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Xiaomi’s Disruptive Business Model Innovation: Is it built to Last?

Research · March 2017

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 Case Study Title

ss Model Innovation: Is it built to Last?

Makhmoor Bashir Dr. Rajesh Verma Mehraj Udin Ganaie

Assistant Professor Associate Dean Research Scholar
Asian Business School School of Business Faculty of Management
Sec. 125, Noida, New Delhi Lovely Professional Studies & Research
201303 University Aligarh Muslim University
Ph. : +91- 8591524664 Phagwara, Punjab (India) - Aligarh, U.P. (India) -
Email: 144411 202002
makhmoor.bashir@abs.edu.in Ph : +91-9872974457 Ph : +91-8715839911
Email: Email:
rajesh.verma@lpu.co.in mehraj.hamre@gmail.com
 Xiaomi Disruptive Business Model Innovation: Is it built to Last?

We are a pioneer in driving change, but whether or not a pioneer can become a true leader

Lei Jun, CEO & Founder

ABSTRACT: Nobody can sell 2,112,010 handsets within 24 hours that too though the

Xiaomi. Five seconds? Yes that is what it took Xiaomi to sell out its stock in India, when

they went for the second round of online sale of Mi3 here in Indian market by the last week

of July 2014. Prior to this, it took 39 minutes for stock to finish when it was launched for the

first time in Indian market in July 2014. The Smartphone manufacturer from China has a very

novel business model wherein they manufacture cell phones in batches thereby keeping the

inventory costs on a very low side. The company has really challenged the brick and mortar

model and sell online, thereby cutting down the intermediaries and keeping the costs down

for the company. The company sells smartphones almost on the cost price. The profit margin

is very thin, and the company believes that they will make money by selling accessories and

other complementary things. The problem which ascends now is that how Xiaomi would be

able to adjust to the increased competition from other players like Huawei and ZUK from

Lenovo who have imitated the same model. The second issue which has come to time light is

that would this business model be sustainable over the long period. The third issue is how the

company would react to the decline in the smartphone sales in China which has been one the

.
GLOBAL SMARTPHONE INDUSTRY: Although the global smartphone growth

has declined to some extent but still the worldwide smartphone market is heading for some

growth. Smartphones shipped in the 2013 touched 1 billion units and in the year 2014 it

increased by around 19.3% and touched 1.3 billion units. The worldwide smartphone

shipment is expected to touch 1.4 billion by the end of 2015 and on a CAGR of around 7.9%

it is expected to reach a whopping 1.9 billion units in the year 2015 (Exhibit 1).1 There would

be added pressures for mobile companies to reduce prices in order to capture markets in

emerging economies.

Apple overtook Samsung for the very first time in the worldwide smartphone market for the

2nd quarter of 2015, as the total growth rate of the devices slowed. With a sudden influx in

the sales of IPhones, Apple shares of global smartphone sales increased from 12.2 percent a

year earlier to 14.6 percent during the 2nd quarter of 2015. Sales of IPhones totalled a record

48 million during the 2nd quarter compared to 35 million in the last year in the same quarter.2

(Exhibit 2)

nd
quarter of 2014 to 21.9

percent in the second quarter of 2015. Even though the company managed to sell more

smartphone in the 2nd quarter of 2015, 76 million compared to 72 million.2 Android market

share also fell from 83.8 percent a year ago to 82.2 percent during the second quarter of 2015.

Androids pain became Apples gain as the share of IOS surged to 14.6 percent from

12.2 percent a year earlier (Exhibit 3).2Some of the Key markets in terms of profitability,

sales and future growth are United States, China and India. China is the leading market

representing almost 30 percent of all the smartphone sales.3 Indian market witnessed a growth

of around 44 percent in Q2 of 2015 and is all set to overtake United States market in the years
to come.4 That is the reason why some executives believe that if a company does good in any

d to expand any further.

