Can Xiaomi smartphone business model last?

Xiaomi is now the world’s third largest smartphone producer, followed by Lenovo and LG according to IDC. Samsung remains in first place, followed by Apple Inc. Xiaomi passed Apple and Samsung to become the best-selling smartphone provider in China in the second quarter of 2014, according to Canalys , a research firm. Xiaomi sold 61.1 million phones representing approximately $12 billion in revenue in 2014.

As the CEO of Xiaomi, Lei Jun summarized its successful model in  the following three main areas:

1. Hardware assembly: all components are of superior quality. For example, the chip is produced by highly regarded Qualcomm. The screen is from Sharp and the smartphones are assembled through Foxconn, the same assembler that builds for Apple smartphones. The quality of Mi phone is equivalent to that of Apple or Samsung smartphones.

2. Customers/Fans deep involvement: for example, when Xiaomi developed its operating system, it listened to the requirements from its fans and took the feedback seriously, including same  in the actual development process. 

3. The price is cheaper. Xiaomi smartphones are sold online in order to reduce distribution costs. The gross profit is very low. The selling price is close to its cost generating a modest margin. Xiaomi makes money through volume sold.  

The combination of the three areas is the so-called Xiaomi smartphone business model. Is this business model sustainable? Let’s compare it with Apple’s business model. For any product, it should follow the 6+1 industrial chains including the following six areas plus manufacturing:

1. Product design 
2. Raw material purchase 
3. Inventory and shipping 
4. Order management 
5. Wholesale    
6. Retail sale

The profit from manufacturing is very low, as we all know. The real profit lies in the 6 areas. Apple takes control of all 6 areas, but outsources manufacturing to Foxconn. In contrast, Xiaomi does not control product design. It is the origin of all kinds of problems. If you have used a Mi phone, you know it constantly has the problems such as crashing, overheating, camera giving off a red image and a periodic echo. The phone operates slower and slower over time and therefore you have to buy a new one every year. 

According to a market research, people who really like Mi phone only accounts for 23% of the users. But those who like Samsung or Apple smartphones account for 80%+. The main reason is because of bad user experience emanating from poor product design. 

Smartphone success is not as simple as assembling components. In my opinion, in order to succeed in the manufacturing field, a company must control all 6 of the industrial chains. Lack of any component will cause problems in the long run.

If you are interested in Xiaomi smartphone business model, you can click here to view what Hugo Barra, Vice President of Xiaomi Global said about it.