Business Today

All Set For The Big Game

After displacing Samsung from pole position in smartphones, Xiaomi aims for a bigger play in Indian consumer durables.
Sumant Banerji   New Delhi     Print Edition: July 29, 2018
All Set For The Big Game

A little after noon on july 22, 2014, the website of India's largest online marketplace Flipkart crashed. Over half a million users had logged in to get their hands on a Mi3 smartphone being launched by a then relatively unknown Chinese brand - Xiaomi. The entire stock of 10,000 units was sold out in minutes. Exactly a week later, Xiaomi had another online flash sale. This time round, it sold 10,000 smartphones in less than five seconds.

Xiaomi had brought to India the concept of flash sales that it had pioneered in China. It used this strategy to launch a series of bestseller mobile devices. "That is when we realised we were on the right path. If half a million people turn up without any advertising but through word of mouth publicity, then we were clearly doing something right," says the 37-year- old Manu Jain, Managing Director of Xiaomi India, who is also a Vice President at the parent firm in China.

The flash sales were just the beginning of Xiaomi's rise in India. "Before Xiaomi nobody knew about flash sales in India where you have limited number of units on sale. This creates a kind of euphoria about the product," says Upasana Joshi, Associate Research Manager, Client Devices, IDC India. "It goes out of stock in a few minutes. It helped a lot in creating hype and generating demand."

From selling a little over 10,000 devices in a few seconds in 2014, Xiaomi overtook Samsung to emerge as India's largest-selling smartphone brand in the last quarter of 2017. In the first quarter of 2018, it reinforced the lead with a five percentage point lead over Samsung. It accounted for 31 per cent of smartphone sales as opposed to Samsung's 26 per cent.

There are multiple reasons for Xiaomi's success in India, which is by far its largest market outside China. That includes cheaper devices, quicker roll-out of devices and innovative features. Unlike competitors that include compatriots like Vivo, Oppo, Lenovo and Motorola - who followed the traditional route of marketing with high decibel advertising campaigns, brand ambassadors and multi crore sponsorship deals - Xiaomi tapped the growth of Internet with its online-only strategy while developing a community of young enthusiasts around its products.

Tarun Pathak Associate Director, Counterpoint Research

Thanks to a very lean marketing budget that kept overheads low, it priced products such that could not be matched by others. It also claims it makes less money than other from its phones.

"Our profitability is lower and our cost structure is very lean. When we launched the Redmi 5A last year, we priced it at Rs 4,999 for the first few million users so that feature phone users are able to migrate," Jain says candidly. "And that cost of a few hundred crore, we bore. Our profit margins are not that high. We are the only company in the world that has capped its profit margins on the hardware side at 5 per cent. Usually companies go the different way - by saying internally they will not make less than 10 per cent margin. We have put an upper limit."

What helped is that specifications and features on its devices are far better than competition which includes Samsung. Further, Xiaomi says it has a robust R&D centre in India that specifically works on the needs of the Indian consumer so that phones are tailored for this market even if they are engineered in China. One such feature is the dual WhatsApp on its phones that enables users to access separate WhatsApp accounts on the same dual SIM handset.

"They spot trends in the market very fast and execute that intel to bring products into the market very quickly," says Tarun Pathak, Associate Director, Counterpoint Research. "At the same time, all its products, including the cheaper ones, stay in the market much longer compared to competition. So over time, they have better volumes on a single product which helps them spread the cost more efficiently."

Online to Offline

With its dominance in online smartphones secure, Xiaomi is spreading wings in the offline segment through dedicated Mi home stores and other multi-branded outlets. The share of online sales that was 95 per cent till the beginning of last year has now come down to 70 per cent, courtesy a six-fold increase in offline sales, albeit on a very low base. Expansion of its offline presence will bring growth for it in the future.

"The biggest priority in smartphones is to build our offline channel. Even though we have a 15 per cent share there, it is still at a nascent stage," Jain says. "In many cities where we have become number one, we have 30-40 per cent share in offline. We can extend this to 100-150 cities and even lakhs of villages. That is when we will achieve the true potential of offline retail."

"Online has reached a saturation point. It will remain at close to 35-37 per cent share in the industry," agrees Pathak of Counterpoint. "But the momentum is with them. In offline, there is lot of headroom to grow. There is a tremendous buzz around the brand so every retailer wants to stock Xiaomi because it is an easy sell."

The offline push, however, is more strategic in nature that goes beyond just smartphones. While it is known mostly for its phones in India, its product portfolio in China goes much beyond that. So does its ambition. Unlike others that make money selling hardware, Xiaomi says it uses the devices only to acquire consumers and plans to make money through Internet services via in-house applications like Mi Music, Mi Video and Mi Credit.

