Klaus Meyer and Jianhua Zhu

Part 6. Chapter 1. Xiaomi Challenges Global

Smartphone Leaders.
pp. 506-510

Peng, M. and Meyer, K., (2016) International Business, 2, Andover: Cengage

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Course of Study: BMAN24312 - International Business

Title: International Business
Name of Author: Peng, M. and Meyer, K.
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 INTEGRATIVE CASE 1

XIAOMI CHALLENGES GLObaL

SM ARTPHONE LEADERS

K la u s M e y e r and J ia n h u a (Jenny) Zhu

CEIBS

n D ecem ber 2 0 1 4 , surprised new spaper readers aroun d the w orld learned that the m ost valuable
I start-up com pany w as a Chinese com pan y that m ost had never heard of: sm artphone m aker X iaom i
(valued at $45 billion) overtook the w orldw ide operatin g taxi-b ookin g com pany Uber (valued at
$40 billion). W ithin only four years, X iaom i becam e num ber one in China by units sold, ahead of
Samsung, Apple and Lenovo. In the second quarter o f 2 0 1 4 , X iaom i had overtaken Samsung to becom e
volum e m arket leader with a 14 per cent m arket share. W orldw ide, X iaom i rose to sixth place in 2 0 1 4 ,
behind Samsung, Apple, Lenovo, L G and Huawei (Table 1). W hat explains the phenom enal success
o f Xiaom i?
The Chinese sm artphone m arket has grown to become the largest in the w orld, overtaking the USA in
2 0 1 2 , with 31.8 million units sold. The industry w as driven by rapid evolution o f sm artphone technologies
and the availability o f Wi-Fi, cheap com ponents, specialized contract m anufacturers and a vast dom es­
tic m arket of budget-conscious consum ers. L ocal Chinese com panies compete head-on against Apple ,
Samsung and other m ajor global brands, who still sold about 20 per cent of their global sales in China.
Six of the top eight vendors are Chinese firms that compete intensely am ong themselves: com puter m aker
Lenovo, telecom equipment giants Huawei and Z TE, consum er electronics firms TCL and Coolpad and
start-up Xiaomi. Samsung and Apple target the high-end m arket with handsets for about € 5 0 0 , while
dom estic com petitors target lower m arket segments with selling prices set between €100 and €150.
O nly a few years ago, the hottest brand in town w as H T C . O nce a m anufacturer of phones for Western
brands, H TC started its own branded sm artphone in 2007, and became the top A ndroid-based sm art­
phone in the USA in 2010. Driven by a fast innovation culture, H TC aimed to launch a new version every
month. Yet with an undifferentiated product and a mid-price positioning, H TC soon found itself squeezed

506

C o p y rig h t 2 0 1 6 C e n g ag e L ea rn in g . A ll R ig h ts R e se rv e d . M a y n o t b e co p ied , sc an n e d , o r d u p lic ated , in w h o le o r in p art. D u e to elec tro n ic rig h ts, so m e th ird p a rty c o n ten t m a y b e su p p re ss e d fro m th e e B o o k a n d /o r e C hapter(s).
E d ito ria l re v ie w h a s d e e m e d th a t an y su p p re ss e d c o n te n t d o es n o t m a teria lly a ffec t th e o v e ra ll le a rn in g ex p erien c e. C e n g ag e L e a rn in g re se rv e s th e rig h t to re m o v e a d d itio n a l c o n te n t a t any tim e i f s u b se q u e n t rig h ts restric tio n s re q u ire it.
 IN TEG RATIVE CASE 1 X IA O M I C H A LLEN G ES GLOBAL S M A R TP H O N E LEA DERS 507

Table 1 Es tim at ed w o r l d s m a r t p h o n e m a r k e t shar e (units sold)

2011 2013 2014

Samsung 16.8% 32.5% 28.0%

Apple 10.2% 16.6% 16.4%
Lenovo n/a 4.9% 7.9%
LG n/a 4.3% 6.0%
Huawei 9.5% 4.4% 5.9%
Xiaomi nil 2.2% 5.2%
Coolpad n/a 3.6% 4.2%
ZTE 6.9% 3.2% 3.1%
Sony n/a 4.1 % 3.9%
Nokia 30.1% 3.0% n/a
Other 26.6% 21.2% 19.4%

Source: Technavio, Gartner, author’s estimates.

between Apple and Samsung at the high end and Chinese players such as Huawei and Z T E at the low end.
H T C ’s global m arket share slipped to 2.2 per cent in the third quarter of 2012. In the next two years, H TC
launched new high-end phones, but despite aw ards and rave reviews, sales remained m odest.

