Five reasons Xiaomi now trails Huawei as No.2 vendor in China

Mochou Lee and Frank Ou

A recent survey by IHS technology shows that Xiaomi, China’s trendsetting smartphone vendor, has seen its third quarter shipments fall short of that of its rival Huawei. A shortage of nine million units has caused Xiaomi to lose its top spot as China’s largest domestic smartphone vendor.

Xiaomi saw shipments of 18.5 million, while Huawei saw shipments of 27.4 million during the third quarter.

In terms of Xiaomi’s market strategy, fierce competition and an increasingly saturated domestic smartphone market have cost Xiaomi heavily.

AllChinaTech suggests five reasons why Xiaomi is currently losing the battle to Huawei.

I. Xiaomi lacks new innovative products.

Xiaomi in mid August launched its updated MIUI 7 operating system and a refresh of its popular Redmi Note phone, Redmi Note 2 is equipped with four alternate UI’s to choose from targeting different customers, and the pricing for the Redmi note 2 remained set at RMB 1,000 (USD 157).

Most of the Xiaomi’s newly-launched products have been mid-range phones of the Redmi series. The most expensive Xiaomi phone on the market is the heavily equipped Mi Note, which sells for RMB 2999.

“People are waiting for them to launch a new flagship product, a ‘Mi 5’, since the low and mid-range smartphone bracket no longer appeals,” said a distributor.

II. Xiaomi has been slow to tap offline sales channels.

Xiaomi has launched 22 offline stores so far. Though Xiaomi established a sales record selling 100,000 phones in 3 hours online, the retail climate has changed and smartphones sold online dropped more than 20% for the fourth quarter 2014 and first quarter 2015 .

“The spring for online sales has come to an end,” Wu Qiang, Vice President of smartphone maker OPPO told Sohu Tech.

In contrast, smartphone makers, ZTE, Huawei, Coolpad, Lenovo and OPPO, who expanded their offline sales channels, are developing rapidly and exploring new sales channels.

Most of Xiaomi’s domestic users are from tier-three cities, a low-end market. Although Xiaomi was once the largest Chinese smartphone maker, it simply can’t compete with Apple, Samsung and Huawei with its high-end offerings, said Zhang Yi, an executive of IResearch.

Screen Shot 2015-10-25 at 6.05.26 PM
Screenshot from Xiaomi’s website.

III.The weakness of Xiaomi’s small margins & quick returns strategy

Xiaomi’s shipments reached 35 million in the first six months of 2015, almost 30% year-on-year growth. Since most of its smartphones sold were of the same type, revenue was almost kept unchanged, remaining at about RMB 40 billion.

Lin Bin, one of the co-founders of Xiaomi, said that Xiaomi still mostly relies on online sales for much of its distribution. Instead of manufacturing a complete range of smartphones, Xiaomi only releases a select few smartphones as exampled by its Xiaomi series and Redmi series, with only minor variation in its price tags.

Ge Hantao, Vice president of think tank, Yiguan, said that Xiaomi’s low-price strategy gives a strong impression of a “low-end product” to customers. It’s important that Xiaomi tap the middle to high-end market by launching competitive products and attracting more customers.

IV. The challenge of the overseas market

Xiaomi will face a great challenge exploring overseas markets. To date, Xiaomi has already entered a dozen of countries mostly in southeast Asia including Singapore, India, Malaysia and Indonesia. In India Xiaomi was slapped with a lawsuit from Ericsson for patent infringement leading to a temporary cessation of sales. CNBN’s recent report also warns that Xiaomi must be very careful entering the American market, a paucity of design patents and a strong respect for intellectual property may bring Xiaomi into trouble.

Analysts say that European distributors know little about Xiaomi’s sales model, many have been unwilling to introduce Xiaomi smartphones, for fear of a patent lawsuit from an established incumbent.

V. A saturated market and fierce competition

Xiaomi’s phone shipments dropped from 35 million in the second half of 2014 to 34.7 million in the first half of 2015. It may likely prove difficult for Xiaomi to achieve its goal of selling 80 to 100 million smartphones worldwide this year.

Taking into consideration a slowing down of the Chinese smartphone market, Xiaomi CEO Lei Jun may need to lower his 100 million sales target for 2015. Multiple analysts have warned about China’s smartphone market reaching saturation point, observing the decline of smartphone shipments in the first quarter this year.

Xiaomi is valued at USD 46 billion, making it China’s most valuable startup. Its current success has largely stemmed from its restrictive supply marketing strategies, where Xiaomi deliberately under-produces its products to artificially stoke demand for its array of low-priced smart devices. The strategy has since been replicated by many startups. Even though competition has become ever fiercer, Xiaomi has not yet drafted a new strategy to fight against copycats.

Xiaomi insiders suggest Lei Jun has turned the company’s focus from smartphones to other smart devices. Lei’s ambition is reportedly to encourage the development of the smart home ecosystem: connecting Xiaomi’s smartphones with other smart devices, from air and water purifiers to televisions, fitness bands, and even bathroom scales.
(Top photo from Baidu Image)


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