China’s Cellphone Market, Xiaomi’s Impending Implosion

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April 30, 2015 by ...

China sold 110 smartphones in Q1, which is 17% than the year before. Xiaomi would love to eat as much of that pie as it can. And to its credit, it sold more phones than any other firm. Of course it leverages borrowed designs and renegs on legal obligations to do so, but this is China. 

Lei Jun’s group maintained a 12.8% market share, according to Stratchery, meaning since Q4 they’ve neither gained nor lost. To most companies this is not a big deal but is for Xiaomi. Their brethren in arms, ie Chinese counterparts are attacking them where they live.

Forged Designs the norm, Xiaomi suffers

Xiaomi cut its teeth on forged ‘Apple everything’ but all that did was teach other Chinese firms to do the same. Whereas they previously feared Apple lawsuits, now they do not. As a result, iPhone clones abound. 

The bad news for Xiaomi is that they’ve lost their edge. They literally pilfered all Cupertino had to offer then sold its pirated twin at a discount. They proved wholesale IP theft was not only tolerated but rewarded by the market makers. 

As I said, that strategy is old hat, and the bandwagon is now full. Xiaomi needs to grow via change, but it’s not in their DNA. Like that one Flying Wallenda, they cling to the balance bar soon to bring them to their maker. 

Xiaomi, the renal cancer of the design world

Sure they’re trying to ‘innovate’ but all they can come up with are aesthetic contusions such as this:

  

And this 

 
Their ‘innovations’ a malformed hand grasp on the reality of their core competence-anything but innovation and design. 

The problem is that they are learning that in the non-command economy world, ie not China, you’ve got to innovate or die. But as stated, that’s not their strong suit. 

As a consequence, they’ve been investing in and buying up properties, in hopes of cashing in on an Alibaba-like payday. But that ship has sailed. It’s pretty obvious to the world that Jack Ma was an innovator, at least with his financials and in hiding company red flags. This time investors will be much more wary. 

Xiaomi’s days numbered?

So Xiaomi owns the bragging rights as the most valuable private company, but for how long? Their helter-skelter investment portfolio proved they are running scared.

Back to the Wallenda  reference: it would be great to imagine that Xiaomi can leverage ‘what got them there’ far into the future, but it’s simply not so. Even in their home field of China, they are in stagnation mode. Sure they can move to India, but the same ravenous pack of PRC handset makers have followed them there too. Absent an Apple-like reason to buy, then what’s the difference between Xiaomi and a handful of others? The answer is-nothing.

Xiaomi sells tons of handsets but profits little

What has to be most disturbing to Xiaomi is that Apple’s hot on their heels. This sucks for Xiaomi, whose handsets sell at 70% less.  Apple sold 13.5 million phones, 500,000 fewer than Xiaomi’s 14mm, but raked in the cash. Lei Jun’s firm however, lapped at a drying teat. Apple could make as much profit as Xiaomi by selling only a few million phones. 

Xiaomi is pushing gear which makes precious little, a dangerous mixture for any start up. Unable to extend their portfolio in more profitable ways, Xiaomi continues on its Walmart ‘low pricing’ model till the bloody end.

Itty bitty bottom

The bottom line is the bottom line and Xiaomi’s looks ill. They command investment dollars because they need them. Neurotic corporate strategy and eggshell thin margins are not the thing of the next ‘Apple’.

The real question we need to ask is if Lei Jun can cash out before Xiaomi nosedives. They are dishing out new kit, but it’s not enough. Handsets are their bread and butter, and more than one farmer has his paws on their cow.

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