Market in United States: United States is one of the most important and key markets in the

whole world with a total smartphone user base of around 190.3 million. Apple leads the US

market with a total OEM market share of around 44.1 percent android takes

the pole position with a overall market share of around 51.6 percent (Exhibit 4). Samsung is

right next after Apple with a market share of around 28.1 percent. South Korean smartphone

company LG comes up as a surprise third entry overtaking Motorola with a market share of

around 8.3 percent. Then comes Motorola which once used to dominate US marketplace with

a falling market share of around 4.9 percent and lastly there is HTC with a market share of

3.4 percent (Exhibit 5).5 All of the other companies baring Apple have suffered some sort of

decline in their respective market shares. Only Apple is expanding its wings in terms of

Market in China: China is the biggest smartphone markets in the whole world. In 2014 the

country consumed around 32.3 percent of the of all smartphone shipments. As per IDC

smartphone shipments would only grow 1.2 percent in year over year in 2015 which would

be around 19.7 percent down in 2014.6 These tremors have already been felt in Chinese

market. As per Gartner a research based firm, sales in China for the second quarter of 2015

have already fallen by 4 percent. Analysts believe that by the end of year 2019 the overall

market drop is expected to be around 23.1 percent while some markets like India will

continue to grow. Having said all of this, China will still continue to be a very good market

ers in the
world and looking at the population of the country it would always a say in global

smartphone market. As per the reports from Counterpoint Research Xiaomi holds the pole

position in Chinese market with a market share of around 15.8 percent. Huawei is chasing up

very swiftly and giving tough competition to the likes of Xiaomi with a market share of 15.4

percent. Apple is maintaining a market share of around 12.2 percent, vivo 8.1 percent and

finally Samsung holding the fifth place with a market share less than 8 percent (Exhibit 6).7 It

show the dominance of Chinese companies in China, how competitive the market is there and

how much is the pressure for cost reduction.

Market in India: There has been a whopping surge of 44 percent in the total number of

smartphone shipments to India. As per the data from IDC 26.5 million smartphones where

shipped in India by the end of the second quarter of 2015 while as in the same quarter of the
8
earlier year 18.4 million shipments were made. The growth was confined to smartphones

only as the overall mobile phone market shrunk by around -6 percent in the second quarter of

2015. 5 Analysts believe that this sudden surge is only because of the e Tail and their ability

to penetrate market. Despite decline Samsung remained the undisputed leader with a market

share of around 23 percent thanks to the growing sales of Samsung S6 and the success of low

cost phones (A series). Indian homemade brand Micromax is following up very quickly with

a market share of around 17 percent, Intex has a market share of around 11 percent, lava

around 7 percent and Lenovo 6 percent.9 Xiaomi also claims that they control around 4.5

percent of the market (Exhibit 7). IDC also claimed the by the end of 2017 India would

overtake United States to become the second biggest market of smartphones globally. This all

highlights the significance of Indian market for global players in the years to come.
ABOUT THE COMPANY: Xiaomi is a privately held company headquartered in

Beijing, China. The company has come from nowhere and established itself as the 4th largest

smartphone manufacturer in the world.10 The company sold around 60 million smartphones

in the year 2014.11 The company was founded in April 6, 2010 and in such a short time frame

the company has revolutionized the global smartphone industry and completely changed the

way smartphone are manufactured, marketed and sold. Since its release of first ever

smartphone in August 2011, the company has made considerable inroads into mainland

China and also in other countries like India, Singapore, Malaysia, Indonesia, Philippines and

also brazil.11 In December 2014 company Xiaomi received a funding of about US$1.1 billion

from investors and thereby bringing the total valuation of the company at a whopping US$46

billion.12

Xiaomi stands at number 2 in the list of 50 smartest companies 2015 by MIT Technology

Review and on number 35 in the list of most innovative companies 2014 compiled by The

Boston Consulting Group .13The company currently employees around 8000 employees

mainly in China , Malaysia, Singapore, India, Indonesia and Brazil.11

revenue touched US$12 billion in the year 2014 and has already overtaken Samsung and

become the largest smartphone vendor in China in 2014 as per a report by IDC.14 With such

stunning success at such a short period of time the founder and CEO of the company Lei Jun
rd
has become China richest person according to Forbes. The company has also set its
foot in wide range of consumer electronics, including smart home device ecosystem, smart
15

MAJOR COMPETITORS: There are roughly 1000 companies which make

smartphones worldwide but the interesting fact is that Apple and Samsung account for more

than 100 percent of industry profits as all other makers broke even or lost money as per

