Market Insight

Rapidly rising Xiaomi launching smartphones in India despite issues with business model

July 29, 2014

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Chinese smartphone manufacturer Xiaomi is expanding its international footprint to India. It will be launching its flagship smartphone the Mi3 in India on the 22nd of July, which will be followed later in the year by the lower-end Redmi 1S and Redmi Note. The Mi 3 will cost Rs13,999 (approximately equal to $232 or €172) at launch, while the Redmi 1S will cost Rs6,999 ($116 or €86) and the Redmi Note will cost Rs9,999 ($166 or €123).

In a break with its usual strategy, Xiaomi is partnering with local e-commerce company Flipkart to sell the devices exclusively through Flipkart’s online stores. Xiaomi devices are only available through its own online store in China and its other markets. Unlike its Chinese devices, Xiaomi’s Indian smartphones will come with all Google’s apps preinstalled including Google Play. 

Our analysis

The move into India is an important step in the growth of Xiaomi. The company has risen from literally nothing to becoming the world’s fourth largest smartphone manufacturer in under three years (for Q2, pending results from Sony). Unlike many smartphone makers, Xiaomi's CEO announced late last year that Xiaomi had become profitable for the first time.

Xiaomi’s meteoric growth has almost entirely come from China. Its strategy there is to provide high quality handsets for extremely competitive prices. It provides a highly customised Android UI called MIUI which is updated every week often with suggestions that come from Xiaomi’s user support web forums. It supplements its smartphone revenue with accessories and selling content through its own application store. Google’s Play store is uncompetitive in China because like many Google products it is hard to use. Notably, Google does not sell paid apps to Chinese users.

Exporting this strategy to other markets will not necessarily work for Xiaomi. Google Play is the default app store for Android everywhere outside of China and Google's apps which are only available as part of the Google Play store, are critical parts of many consumers lives. Therefore, Xiaomi must adapt its content strategy outside of China and cannot rely on as large content revenues as within Xiaomi's home market.

In order to provide the weekly updates to MIUI, its handsets must be sold outside of operator channels. Android updates for most manufacturers are slowed down by the need for operator testing and approval. While Xiaomi are circumventing this to push updates quickly, it limits its appeal to markets where most of the handset market is not operator controlled. Its low price strategy is necessitated by operating outside the operator channel and the subsidies available for postpaid plans. Lastly, its online only strategy for sales also limits its audience in emerging markets with smaller online audiences.

Expansion in India avoids many of the potential problems – the handset market is not operator controlled; and while there is low online penetration in India, the smartphone market is still in its infancy so there are many available consumers. While the presence of Google Play is a hindrance, India has one of the lowest levels of spend on mobile content anyway, so the opportunity cost is low.

Xiaomi’s sales and distribution partner in India, Flipkart is often referred to as “India’s Amazon”. Flipkart already has a strong pedigree in selling smartphones through its online portal. Motorola sell its smartphones in India exclusively through Flipkart. It announced last week that it had sold 1 million Motorola smartphones in the first five months of the partnership. Partnering with Flipkart removes the complexity of distribution for Xiaomi, and India is probably the most complex country for distribution in the world.

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