E N T R E P R E N E U R S H I P , C H IN E S E STYLE

O ne entrepreneur who observed and learned from H TC w as Lei Jun. A graduate from W uhan University,
he spent his early years as a software engineer, later a CEO , at Kingsoft, a softw are com pany competing
with M icrosoft in China. His first m ajor success as an entrepreneur w as zhuoyue.com, an online book
retailer, he sold to Amazon in 2 0 0 4 , earning him €10 million. After Kingsoft w as listed on the Hong Kong
Stock Exchange in 2 0 0 7 , Lei resigned as CEO and started a new career as a venture capitalist, investing in
online commerce and social m edia businesses.
In 20 1 1 , Lei Jun founded X iaom i . At this time, the sm artphone industry w as rapidly m aturing, with
specialist providers at different stages of the value chain. U pstream were hardw are m anufacturers (like
Qualcomm for chips) and softw are providers, for operating systems (such as A ndroid) and software appli­
cations (like W eChat and Weibo). In the m id-stream, com panies like Foxconn integrated the hardw are and
softw are to m anufacturers of the physical products, sm artphones. Further dow nstream , brand owners like
N okia, Apple, Samsung, H TC, Huawei and Lenovo m arketed the products, and also led product innova­
tion. Sm artphones were usually sold via distributors, including telecom operators China Mobile, China
Telecom and China Unicom, and retails stores like Gome, Suning, JD .com or Taobao.
With a good dozen established sm artphone brands, how could Xiaom i differentiate itself? First, Xiaom i
only used the suppliers for Apple and Samsung to establish a reputation as a top-tier brand. For exam ple,
X iaom is chip suppliers were Nvidia and Qualcomm, and its m anufacturers were Foxconn and Inventec.
Second, Xiaom i developed its own operating system , M IUI, based on Google’s Android system , yet using
creative designs to m ake it more user-friendly for Chinese consum ers.

C o p y rig h t 2 0 1 6 C e n g ag e L ea rn in g . A ll R ig h ts R e se rv e d . M a y n o t b e co p ied , sc an n e d , o r d u p lic ated , in w h o le o r in p art. D u e to elec tro n ic rig h ts, so m e th ird p a rty c o n ten t m a y b e su p p re ss e d fro m th e e B o o k a n d /o r e C hapter(s).
E d ito ria l re v ie w h a s d e e m e d th a t an y su p p re ss e d c o n te n t d o es n o t m a teria lly a ffec t th e o v e ra ll le a rn in g ex p erien c e. C e n g ag e L e a rn in g re se rv e s th e rig h t to re m o v e a d d itio n a l c o n te n t a t any tim e i f s u b se q u e n t rig h ts restric tio n s re q u ire it.
508 PART S IX INTEG R A TIVE CASES

Third, Lei Ju n developed an innovative business model to reach consum ers while reducing costs. Xiaom i
spent next to nothing on adverting, but sold its phones exclusively through the internet. In this way, it not
only saved the m argin the retailer w ould earn, but dram atically reduced the need to keep inventories. Build­
ing on his experiences in e-commerce and social m edia from his earlier entrepreneurial ventures, Lei Jun
designed innovative online m arketing and distribution channels. Initially, Xiaom i targeted technology-
savvy IT engineers and college students via an online Xiaom i forum. Thus X iaom is official website is
its m ain sales channel, complem ented by online m alls, such as Taobao. Lei Ju n m oreover developed a
pre-selling m odel to reduce expenses for inventory. X iaom is cell phones were usually offered with limited
supply, and custom ers had to register online before being able to bid online for a Xiaom i smartphone. As
a result, 150 000 units were often sold online within minutes. A Financial Times correspondent observed:

offering sleek, high-spec kit at low prices, X iaom i has overtaken more venerable rivals to become the
country’s m ost popular sm artphone brand. Its m odels sell for hundreds o f dollars less than the latest
Apple or Samsung phones, yet on the streets of Beijing or Shanghai they have become objects of lust.