A very shocking thing which has happened in smartphone industry

is that for the very first time Sony and Microsoft has lost their positions under top 10. Some

of the major competitors are as follows:

Apple: Apple sells less than 20% of the smartphones but takes in 92 percent of the global

smartphone profits (Exhibit 8).16 This thing reflects one only thing about the company and

that is the ability with which Apple is able to continuously charge a premium price on its

smartphones. As per the words of Denny Strigl, former Chief Operating Officer of Verizon

communication Inc., This dominance of Apple is very hard to overcome . The company

shipped a total of 47.5 million units with a decline of 22.3% from Q1 of 2015.Overall

IPhones saw a growth of 35% year over year and a remarkable 51.4% in emerging markets.17

This data again shows how important developing markets are for companies like China,

India, and Brazil.

hly integrated. Researchers use a

18
This is because you
consumers to move away from it. Due to such commanding position in the global market

place the company was valued at over $700 billion.19

The company has revisited its strategy in many markets particularly in India which earlier

used to be a dumping ground now has become one of the most important markets for the

company as the company recorded a growth of around 93 percent from a period of April to

June 2015 and thus overtaking not only China but many countries like Italy, Netherlands,

clocked $1 billion dollars in India.20

Samsung Electronics: Eve

Samsung sold 76 million smartphones up from 72 during the same quarter of 2014.2 Samsung

Electronics accounts for more than 70 percent of the revenue.21 The company still

has a huge dominance in the worldwide smartphone market and still has the highest shares of

21.9 percent. Samsung was able to retain the flagship position due to the surge in the

shipments of lower end models in regions like Middle East, South East Asia and Africa.

Despite this surge company has lost its dominance in the region from controlling 53 percent

market share in second quarter of 2013 to 32 percent in the same quarter of 2015.18 Sales

from the second quarter of 2015 have dropped to 8 percent from a year earlier primarily due

to June 30

was 5.75 trillion Won while in the last year in the same timeframe it was 6.25 trillion won.

Further the operating profit margin also declined to 10.6 percent in the second quarter of

2015 from 15.5 percent in the same quarter of last year. 22

Lenovo: Due to its strong dominance in Chinese markets, Lenovo has come from nowhere

and established itself as the third biggest manufacturer of the smartphones throughout the

world. Last year in February 2014, Lenovo claimed that its sales of smartphones in India

have been increasing 100% per quarter while the market is only growing 15-20% over the

same period.23 The company currently controls around 5 percent of the Global market share

in smartphone industry. Further with the acquisition of Motorola an iconic brand at a

valuation of around US $2.91 billion Lenovo has made its presence felt not only in China but

throughout the globe.24

Huawei: Huawei is a Chinese multinational company based in Shenzen, Guangdong. Huawei

global giants to being one of the top five smartphone manufacturers in the world. The

company currently controls 5 percent of the global market share in smartphone industry.25

Huawei shipped a record number of 30.6 million mobile phones in Q2 2015. Huawei is

escalating fast in all countries of the world, especially in China where its 4G models, such as

the Mate7, are showing wide popularity. Huawei has finally surpassed Microsoft to grow into
26
As per the data from

giving it a share of around 8.9 percent and making it the fastest growing competitor among

the top five smartphone companies. The company has already overtaken Samsung in China

with smartphones having higher resolution, better battery life and less prices as compared to

Samsung. If we take the Middle East into consideration the company has almost quadrupled

its market share from a small 2.6 percent in the second quarter of 2013 to 11 percent in the
same quarter of 2015. The total shipments at the same time in Middle East and Africa

combined jumped 60 percent as per the data from IDC. 27

Others: LG is a South Korean multinational company headquartered in Soul and a member

of LG group one of the biggest conglomerates in South Korea. The company currently

controls around 4 percent of the global market share. Then there are companies like ZTE

controlling around 3percent of the market share along with Coolpad controlling around the

same market share by the ist quarter of 2015. This data is being witness to the fact that how

Chinese companies have overtaken almost all the top eight spots in the global smartphone

industry replacing the likes of Sony and Microsoft.

BUSINESS MODEL: Nobody can sell 2,112,010 handsets that too though the

Xiaomi.28 This fact points out to the disruptive nature of the business model which the

company has established.

component quality and performance rather it beats rivals in terms of performance and quality.

