now Xiaomi is kicking Qualcomm out of the bed and marrying their neighbor. The problem with this strategy is that it runs contrary to what Xiaomi should be trying to do-maintain quality growth. Sure they can cut chip costs, but then again they had Mediatek for that. By the same token, Mediatek provided a measure of quality that Leadcore cannot.
Essentially Xiaomi started mid range, climbed to the summit and now has decided to plummet, what kind of strategy is that? In the pursuit of cutting costs, Xiaomi is getting away from what got them there. They achieved success by being an assembler of phones and nothing more. Xiaomi cribbed designs, promoted them and made money. They stuck to what they now, but now that has changed.
By taking on Leadcore Xiaomi has diversified their portfolio, meaning more headaches and diversified challenges. All of these are new to the firm and a tremendous obstacle. This is proving to be their undoing as they have not only balked at making good on the promise of a new phone line this year, but plans for international expansion are torpedoed as well.
The need to grow will result in pain if not death
Xiaomi has no coherent growth strategy which could be their demise. They have not decided about what kind of company they are and their key strengths. In line with this, they are supplier hopping which disrupts production runs leading to shortages. If this weren’t enough, they plan on morphing into a manufacturer and producing in India as well. They have no experience in any of this, which is a recipe for anything but success.
Changing strtategic suppliers, while transforming one’s value add and starting a plant overseas all merit care but most likely cannot be done simultaneously. Xiaomi is acting like the young company that it is. Because they have not figured out who they are they want to be everything. Being everything is not what made them and takes away from their essence. Without refocusing on their value add, quality will slip, orders will be late and expansion will suffer eve more.