January 23, 2015 by ...
Xiaomi’s message is China-centric and will hurt its efforts at international expansion. They tout value-for-the-money products which are ‘fairly’ priced. Key to this message is Xiaomi’s claim that they do not make money on the hardware and pass along those savings. This message is a direct shot against the major players whose phones cost almost twice as much. It piggybacks on the Chinese notion of demanding to know how much a supplier makes on a good and then pricing from there. For example, most Chinese vendors will attempt to find out your profit margins on a product and then add a percentage for a ‘fair price’. Setting aside the absurdity of this notion, let’s see why Xiaomi will have a hard time peddling this abroad.
Companies deserve profits
Most of my Chinese students are amazed when I say that firms deserve to make money. General Electric, for example, has huge profit margins on some of their goods and deserve it. If they did not add requisite value then they could not command such premiums, right?
As my students look on with horror I explain free market mechanisms which are akin to commercial Darwinism. The strong survive and the weak die off as they should. If a company prices above its value, it too will die. Thus, in a free market, supply and demand happily coexist where supply and demand meet.
Chinese grad students must study Marx
This runs contrary to their Marxist teachings, and yes all Chinese MBA students must pass a test on Marxism before entering their programs. The logical inconsistencies is not lost on them nor me as we just shake our heads and write it off as education ‘with Chinese characteristics’.
What is astounding about all this, however, is how much they buy into Marxism and its ideals. To them, the notion of a company earning money is sacrilegious. After all, it is what Mao banished decades ago. Companies, it would seem, are there to serve the masses. While this is all well and good in a communist/socialist context, it does little more than suck in the world today.
Sure it sounds good to bash the West and all, but capitalism has proved nothing, if not that competition creates world class firms. To find proof of this look no further than Forbes Magazine. Count how many communist runs firms are leading the pack in anything aside from wasted talent. Communism, as practiced today, leads to lazy firms who are protected an need not compete to survive. As a result, they thrive in China but flounder outside of its borders.
Back to Xiaomi
Which brings me back to Xiaomi. Lei Jun has the Chinese convinced that he and his are charging a fair price for a good product and part of that is true. Yes his product is ok, but ‘fair’ and ‘Xiaomi’ are at odds. After all, how do they define the term? Is it fair that Xiaomi pays no royalties nor
Is it fair that Xiaomi pays no royalties nor license fees which can account for up to 30% of the price of a similar phone?
Is it fair that they liberally borrow designs and tech from the competition in violation of Chinese laws?
Even Xiaomi would be hard pressed to deem any and all of that as fair, but then again, who really knows. And in all honesty, this is not ground upon which Xiaomi dares tread when they utter that term.
Xiaomi’s ‘fair pricing’ holds no sway
Once again, when addressing the notion of ‘fairness’, Xiaomi means that they are telling us their true bottom line. The message is, ‘We sell at cost and make no money on our phones.’ and we are supposed to respect that.
It won’t take long for global markets to see that
1- Xiaomi makes at least 8-10% on each handset and thus does not ‘sell at cost’
2-IP theft and local protectionism play a great part in Xiaomi’s ‘fair pricing’ model
3-Nobody believes they are selling at cost anyway, and if they do they are suckers
4-Playing the ‘victim’ looks great at home, but wimpy overseas
The bottom line
Xiaomi would be better off with a ‘big boy’ marketing campaign. Crying ‘poor mouth’ works well in China but not overseas. Sure, other brands cost more, but part of that is baked into costs they incurred while developing and creating their products. Anyone can Xerox a design and sell it, but such knockoffs command no price premium.
It would make more sense for Xiaomi to ‘fess up’ and be honest. But then again, how appealing is ‘We are cheaper because we steal’ as a slogan?
Xiaomi is sprinting to the finish line and hoping to get there before the long arm of the law catches up to the but the cracks are showing. Last year they had more customer complaints in China than any other firm. Their prices too, are increasing. This is partially due to the fact that as they expand they must obey the law and this means footing the bill for ‘borrowed tech.’
I guess the lesson learned is that global markets will force them to truly charge a ‘fair price’ after all.