Xiaomi claims that they sell cell phones at the bill of material prices which is very unlikely of

the other major smartphone companies like Apple and Samsung. In order to cope up with

these thin margins the company sells smartphones for a period of 18 months and benefit from

the falling prices of the components over the time instead of 6 months used by companies like

Samsung (Exhibit 9). 29

The company takes absolute advantage of E-commerce and sells exclusively through its own

online stores in China and in other parts of world in collaboration with some E-commerce

companies like Flipkart in India. The company thereby keeps the costs down again as they
 30
The company has really challenged the

promotion aspects of products in the smartphone industry. The industry leader in terms of the

profitability (Apple) exhausted around 0.6 % of its revenues on advertisement and promotion

in the year 2013 while at the same time Samsung exhausted around 5.4% of its revenues. In

fact South Korean giant allocated a budget of around $14 billion US dollars on advertisement

in the year 2013 for advertisement which is more than the GDP of Iceland. 31

Keeping the industry expenditure in mind its ironical to know that Xiaomi spends only 1

percent of its revenues on advertisement. The company relies on China ial networks,

Weibo and WeChat in China. Despite of all this it is still a well-known brand in the market.

According to Hugo Barra the company has a reason for not advertising its offering; in fact we

would quote what he said in Barcelona at the Mobile world congress

Early adopters don't want the technology that's being blasted in their faces on TV and

outdoor advertising all day every day. They want to be first. They want to be the ones to

The company spends a very little money on social media promotion especially on Facebook

in boosting a post. In comparison Apple burned $351 million on advertisement in 2013 in US

32
markets only and Samsung burned $363 million according to Kantar Media. The company

when they hold special marketing campaigns and introduce new products. 20

Subsequently the business model of Xiaomi uses disruptive pricing and in order to keep a

other players in the industry but rather manufacture them in batches thereby keeping the stock
in check and inventory costs down. The company usually organises flash sales to sell batches

of cell phones ensuring that supply never outstrips demand. This leaves many of the potential

customers without cell phones as demand is underserved and what happens next is that an

This

al

players in industry as it cuts down almost all of the intermediaries and brings the product to

the customer at a very disruptive price. 33

Companies usually roll out updates on quarterly basis in fact in some cases even after 6

months, but again Xiaomi stays ahead of the competition. The company takes the feedback of

its users via its app and every time a new batch of cell phones is shipped, it comes up with

some improvements containing new software builds and in some case small changes in

hardware tweaks. Xiaomi engineers spend almost half of their time browsing through the

34

The company believes that they have made high end smartphones accessible to the masses.

Since the company is using disruptive pricing by selling cell phones at the bill prices they try

to make money through selling accessories. This leaves consumers in peace of mind also as

the company delighted.21 Exhibit

model in line with Osterwalder & Pigneur (2010).

INTERNATIONAL EXPANSION: Xiaomi has come a long way from selling just

around 20 million smartphones in the year 2011 to around 80 million by the end of 2014 and

now its expecting to sell around 100 million in the year 2015 (Exhibit 11). The company has
set higher targets to overtake Apple and Samsung in the next ten years and in order to full fill

this vision company has to heavily focus on their international expansion programme.

Talking of international expansions one of the main reasons for hiring or some people would

rra from the Google is to expand the presence of

Xiaomi outside Chinese markets and make it a global company generating revenues not only

from China but globally. Since the Chinese smartphones market is showing signs of maturity

the company needs to find other markets to sell their phones. The

expansion has logic and they are very selective in choosing which markets to target and

which to ignore for time being.

South East Asia: The very first market for its international expansion not only in south East

Asia but outside China was Singapore. Xiaomi had created a Singapore centric app with
35
MIUI platform and wallpaper The company serves as its regional

headquarter and will house its new corporate office and regional distribution centre. The next

stop for the company was Malaysia, Indonesia, Philippines (Exhibit 12).

