December 11, 2014 by ...
This is part 2 of a multi-part post explaining why Xiaomi phones are destined to fail in the US market. In the first edition, I explained that China’s Xiaomi will flounder in the States because Xiaomi lacks brand appeal (problem #5)and originality. Simply put, they have been selling an Iphone clone. Xiaomi has no experience in selling anything but a Xerox copy of the international icon (problem #4). This hurts them insofar as they have no experience/ability to market their phones. Xiaomi essentially says, ‘Hey look at this, our phone basically does the same stuff.’
By any definition, this form of ‘marketing’ is sketchy at best. After all, selling people on the notion that you are just another of these guys (Apple), is hardly something global brands are built upon.
If you think that I am exaggerating about Xiaomi’s lack of skilled marketeers, then consider that according to Xiaomi, they spend almost nothing on marketing and zero on Ads. The power of saying,’We make the same stuff that Apple does,’ is painfully obvious. Once again, this will not play out as well in countries with the real McCoy, however.
Intellectual Property (IP) issues-Problem-Reason #3
This brings me to Xiaomi’s big problem in entering the US market-potential IP lawsuits. Lei Jun and company spend nothing on ads and marketing because they do not have to. Their sales are primarily in China where the communist party would rather back a hometown favorite then enforce its own IP laws. As such, Xiaomi copies with impunity.
The problem goes beyond design, however, as Xiaomi is probably violating other forms of IP as well. It’s MIUI operating system, for example, relies on the Android kernel. Thus far Xiaomi has not opened its system up as it must under the Android T and A’s. Worse yet, Xiaomi coders have admitted that their own software ‘too closely’ mimics that of Apple’s IOS.
Returning to the notion of home-field advantage and not abiding by IP laws, Xiaomi pays nothing in the way of license fees. All of this must change when and if they foray into countries with a strong rule of law, such as the USA. Xiaomi will either be forced to pay fees or leave the market. Considering that they would rather do the former, Xiaomi better have built up a substantial war chest. According to this report, thirty percent of a cell company’s revenue goes to paying license fees. This year Xiaomi looks to sell 60 million phones and one-third of this amount is not inconsequential.
So far Xiaomi has paid nothing, which is part of the reason they can sell for so little. By peddling products in litigious countries, they will not be able to exercise this luxury. Thirty percent of their profits will be ‘eaten up’ by obeying the law. Based on financials here, this alone would reduce their profit margins by more than a few points.
You have to pay to play and Xiaomi will have to pay big
All of the above proves two things. The first is that if Xiaomi wants to sell in the USA, they need to convince Americans to buy. Selling a faux- Apple is hardly an emotive driver. This point is moot as unless they decide to invest in design, Xiaomi will probably not be able to sell in America due to IP violations. Apple could have an injunction put on Xiaomi sales until it all gets sorted out, which essentially would stall their growth.
The Xiaomi experience is China-centric
One need only check out their website to see that so far, Xiaomi is geared towards the Chinese market.
As I said, the idea of a mascot rocking the communist star may go over well with Xiaomi’s Chinese buyers, but I doubt if the same is true in the USA. Aside from this, even the phone nomenclature is off. For example, does a Chinese company really want to tout anything called the ‘red mi’?
Even if we set nationalism aside, Xiaomi kit is geared for the Chinese. The phone links to Chinese app stores and not Google play. Of course this could be altered, but it takes them out of their game, so to speak.
The native apps such as ‘Mi Talk’ and ‘Mi Market’ also have a decidedly Chinese taste.
This could be reconciled with changing partners but is Xiaomi up to this? All changes mean an increase in costs and exponential headaches as well. So far Xiaomi has been living under the cocoon of a protected environment where forestalling problems was relatively easy. They sell good quality at a low price to consumers who have little chance of buying the phone upon which Xiaomi has modeled itself. These benefits will not extend well to countries which have more choice and abide by laws.
Where does this leave us?
Reasons three and four focus on the problematic areas of a China focus and IP challenges. Both of these can be overcome, but not without a substantial overhaul of Xiaomi’s business model. They do well by selling ‘shanzhai’ or a knockoff in China because they can. Chinese consumers enjoy ‘sticking it to the big guy’ and Xiaomi plays off this nicely. They cannot do this overseas, however. This will create a tectonic shift within the organizaiton, or they simply will not be able to sell. In order to accommodate this need, Xiaomi will need to invest money in areas such as law, marketing and even management.
Another challenge they have is putting a global face on their kit. In a theme which heavily relates to nationalism, ‘shanzhai’ sells in China. This is due to the nature of this phenomenon and how the Chinese view it. Much of what the local audience appreciates in shanzhai, foreigners do not. Sure it is one thing to come to China and buy a ‘Rorex’ watch for $20, but would you do the same for an ‘Iphrone’?
In both instances Xiaomi must make strategic decisions which run contrary to the one’s they have used thus far. Skimming the fat off protected markets such as the PRC are relatively easy when compared to challenges they will face in the west. Whether or not they are up to this is anybody’s guess. Based on what we have seen thus far, however, your humble author has his doubts.
And now for the number one reason that Xiaomi will fail in the USA…..oh, sorry it is time for lunch. I guess you will just have to come back later and finish this incredible journey with yours truly.
To be continued….
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