May 1, 2015 by ...
A few days ago I posted alarmist words about Xiaomi’s demise-gasp?
Well now I’m going to continue with that heresy. Sound odd to say such a thing about the number one producer of handsets in China? Well, read on and decide….
Xiaomi is the number one seller in its field, but not by much. To make matters worse, their margins are paper thin and getting smaller. Competition from the likes of Lenovo and just about every other mainland producer, has Xiaomi slashing prices to stay on top. And that’s the good news.
Xiaomi inexpensive and losing ground?
Now consider how companies such as Samsung and Apple fare. They sell kit which goes for tons more than Xiaomi units. This alone should have them behind the power curve. But of course, one could argue that the RMB 5000+ category where Sammy and Apple have essentially 100% market share is not Xiaomi ground anyway. While this may be true, it also points at a fatal flaw in the Xiaomi model- it’s lower end gear which even lower income earners now eschew for Korean or American phones.
Now to make sure you are vibing me, understand that Xiaomi’s cheapest phone goes for $98 and iPhone 6 for $854. Sammy sells at a broader price point range, so leave them out for now. The high end Xiaomi sets you back $390 and corresponding Apple 6 at least $1350. We can see that buying any new Cupertino-wear, is from 450-800% more costly than buying from Lei Jun. despite all this, Xiaomi only outsold Apple 14million to 13.5million.
Chinese consumer cash profile
Now consider how much disposable income your typical person in China has. The charts below indicate this for the first quarter of this year.
According to the data, the most affluent province/area in China is Shanghai and doing the math we see that on the average Shanghai’er has:
RMB 14153/6.2= $2283 per quarter
$2283/3= $761 per month to spend.
Remember that According to the charts Shangai’ese have the most disposable income. But even they only have $761 per month leftover. Of course, anybody who knows anything about China knows that the average savings rate is ~.40% which means that the true disposable income is about one-half of what’s shown. Let’s sideline that little factoid for a moment and continue.
What we find is that in order to purchase the cheapest Xiaomi gear, someone from Shanghai needs to not buy anything extra nor save one penny and use about 3.8 days wages. In order to buy the low end Apple however, they’ve got to toil for the entire month plus three days. And that’s comparing low-end gear in the wealthiest area.
Now let’s see what happens when we knock it down a notch and compare incomes in Qinghai, the poorest area shown. In Qinhai, a worker must work, not save and buy nothing else for ten days to obtain Jun’s low-end. To get cheapo Apple tech, they’ll skimp not save and punch the clock 77 days or about 2.5 months.
What this means is that Xiaomi should be rocking the sales. With such a huge group of people with take home cash so sparse, Xiaomi should be leaps and bounds ahead. After all, their core market is less affluent consumers in tier two and three cities. They essentially could not ask for more favorable demographics.
Based on what we saw however, is that Xiaomi is barely staving off Apple. The argument could be made that Chinese consumers don’t lie on a bell shaped normal distribution, but rather barbell curve. While this is true, the low end of the spectrum is still at least 1.3 billion people larger than the top-of-the line crew. In other words, to use a Texas phrase, Xiaomi should be ‘defecating in high cotton’. The numbers prove this untrue.
Xiaomi soon to be cell phone ‘so what?’
The impact of all this is that Xiaomi’s days as top dog are numbered. Sure they can continue to discount low-end gear and pop off the midrange stuff, but for the most part, Xiaomi has no cachet. Aside from rabid ‘Mifans’ their kit is seen as little more than a starter smartphone. Something one buys until they can afford something better.
If this is true then Xiaomi can maintain pace as a bottom dweller, but for how long? Like I said, they operate on a tight budget and they they operate outside the law. How healthy will their balance sheet be when 30% of their costs go to paying license fees, a thing Stratchery claims they don’t pay.
Chasing price down a rabbit hole may sound logical, but it’s not. Competitors are challenging them on that front and many of them abide by IP laws. In other words, their cost structure is higher than Xiaomi yet meet them on price. How will Lei Jun differentiate his gear in the future?