Chin-Innovation, Xiaomi and Chinese Business Models

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July 9, 2015 by ...

Forbes recently did an article about how China is innovative. Assuming that their goal wasn’t to utterly confuse us, let’s assume there is truth to this assertion, at least as far as Forbes is concerned. 

Their thesis was that Chinese business leaders are driven by a ‘sense of purpose’- to serve their customers better. At this point I’d like offer Kleenex to wipe away the tears of laughter to anyone familiar with China inc., for as customer service in the PRC shows, the only people that these leaders serve are themselves.

Forbes on China

The article paints a rosey picture of the vision these Chinese leaders have, but once again I beg to differ. By and large, China is still a command economy. Sure they have McDonalds, Starbucks and the like, but their existence does nothing to weaken my claim. The only reason that they are allowed to exist is because they have been granted a special favor. 

No business is permitted to run, sans communist party help and permission. Take for example, Mary Kay, Walmart and Starbucks, each has a communist part team helping to make decisions. No CCP team, no business lisence.

But back to Forbes

According to Forbes best business analysts, Chinese excel at ‘serving customers better’ as I mentioned earlier. In a land where a gruff, ‘You want what? ( Ni Yao she me?) ‘, is the standard greeting to any and all customers, I’d have to disagree with those analysts. Closed markets do little to foster a sense of putting the customer first. Show me the Chinese firm which is globally competitive in this regard and I’ll humbly recant. 

Modus operandi for China inc.

What they mean to say is that Chinese are very good at taking foreign ideas, tweaking them, peddling them to the locals and then petitioning Beijing to exclude the competition. Let’s be honest, would Baidu, which supposedly stole Google source code, be able to compete if Google was not crippled and blocked in China?  From the looks of it the answer is ‘no’.  Shucking off Baidu’s China presence in the land of search, they are essentially a non-player outside the PRC. 

Anyone who has searched with Baidu can ‘feel my pain’. Even forgiving them for heavily censoring search results, their algorithm is dysfunctional. Querying in English leads to ‘wtf?’ moments at best. This is never more true than when searching for data-driven or academic works. My job revolves around this and when I cannot access Google, I find it more productive to ram darning needles into my sinuses than venture into Baidu-land. The needles are much less painful.

How this relates to Xiaomi

Xiaomi is a perfect example of team China and how it operates. In fact, they expose the good and the bad. 

The good:

Xiaomi is a great business case for doing business in China. Their online sales model is wildly successful. Hunger marketing, or holding flash sales and limiting quantities offered ‘luxurizes’ a commodity like cell phones. People feel as if they’d won the lottery after being ‘lucky enough’ to purchase a Mi phone. They also leverage ‘shanzhai’ or knocking off a western product and selling on the cheap. 

The most brilliant strategic move they’ve made is to subtly leverage nationalist sentiments, especially among the one-child policy generation. The communist themed company mascot pictured below is proof enough of this. 

What other company could so brazenly fly the flag of oppression with impunity?

China’s only children have been spoon-fed anti-foreign rhetoric as was their parents and theirs too. This generation has a decidedly pro-China bent which is readily apparent to most who have been in contact with this demographic. The CCP mascot is a great choice.

Now for the bad

The biggest knock on Xiaomi is that it Xiaomi is a ‘stereotypical’ Chinese firm. They lift product design from the best, replicate it and then sell on the cheap. Their value lies in faithful replication of the world’s best tech. 

With a patent portfolio valued at slightly more than the coins in my pocket, Xiaomi’s business model favors countries playing fast and loose with the law. A study of Samsung’s IP theft woes proves the hell awaiting those who scorn originality for replication.

If Samsung is guilty to the tune of hundreds of millions of dollars for IP theft, then what fate awaits Xiaomi? A decent chunk of their $45 billion valuation will go to the rightful owners of Xiaomi’s products and tech.

The bottom line

In sum it would appear that Forbes was right to a certain extent and wrong in others. Xiaomi does cater to the Chinese crowd. Over 70% of their clientele are men aged 15-35. This is a group for whom th ‘rah rah China!’ message is more than welcome. In addition, such people relish in buying ‘shanzhai’ or knock off goods sold for a relative pittance.

In this sense, Forbes was right, Chinese firms serve up what their consumers need. On the other hand, what’s good for China is not necessarily scalable. How many outside of China will proudly plop this next to their work pc?

In effect, Chinese firms act ‘Chinese’ because they must. That’s great in driving sales on the Homefront but a dubious proposition when taken abroad. The lack of success of so many Chinese firms bears witness to this contention.


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