5 problems that could halt Xiaomi’s rise to glory

The meteoric rise of Xiaomi has been generating plenty of headlines lately. According to IDC Xiaomi dominated the Chinese smartphone market in the last six months of 2014, beating heavyweights Apple and Samsung, as well as compatriots HUAWEI and Lenovo. For a company that released its first smartphone in 2011, sales of more than 60 million smartphones and a valuation of $45 billion by the end of 2014 can hardly fail to impress.

Speculation that international success is just around the corner for Xiaomi is rife. Hype that Xiaomi was keen to build on with its first US event last week and plans for an e-commerce launch Stateside this year. Initially it has other Asian markets, along with India and Brazil, in its sights. The Mi 4 sold out in India within 15 seconds of its carefully controlled launch.

Glowing predictions about Xiaomi’s ability to translate success in emerging markets into worldwide dominance could be conveniently ignoring a few potential problems.

Licensing and lawsuits

Part of Xiaomi’s rise in China can be explained by its early strategy of copying Apple. If you can get past the similar aesthetic of devices like the Mi 4 and Mi Pad, next to the iPhone 5S and the iPad Mini, there are some very obvious differences between them. Xiaomi clearly has a different attitude to design, customization, and many other facets of its mobile device business, but it has shamelessly aped Apple when it comes to marketing.

As Business Insider pointed out, the CEO, Lei Jun, certainly seemed to be inspired by Jobs with his on stage presentations and “one more thing” slide, but the company has also closely emulated Apple’s marketing. It doesn’t just copy Apple, it also used copyrighted photos in its marketing. It gets away with this in China, but it won’t get away with it in countries with stronger IP laws. If Apple could win in court against Samsung, then Xiaomi has very little chance. Microsoft and the other Android OEMs also won’t hesitate to have a go if they see an opportunity.

The cost of licensing patents and fighting lawsuits has the potential to take a huge bite out of Xiaomi’s bottom line and it doesn’t have deep pockets like Apple or Samsung.

Lost in translation

Even if wasn’t going to set the stage for a series of lawsuits, the Apple-style marketing is going to need a rethink for markets like the US anyway. Realistically Xiaomi will have to completely re-imagine its marketing approach. It has relied on a close relationship with its fan base with more than 100 million MIUI users enjoying weekly updates to the custom ROM. It has made a huge deal out of listening to its customers and giving them what they want.

Can it replicate that success outside China? Xiaomi recently boasted about 40 million active forum users and 500,000 new posts on a good day. The fans drive the design, the excitement, and the hype for word-of-mouth recommendations on social networking sites. Flash sales with limited stock reduce risk and generate more marketing buzz.

How many of the techniques that carried Xiaomi to success in China can be replicated in the US or Europe? Are its offerings exclusively tailored for a Chinese and Asian audience? A lack of international experience could certainly hinder its growth.

Online only

Xiaomi sells devices directly to consumers online. It’s a model that’s accepted in many markets, but the US and much of Europe is still dominated by carriers and long term contract deals. It can be very tough for OEMs to strike deals with carriers. If you want shelf-space then they want a cut, they want a design input, they want their bloatware pre-installed.

Even Google itself has had limited success selling devices direct online. Even at knock-down prices the upfront cost often exceeds the on-contract deal. People end up paying a lot more in the long term with contracts, but it’s a model they’re used to and it’s still the dominant one. The online only approach has limitations.

Wafer-thin profit margins

Direct online sales are only part of Xiaomi’s model. It also has a small portfolio with long product cycles. The phones and tablets are sold near cost and Xiaomi looks to make money on accessories and apps. That’s part of the reason it describes itself as an “internet company” and not a smartphone manufacturer.

The lower cost of Xiaomi devices is an obvious attraction for consumers, but will Western markets buy into the accessories and app ecosystem? They may ship with Xiaomi apps in China, but worldwide Xiaomi is a Google partner and its Android devices carry Google’s apps and the Play Store. Can it hope to turn a profit without these additional income streams?

Copycat competition

Ironically, given the criticism often leveled at Xiaomi, one of its biggest risks could be the competition copying it. HUAWEI has already emulated the online-only approach with the HONOR line. Other than a head-start in China, what does Xiaomi have that other OEMs don’t in terms of strategy? Given that it would be starting from scratch in the US, how is it going to differentiate itself?

A lot of work to do

None of these problems are insurmountable, but it would be naive to assume that Xiaomi’s success outside China is assured. Its performance in other emerging markets will serve as a test, but the process of international expansion is clearly underway. Hiring Barra from Google in 2013 and using him as the international spokesman was one of the first steps. Holding its first US event last week was another one. Concrete plans for the US are still very vague and you don’t really get a sense that the company is deluding itself about its prospects. There seems to be an understanding that there’s work to be done yet.

Xiaomi does have plenty going for it. Amid the copying there is innovation. A combination of low prices and listening to consumer feedback has the potential to crack any market. It’s just too early to tell whether the fierce brand loyalty it has cultivated in China will cross the border with its international ambitions.