Friday, August 30, 2013

I don't believe Hugo Barra left to Xiaomi due to personal drama. It's Google, not GLEEgle!

Who is Xiaomi?

Xiaomi is not your average cheap phone maker from China. Don’t get me wrong, they do make affordable phones. However, when most Chinese cheap phone maker achieve such low prices through keeping specs low and cutting corners in terms of build quality, Xiaomi’s devices are praised for their built quality, specifications and refinement.

Here’s what CEO, Lei Jun, said:

“Never produce lower quality product for the sake of cost and never spare any effort at creating the best quality.”

Okay, talk is cheap so let’s take a look at two of the flagships phones that they have launched thus far.

Their first phone was called the Mi 1. It was launched in August 2011, at a time when the Galaxy S2 was Samsung’s flagship. The Xiaomi Mi 1 shares the S2’s WVGA resolution, 1 Gig of RAM and dual core processors. But whereas Samsung equipped the S2 with a 5 megapixel camera, Xiaomi’s M1 had an 8 megapixel BSI camera, with all the bells and whistles that the best phone camera of 2011 can boast about. Furthermore, whereas Samsung’s flagship was priced at around $650 off contract, Xiaomi’s flagship was sold at $320, off contract!

A year later, Xiaomi refreshed their product line. This time they launched two devices, the Mi 2 as their flagship which was sold at $320 and the refreshed Mi 1S which was sold at $240 to cater for the mid-range crowd.

Xiaomi kept their old mantra of keeping prices low while offering the best the mobile tech world has to offer to their customers. The Mi 2 was the first phone announced to be powered by the (then) venerable 1.5 GHz Snapdragon S4 Pro with its quad core Krait processors and Adreno 320 GPU. Although in practice, LG’s Optimus G beat them to the market by a matter days.

For around $300 cheaper, the Xiaomi Mi 2 offered specs that were on par with LG’s flagship such as, 2GB of RAM, a high definition 4.3” IPS screen from Sharp and JDI (the Optimus G came with a slightly bigger screen), 8 megapixel BSI camera with F/2.0 aperture and image stabilization, 2 megapixel front camera, 2000 mAH battery (there was an official 3100 mah battery pack offered) with MIUI running on top of Android 4.1 Jelly bean.

For those of you who are interested to learn more about the phone, you can check out a full review of the Mi 2 here

Remember this was August 2012, the Nexus 4 was still months away from entering the market so the Mi 2 was not only one of the most powerful phones in the market at the time, but also the cheapest phone with a quad core Snapdragon S4 Pro. Since then the Mi 2 has been slightly updated to the Mi 2S with a slightly faster processor.

Xiaomi sells their phones at close to cost, with some analysts estimated that they only make around 10% profit for each device sold.

Another thing that separates Xiaomi from your run of the mill cheap Chinese smartphone vendors is the fact that they were the guys behind MIUI. A popular Android custom ROM used by millions of people in the world. This allows them to be the only smartphone maker in the world to offer weekly updates with “stable” updates released monthly. Not even Google’s own Nexus phones get official updates that fast!

How did they do that?

How did they achieve their crazy pricing without cutting corners? Even Google’s Nexus 4 was possible to be sold for $300 through Google’s subsidy, in areas where the Nexus 4 is not available through the Play Store, LG is selling it for well over $500.

Well, the answer to that would be some very cunning tactics.

First, the obvious one, is marketing. We often heard how people thinks that HTC just doesn’t have what it takes to take on Samsung’s Kaiju-scaled marketing budget. Well do you know how big is Xiaomi’s marketing budget?

Their president, Lin Bin said in an interview with Diveintomobile last year that they have practically zero marketing budget. 

All of their marketing is done through word of mouth on China’s version of Twitter, Sina-Weibo where Xiaomi’s CEO, Lei Jun has millions of followers.

That’s not the only thing they do on Sina-Weibo though. They also do most of their sales through the social media. See, the other strategy that Xiaomi used to keep their prices down is cutting the middlemen. By middlemen we mean both traditional distribution channels as well carriers. Some reports have stated that more than 70% of their sales are done directly through their website with customer acquisition taking place on Sina-Weibo. The other 30% is sold through carriers at 30% higher price.

Another piece of strategy that they employed to achieve their pricing is avoiding having large, sitting inventory. Currently, they produce their devices in batches of 200 to 300 thousand units. Most of these are cleared in less than an hour, through sales acquired on Sina-Weibo, creating a sense of scarcity that helped to their word of mouth marketing up.

Below you can see a chart showing the number of unit Xiaomi produced in batches and how fast they are sold (courtesy of

So with all this “out of the box” tactics, how well has it worked for them? Let’s check out the following facts:

Xiaomi is now the 6th largest smartphone manufacturer in China, one spot above Apple (according to TechInAsia) and on track to surpass Nokia.

In the first half of this year, they have sold more Mi 2S than Samsung managed to sell the Galaxy S4, even though the GS4 is available through all major outlets and carriers. Mi 2S was released the same month as the Galaxy S4.