However, the true source of X iaom is success m ay not be the product, but the community o f fans that
Xiaom i has built. Before launching its products, Xiaom i already recruited tech enthusiasts to help testing
its M IUI operating system. Xiaom i engages directly with its fans both online, for exam ple, through social
m edia com m unications and early bird offers, and offline, by inviting them to product launches or parties
in nightclubs across China. With intensive online com m unication, X iaom i developed a fashionable im age
beyond online geeks. As CEIBS professor Jan e Wang observed (source 15):

Everyone around us has the iPhone6 and iPhone6 plus. But X iaom i stands out as something different.
W hat does this say about its users? It says: I’m experim ental, I’m willing to give new ideas a try and
I’m really leading the trend.

As the brand m atured, it also became popular as a gift young people gave to the grandparents: good
value for money, and easy to use. This m arket however w as less emphasized by Xiaomi, as it adds less to
its aspired brand image.
X iaom is innovation strategy focuses on fast prototyping with very short ‘launch-test-im prove’ cycles,
a strategy found in many Chinese technology start-ups. Thus products are launched in quick succession,
custom er feedback is collected via online forum s, and engineers quickly incorporate new ideas in the next
product ideas, especially in softw are. While every change is sm all, cumulatively this process generates quite
substantive innovations in the operating softw are, M IUI, and the apps that come with the Xiaom i phone.
This business m odel enables Xiaom i to offer innovative products while undercutting rivals with rock-
bottom prices; m any Xiaom i m odels are available online for prices around €100, whereas Samsung’s
G alaxy sm artphones retail for € 5 0 0 and more. Thus in 2014, X iaom i sold 61.1 million sm artphones
(a 22 7 per cent increase over 2013) and earned sales revenue of alm ost €10 billion (135 per cent increase).
However, some observers expected Xiaom i to drive sm artphones to com m oditization - a process o f com pe­
tition by which differentiated products that com m and high prices and high m argins lose their com parative
advantage. Xiaom i focused on building volume and m arket share, and expected profits to come later once
m arket leadership had been consolidated, thus following a strategy com m on in boom years in Silicon Val­
ley. However, with thin m argins, the business model w as also sensitive to disruptions, as Xiaom i had little
financial buffer to absorb unexpected shocks.

C O M P E T IT IO N , C H IN E S E STYLE

As Xiaom i became the m ost popular A ndroid-based sm artphone brand, it w as recognized as the m ost
‘threatening’ com petitor for Samsung in China. In the third quarter of 20 1 4 , Samsung’s m arket share
in China fell to 24.4 per cent, down from 32.1 per cent a year before, and for five consecutive quarters

C o p y rig h t 2 0 1 6 C e n g ag e L ea rn in g . A ll R ig h ts R e se rv e d . M a y n o t b e co p ied , sc an n e d , o r d u p lic ated , in w h o le o r in p art. D u e to elec tro n ic rig h ts, so m e th ird p a rty c o n ten t m a y b e su p p re ss e d fro m th e e B o o k a n d /o r e C hapter(s).
E d ito ria l re v ie w h a s d e e m e d th a t an y su p p re ss e d c o n te n t d o es n o t m a teria lly a ffec t th e o v e ra ll le a rn in g ex p erien c e. C e n g ag e L e a rn in g re se rv e s th e rig h t to re m o v e a d d itio n a l c o n te n t a t any tim e i f s u b se q u e n t rig h ts restric tio n s re q u ire it.
 IN TEG RATIVE CASE 1 X IA O M I C H A LLEN G ES GLOBAL S M A R TP H O N E LEA DER S 509

Samsung reported falling earnings, because it w as squeezed by Apple’s iPhone6 and Chinese local rivals
like X iaom i .
M oreover, X iaom i also ate m arket share of local players like Huawei and ZTE. In response, Huawei
and Z T E launched m obile phones with sim ilar configurations at competitive prices. Thus Xiaom i launched
Redm i N ote at the price of €1 1 0 , which w as in direct com petition with Huawei’s H onor 3 X , priced at
€130. The intense com petition between Chinese brands raises the question whether or not Xiaom i has
sustainable competitive advantages. Some com m entators suggest that the loyal fan base and the associated
online platform s are rare and hard to imitate resources. However, CEIBS Strategy professor Sam Park has
his doubts (source 15):

There is nothing that w arrants any type of sustained advantage for Xiaom i even in the local m ark et...
Given the lack of unique competences, X iaom i is, and will continue to be, easily challenged by other
local com panies. M ost o f these, including Lenovo and Huawei, already launched a sim ilar business
m odel in part of their operations. For local com panies, once com petition heats up, and the m argins
become thin, it becomes difficult to survive.

