Xiaomi - The Rise of “Little Rice”

Xiaomi, which literally means "little rice" in Mandarin, just became the largest smartphone manufacturer in China, edging out none other than Samsung.

Add to that on the world stage, Xiaomi has also upped its market share from a little under 2% to just above 5% and has leaped upward to become the 5th largest smartphone manufacturer in the world, after Samsung, Apple, Huawei & Lenovo, based on handsets shipped (source: Strategy Analytics).

So, what could be the reasons behind this fairytale rise of the Chinese electronics company in the seemingly saturated smartphone market dominated by international giants like Apple & Samsung, the same marketplace that was fickle enough to dump once market leaders Nokia and Blackberry?

IMO, we can break it down to two major reasons, one is their basic philosophy and the other is their business strategy.

The Xiaomi Philosophy

While trying to study the meteoric upsurge of Xiaomi, it is important to understand their beginnings. Their founder and CEO Lei Jun, a self-styled Steve Jobs version 2.0 right down to the trademark blue jeans and black t-shirt, is said to follow a Buddhist concept that "a single grain of rice is as great as a mountain". They founded the company in 2010 on this basic philosophy with a view to creating little grains of rice that will be perceived as gigantic as mountains. The philosophy also keeps them grounded in terms of attitude and yet be aggressive in a humble way, after all it is about a grain of rice!

The Xiaomi Strategy

Business Strategy is only as good as its execution. But for a strategy to be executed there should be a plan. In my mind, Lei Jun and his team have a well-planned and well thought out business and market strategy that they are rolling out with great precision. Let’s look at some of these:

Clear product road-map

Their overall and product road map seems to follow the principle of “one-year goal”. They announced their arrival in the month of August of 2010 with the launch of the Mi1 Android phone that is notorious for resembling Samsung and Apple's products. I would call “grain of rice 1”. Exactly a year later they launched Mi2 and then a year down the line from then, they announced the Mi3. Cut to the present, again one year from the launch of Mi3, they are going international with their products. To this end, they have already set up their offices in Singapore and, as I write, they have also established local presence in Malaysia, Philippines and India. They also announced the LTE-ready Mi4 in July 2014.

So, obviously they are looking at a year on year product launch, giving each product the time to settle in and the market enough time to understand and accept the product. They are not rushing with too many variants which not only would spread themselves wide and thin but also tends to confuse the market.

Direct sales

Their play is very simple in this regard. They are not setting up a huge network of brick and mortar stores, instead going with the contemporary model of virtual or online stores. This saves them big on overheads and that makes them agile and price competitive. Even in India, the product is sold through Flipkart. They also rely more on social networking communication than spending on traditional advertising methods.

Differentiator

The price sensitive markets including India have many smartphone brands that have similar hardware and they rely mostly on their marketing efforts to differentiate. In the case of Xiaomi, they present a key differentiator – MiUI, their killer feature. This is a specialized UI based on the Android OS and designed by getting online feedback from users, updated & released once a week based on the feedback from users.

Tight Demand-Supply equation

They have an interesting approach to the market. Veering from the traditional “availability” concept and flooding the shelves (virtual or otherwise) with inventory, they seem to prefer to capture the attention of the prospective consumer and create demand. They address the demand with initial low supply and then ramp up shipments. This makes for an interesting situation and play on the consumer behavior where the prospects are left yearning for the product so, the consumers chase the product instead of the other way around. In fact, according The Economic Times, their Mi3 is selling like hot samosas in India creating what it calls a "supply challenge".

Price

The products are priced practically at Bill of Material costs with razor thin margins that they offset with the decrease in price of components over a period of 18 months. They are able to stay price competitive also because of their avoiding traditional expensive advertising and sales methods. In addition, they also profit from selling apps, games and special Android themes and Internet services by which they are able to balance the P&L and maintain the attractive pricing. Result: they are able to sell high quality products at very low prices.

Branding and Market Strategy

As mentioned earlier, they are using the more contemporary social media to communicate to their target audience rather than traditional modes. They have a fan club of users called Mi fans that Xiaomi interacts with new MiUI releases / updates, product announcements, etc. They also use native festivals as a platform for marketing and communication.

Additionally they believe in hunting in the right market segments with the right weapons or horses for courses. For example, their first three models Mi1, Mi2 and Mi3 do not have LTE capability because the markets targeted do not have LTE presence.

Their entry to the Indian market is a long haul approach. They want to lead with the advantage of price and features combo that can better Indian phone brands, but they seem to be willing to play the patient game.

Having tamed the Dragon, it seems very conceivable that they might win over the Tiger too!