They initially planned to sell 15 million phones in 2013 (up from 7 million that they sold the previous year), they just increased the target to 20 million.

Company is valued at US$10 billion, on par with Lenovo.

They are planning to launch a new flagship in September and expand their sales to Taiwan and Hong Kong.
Their custom OS, MIUI which is based on Android is now used by 20 million people, up from 10 million at the start of the year.

Now let me reiterate for a bit, this company achieved all of the above in less than three years with virtually no brick and mortar presence and no carrier support!

How are they making profit then?

In an interview, Lin Bin, the company’s president, said:

“The smartphone market today is in many ways like the PC market 20 years ago. At first, margins were high, but over time they declined. That is why Xiaomi does not aim to generate profits through device sales but from services, accessories and complementary devices.”

At this point, I think it’s clear that Xiaomi is not just another cheap phone manufacturer. This is a company that has a clear understanding of where the future of the smartphone market is heading. That in the future, companies cannot rely on device margins to make profit, companies should rely on services and added value that they can give to consumers after the purchase is conducted.

One of the ways Xiaomi attempts to bring this added value to their consumers is by refining their firmware on a weekly basis and opening themselves up to feedback from their own customers.

Tired of hearing people’s complaints about Samsung’s TouchWiz falling on deaf ears? Well that will not be the case with Xiaomi, because not only do they expose and distribute their firmware on a weekly basis to millions of MIUI users to use and scrutinize on non XIaomi phones, they also take in feedbacks from their users to refine their next firmware version.

The feedback loop does not stop on firmwares, it also applies to the design of their hardware. Xiaomi puts a heavy emphasis on inputs that they receive from their users through social media. Every phone release is actually a culmination of refinements based on customer’s feedback gathered during the previous product cycle.  

Contrary to popular views, apart from their CEO’s choice of outfits, Xiaomi is not China’s Apple. Based on how they price their devices and maintain their firmware, The Communist Nexus Program would be a more appropriate description. Why? Because the parallelism to what Google is trying to achieve with their Nexus program is uncanny. Both try to sell devices close to cost and gain profit from services that users use. Both also opens their firmware to user input and aims to provide timely updates to improve the user experience.

What does this have to do with Hugo Barra?

Hugo Barra

In the same interview, Bin stated that they are planning to start their international push in countries with a strong Chinese culture. Recent reports stated that they are beginning to push their devices in Taiwan and Hong Kong. This is partly the reason behind the readjustment of their 2013 sales target.

If we look closely, having a strong Chinese culture is not the only similarity that Taiwan and Hong Kong share.

Unlike mainland China, the Taiwan and Hong Kong market are heavily subsidized, hence they are not as sensitive to price. In this regard, the two Asian markets are similar to the North American market.

So far, Xiaomi has yet to prove that their business model would be able to compete in such a subsidy-laden market. There is reason to believe that Xiaomi is planning to use the Taiwan and Hong Kong market as a “beta project”. Lessons learned in these markets can then be used and adjusted as template for their push into the developed markets like North America.

This is where I think Mr. Barra will play a role. He can use the lessons he had learned through the Nexus project to, for example help Xiaomi construct a plan to work with American carriers or even to fight them on their home turf.

This is also why I don’t believe that Mr. Barra’s move to Xiaomi was hinged on a high school drama like affair. Afterall, Lin Bin was a former Googler himself. There’s all the reason in the world to believe that this was calculated acquisition from Xiaomi, a company whose short history has showed that they have the capability to think outside the box and catch people off guard. In my opinion, suggesting otherwise would be disrespectful for all parties involved.

How would Xiaomi try and crack a developed market like the U.S.?

To answer this question I turned to a few people who are familiar with the market.

Sameer Singh, a tech industry analyst who blogs on mentioned to me in a correspondence that while the prepaid market would be an obvious target for Xiaomi, carrier support would provide them with a huge boost. In order to appeal to carriers in developed markets, Xiaomi needs to demonstrate that they are able to maintain high level of web usage from their customers. Currently, in China Xiaomi users are spending twice the amount of time that other users spend on mobile web. If Xiaomi can maintain this level of engagement from their international customers then carriers would likely be interested. Furthermore he elaborated how Xiaomi’s pricing could be a competitive advantage to appeal to the carriers. If a carrier were to sell Xiaomi phones on contract with no up-front commitment (free on contract), they could save about $200 compared to offering other high end smartphones for “free”.  

Jonathan Franklin from stated that Xiaomi might have to alter its’ marketing efforts should they want to succeed in the US. On a more technical note, Franklin thinks that incorporating Qualcomm’s latest RF360 modem would be beneficial since it would allow Xiaomi to make a single device both in the GSM international market as well as in the US LTE market. Xiaomi can then offer their phones through a direct online channel, just like they did in China, to “test the waters” and demonstrate the kind of demand that they can generate.

Both analysts agree that in order to establish presence in the developed markets, Xiaomi would need to alter their approach to a certain degree. Among those adjustments, they agree that Xiaomi’s zero inventory approach might need some adjustments. This will increase their overhead but it is nothing that an increase in sales couldn’t cover.