M oreover, the lack of patents has become X iaom i’s Achilles heel. Huawei has built a portfolio of 22 169
patents, one of the largest number, not just in China, but w orldwide. Likewise, Lenovo has accum ulated
14 493 patents, including 2 3 0 0 patents acquired with the takeover of Motorola Mobility. In contrast,
X iaom i had only seven patents, quite literally a technology dw arf am ong the giants of the telecom industry.
This lack of patents came to haunt Xiaom i as it challenged the leaders. In N ovem ber 2 0 1 4 , lawyers for
Huawei and Z T E sent letters to Xiaom i about the latter’s patent infringements. Yet neither Huawei nor
Z TE actually sued Xiaomi in court. The reason w as tw ofold. Xiaom i’s hardware supplier Qualcomm owned
80 per cent of the patents for C D M A comm unications. Qualcomm also signed reverse patent authorization
whenever it w orked for a different m obile phone vendor, which m eant that Qualcomm w as able to integrate
all kinds of patents on one smartphone chip. As a result, the Xiaom i chip provided by Qualcomm w as safe.
On the other hand, due to the IP protection environment in China, even if Huawei or Z T E won the lawsuit,
the reimbursement fee for each patent w as only €10 000, which w ould hardly dent Xiaomi.

in t e r n a t io n a l a m b it io n s

Focused on the vast and fast-growing Chinese m arket, Xiaomi sold only 3 per cent of its smartphones outside
of China, compared to Lenovo ’s 16 per cent and Huawei’s 41 per cent. Following the example of its Chinese
peers, Xiaomi decided to first focus on other emerging economies, starting in India and then Brazil and Russia.
X iaom i ’s first m ajor international venture w as in India, where its €90-a-piece sm artphones undercut key
com petitors including global players Samsung and Apple , as well as local start-ups M icromax , Karbonn
and Spice. However, Xiaom i found India more difficult to penetrate than China. While both are emerging
economies, the Chinese experience w as only of limited use in India. In particular, the online sales channels
were - so far - less effective: first, Xiaom i does not enjoy the sam e attention in online tech circles and
hence did not gather the sam e extent of buzz. In part, this w as because many Chinese like Xiaom i because
it represents the Chinese entrepreneurial spirit, an appreciation that is difficult to replicate abroad. Second,
online retailing w as still in its infancy in India, mainly because the physical infrastructure to bring online
ordered products to consum ers is not in place. Thus X iaom i adapted its business m odels by collaborating
with phone operator Bharti Airtel and electronics retailer MobileStore to develop more traditional distribu­
tion channels - but this increases its costs.
A different challenge of internationalization is the possibility of global com petitors claim ing intellectual
property rights (IPR) infringement. IPR disputes are com m on am ong sm artphone giants; Apple and Sam­
sung have been fighting court battles in several countries for years. While the nature o f IPR is often dis­
puted, claim s of IP infringement have become an effective, if costly, w eapon of competition. In China, many

C o p y rig h t 2 0 1 6 C e n g ag e L ea rn in g . A ll R ig h ts R e se rv e d . M a y n o t b e co p ied , sc an n e d , o r d u p lic ated , in w h o le o r in p art. D u e to elec tro n ic rig h ts, so m e th ird p a rty c o n ten t m a y b e su p p re ss e d fro m th e e B o o k a n d /o r e C hapter(s).
E d ito ria l re v ie w h a s d e e m e d th a t an y su p p re ss e d c o n te n t d o es n o t m a teria lly a ffec t th e o v e ra ll le a rn in g ex p erien c e. C e n g ag e L e a rn in g re se rv e s th e rig h t to re m o v e a d d itio n a l c o n te n t a t any tim e i f s u b se q u e n t rig h ts restric tio n s re q u ire it.
510 PART S IX INTEG R A TIVE CASES

