Xiaomi – The First Global Chinese Brand
comment by Frost & Sullivan ICT Consultant Lawrence Lundy
The profit challenge
The single biggest challenge facing the smartphone industry is making profit. In 2012, Apple captured 87% of smartphone profits and Samsung managed 32%. Every other smartphone vendor made a loss. Apple dominates in the premium and profitable end of the market, whilst Samsung benefits from an integrated supply chain and a huge channel presence. Companies such as LG, Sony and Lenovo are replying on other electronic businesses to support their smartphone efforts.
Not only it is difficult to capture profit today, competition has increased at a rapid pace as local manufacturers begin to scale and build cumulative experience in operations and manufacturing. Companies like OPPO and Miromax can now produce smartphones that are considered ‘good enough’ to the majority of consumers for less than $100. These dynamics are driving down the average selling price (ASP) and eating further into margins. If smartphone vendors are to remain competitive and capture any profit they must offer more than just hardware. Companies must differentiate and add value with software, services, content, and the integration of all of these parts to create a compelling user experience.
Xiaomi the money
Xiaomi’s handset sales more than doubled in 2013, with 18.7 million devices sold compared to 7 million in 2012. This represented $5.22 billion in revenues for the year, with the company forecasting revenues of $11.2 billion for 2014. Since its first smartphone launch in August 2011, the company has developed a 6% market share in China, the world’s largest smartphone market. On the face of it, this success can be attributed to its cost leadership strategy, which has allowed it to win market share by undercutting competitors such as Lenovo, Huawei and Coolpad. However Xiaomi’s strategy is in fact to price its devices as low as possible, often at cost price, and generate its revenues by selling software and services to the user. Amazon have adopted a similar strategy for its Kindle devices, but this is the first time we have seen it in the smartphone industry.
In order to provide value to the customer Xiaomi focuses on 3 key factors; a ‘Hardware as a Service’ strategy, an e-commerce sales model, and a focus on software, services and content. These 3 factors create a new smartphone business model using hardware as a platform to deliver services. This model positions the company perfectly for the evolution of the value chain in the smartphone industry which will see the bulk of profits move up the stack from the devices towards the application and service layers. By providing the hardware, software and services in an integrated model, Xiaomi is well positioned to provide the best customer experience and capture greater profits. Xiaomi may well go on to be the first truly global Chinese brand.
For further information and to interview the analyst please contact Edyta Grabowska, Corporate Communications, edyta.grabowska@frost.com – Tel. +48 22 4816203
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