India has been a very successful market for the company. They have launched their cell

phones exclusively through Indian E-commerce giant Flipkart. India is one of the most

attractive markets with a year on year smartphone shipment growth of 186% in Q1 of 2014.

availability of low cost devices by many players like Micromax, Karbon, Lava and now

Xiaomi. 36 Although the exact figures of sales are not available but company claims that they

have sold 1 million smartphones until December 2014 here in Indian markets. Due to huge
potential of Indian markets Xiaomi plans to set up first research and development centre

outside China in Bangalore.37

Outside Asia: The Company is deliberately targeting those markets which best suit its

business model. In this regards for the first time outside Asia Xiaomi expanded to Brazil,

Russia, and Mexico and there are plans of entering other Latin American countries. The

company is planning to set up manufacturing plant in Brazil as the country has high import

tariffs. The company has launched Redmi 2 in Brazil at a price of $160. 38

CHALLENGES: Although Xiaomi has a very unique and novel business model and has

done considerably well in such a short period of time but in spite of that the company is and

will face some significant challenges which they need to overcome so that this burst prevails

in long run. One of the biggest reasons for this huge success in such short run was the

dominance of Xiaomi in Chinese market. The company had no close competitor in China

which could beat them in price and quality but now due to the sudden rise of Huawei and

Lenovo who has launched a separate subsidiary under the name of ZUK with a similar

business model like Xiaomi, life is not going to be very easy for the company. Both the

companies have started selling their devices online aimed at young price conscious users like

Xiaomi.39

The second major challenge for the company is that for the first time in last decade the

smartphone sales in China showed some sort of decline. The sales in China showed a decline

of around 4 percent in the Q1 quarter of 2015 with respect to last year.40 Thus in order to

survive company needs to expand its wings outside China and for that they need logistics
support which not only creates hindrances for the company but also adds to the production

cost also.

Since the company has already expanded their businesses in many countries like Singapore,

Malaysia, Indonesia, India, Brazil etc. and there are many in the to do list. Thus in order to

make all these expansions successful the company needs a very good and sound intellectual

capital and patents have as they usually relay on

Qualcomm for providing this access.41 The company could face some patent disputes like

what happened in India. The company came into dispute with Ericson in India following a

complaint that the company is using without paying the

loyalties.42 The company faced a short term selling ban by a court in Delhi and thus sales

were halted. The company could face a similar kind of challenge in other markets around the

world and thus making expansion a major challenge.

The company understands the need for international expansion in order to fulfil its vision of

overtaking Samsung and Apple within 10 years of time. Looking at the business model and

the company strategy, e being as they

these markets like Philippines, Vietnam and even in India internet penetration is still very low

ll phones.43 This could result in huge

market loss if the company sticks with the current model.

The last major challenge which the company faces in almost all the markets is the production

capacity constraints. As the company manufactures cell phones in batches and then sell

through flash sales through their website or in collaboration with partners but what happens
in majority of these cases is that the stock is sold out within seconds and thus bulk of the

demand is unfulfilled. No doubt that this helps to create a buzz but it costs company badly in

terms of the sales. The industry changes rapidly and technology becomes obsolete in no time

this gives a potential opportunity to other players to eat away the market share. Although the

company has increased their production capacity from tens of thousands a month two years

back to currently about three million a month. 32

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Exhibits:

Exhibit 1

Exhibit 2
Exhibit 3

Exhibit 4:
Exhibit 5

Chinees smartphone Market Share

Others

Samsung

Vivo

Market Share
Apple

Huawei

Xiaomi

0 5 10 15 20
Exhibit 6

Exhibit 7
 Exhibit 8

Exhibit 9
Key Key Activities Value Customer Customer

Partners Manufacturing Proportion relationships segments

Fan community Maintain Fan Low Price Global Market

Mobile community High Quality Developers

operators Software Large choice of

Hardware Developing Apps

Manufactures Peripheral

Key resources Products Channels

Xiaomi Social Media

Employees Xiaomi.com

MIUI

IT Infrastructure

Cost structure Revenue streams

Marketing Hardware

Fulfilment Software

General & Admin Peripheral Products

Technology & content

Exhibit10: Adapted from

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100

80

60

40

20

2011 2012 2013 2014 2015

Exhibit: 11

Source: IDC Quarterly Mobile Phone Results Aug 2015

Philliphines
0.3

Indonesia
0.7

India
1.6

Malaysia
4.4

Hong Kong
6.7

Taiwan
7.6

Singapore
16

Exhibit 12

Source: IDC Quarterly Mobile Phone Results Aug 2015