"Smartphone is what we are famous for, but we have a much bigger pool of products. Smart TV, scooters, cycles, air purifier, water purifier, shoes, power banks, T-shirts, back packs, laptops, drones," Jain rattles off. " Even refrigerators and possibly air-conditioners. Why not? We are an Internet company. Anything that can be a smart-connected device, we want to be there."

"The aim is to make money from Internet services. Most of our profits come from that. When we started making smartphones almost seven years ago, we saw them as vehicles to deliver these Internet services like apps for music, streaming videos or even availing loans and credit, to the consumers. Smartphone is used to acquire the customer and once that is done, we try and provide these Internet services to him. It is a very different thinking from any other smartphone manufacturer. For others, the relationship with the customer ends when he/she buys the phone; for us, that is just the start."

In March, the company launched its range of smart TVs in India and like its smartphones they offer much more like in-built 500,000 hours of content; 80 per cent of which is free, at provocative prices under-cutting similar products from established rivals by as much as Rs 10,000-40,000. The TVs are sold through online flash sales and again like the phones have disappeared in a matter of minutes if not seconds.

The company would not give out how many TVs it has sold so far, but says the response has been "incredible" and demand higher than expected. At the same time, Jain agrees selling TVs or water purifiers would be more challenging than smartphones. For one it would need robust offline distribution, sales and service network and better logistics support. That is exactly, what it is doing.

"Our first big category is smart TV. Over a period of time we expect smartphone share in our revenues to come down. In China, even though smartphone sales are still growing, the share is coming down as other categories are gaining traction. That is what we believe will happen in India as well," he says. "TV is a more challenging segment. Unlike smartphones where repeat purchase is much higher - customers tend to upgrade every year, the replacement cycle in TVs is around five years. The market is much smaller and not as evolved. It is still predominantly offline and more of a family transaction. It has a much longer decision-making process. Logistics and after-sales are also more challenging. For TV, we have to send specialised vans."

As it motors ahead with its grandiose plans, competitors seem clueless. A clutch of officials and sales executives from rival firms that Business Today spoke to grudged the predatory pricing of Xiaomi. The animosity is palpable with some even writing it off as a cheap Chinese firm that will not survive for long. But none of the executives could point towards any credible flaw in their business strategy. The prospect of Xiaomi giving an almighty challenge to the likes of Samsung and LG in other segments may not be far-fetched.

Upasana Joshi Associate Research Manager, Client Devices, IDC India

"At some level, we are competition to the big consumer durable companies of the world. But at another level they are not competition to us because our thinking is very different," Jain says. "Consumers are the same but our approach to solving their needs is different. We are not just a hardware company. We are also an e-commerce, an Internet services company, which none of the hardware brands will ever be."

Copycat?

In the sweltering heat of May-end in Delhi, journalists were witness to a rather strange event - one Chinese firm alleging patent infringement against another. The aggressor was Coolpad, another big Chinese smartphone maker. Under siege was Xiaomi.

"The patents are the fruits of thousands of our engineers and years of their hard work, and we cannot allow it to be misused," thundered Coolpad's Global Chief Patent Officer, Nancy Zhang, at a conference in Delhi. "This issue goes back to 2014 and we have sent multiple warning letters to them (Xiaomi), but the company has not responded to us yet. Some brands prefer taking shortcuts, I suggest them not to do that."

Since January, Coolpad has filed seven cases against Xiaomi in various courts of China. The allegation is Xiaomi violated its patents in multi-SIM card design and other technology that pertains to user interface. In-balance is the future of not only five of Xiaomi's smartphones, including Xiaomi 6, Max2, Note3, 5X and Redmi Note4X, but also its reputation as a disruptive innovator.

Jain refused to be drawn into the debate citing it as subjudice in China, but this is not the first time Xiaomi has been accused of patent infringement. In 2014, when Xiaomi was still taking baby steps in India, it was taken to court by Swedish telecom firm Ericsson for using certain parts made by Taiwanese chipmaker Mediatek that used its patented technology. The Delhi High Court agreed with Ericsson and Xiaomi had to stop selling the 3G version of Redmi Note that used the Mediatek chipset.

"China's copyright provisions are very lax and while India's may not be world class, they are far better," says an analyst, who requested anonymity given the sensitivity of the matter. "The technology world has become very opaque and competitive. India is a big market and it is not a surprise Coolpad and Xiaomi are already at loggerheads. Expect lot of litigation in this space between various companies going forward."

But Xiaomi's bumper global IPO in Hong Kong is likely to be pared with the company pricing its shares at HK$17, the lower end of the pricing band of HK$17 to HK$22. That would value the company at $54 billion, about half of the $100 billion originally sought. Despite the Hong Kong hitch, the Xiaomi story has just begun.

@sumantbanerji

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