IPR that are not specifically registered in China cannot be enforced. Yet once com panies operate outside of
China, and become big enough to be able to pay large fees, they become the targets o f IPR lawyers. Thus
Xiaom i and other Chinese sm artphone m akers have armed themselves with Google executives and Silicon
Valley lawyers seasoned at navigating the perilous waters between w ar and peace in IPR.
Xiaom i experienced its first foreign IPR conflict in India. In December 2 0 1 4 , Ericsson sued X iaom i in
an Indian court for IPR infringement, and the Delhi H igh Court ordered Xiaom i to suspend its sales in
India. A few days later, the ban w as reduced to a specific product with a specific chip m ade by MediaTek
o f Taiwan. Yet the ban w as reintroduced a few months later when that particular phone w as found to still
be on sale in India through an online retailer that Xiaom i claim ed w as not an authorized retailer. While
sorting out this specific legal battle, X iaom i had to prepare itself for bigger battles to be expected when it
entered other m arkets around the world.

Sources: (1) BBC News, 2014, China’s Xiaomi becomes most valuable tech start-up, December 30; (2) CCID Consulting, 2012, Strategic Analysis
on Chinese Smartphone Industry; (3) South China Morning Post, 2014, Chinese companies drive commoditisation of smartphone market, August
18; (4) Wall Street Journal, 2014, HTC One (M8), March 25; (5) C. Clover, 2015, Self-made in China, a smartphone billionaire, Financial Times,
January 3; (6) Xiaomi’s microblog, 2013, www.weibo.com, November 28, accessed March 2015; (7) E. Dou, 2015, Five things Xiaomi does to
cultivate fans, Wall Street Journal, April 6; (8) C. Clarke, 2015, Rebel, geek, or both? CEIBS Link (Alumni Magazine), no 1, p. 38-44; (9) T. Hout
& D. Michael, 2014, A Chinese approach to management, HBR, September, 103-107; (10) T Bradshaw, 2015, Xiaomi Mi Note, Financial Times,
February 27; (11) South China Morning Post, 2014, Chinese companies drive commoditisation of smartphone market, August 18; (12) K. Benner,
2015, Xiaomi’s passage to India, Bloomberg view (blog), April 1; (13) S. Mundy & S. Jung-A, 2015, Profits blow sends Samsung back down to
earth, Financial Times, January 9; (14) Sohu, 2014, The price war between Xiaomi and Huawei, roll.sohu.com/20140322/n397023827.shtml,
accessed March 2015; (15) J. Coughin, 2015, Mobile Battlefield, CEIBS Link (Alumni Magazine), no 1, p. 28-31; (16) S. Yu, 2014, Why Huawei and
ZTE cannot sue Xiaomi for patent infringement? tech.sina.com.cn/t/2014-11-26/doc-iavxeafr5; (17) Bloomberg Businessweek, 2014, Samsung’s
China problems come to India, October 27: 44-45; (18) The Economist, 2014, Smartening up their act, October 25; (19) J. Crabtree & C. Clover,
2014, India ban threatens Xiaomi’s overseas expansion, Financial Times, December 11; (20) J. Crabtree, 2015, Indian court to investigate Xiaomi in
Ericsson case, Financial Times, February 5.

DISCUSSION QUESTIONS
From an institution-based view:
1 How has Xiaomi been able to leverage the institutional environment in China to challenge global players such
as Samsung and Apple?
2 What obstacles would it have to overcome to similarly succeed in India or Brazil?

From a resource-based view:

3 What resources has Xiaomi been able to create to enable its growth in China? Do you believe it has a sus­
tainable advantage in China?
4 What obstacles to transferring resources to India and Brazil is Xiaomi likely to experience, and how to you
suggest overcoming them?

C o p y rig h t 2 0 1 6 C e n g ag e L ea rn in g . A ll R ig h ts R e se rv e d . M a y n o t b e co p ied , sc an n e d , o r d u p lic ated , in w h o le o r in p art. D u e to elec tro n ic rig h ts, so m e th ird p a rty c o n ten t m a y b e su p p re ss e d fro m th e e B o o k a n d /o r e C hapter(s).
E d ito ria l re v ie w h a s d e e m e d th a t an y su p p re ss e d c o n te n t d o es n o t m a teria lly a ffec t th e o v e ra ll le a rn in g ex p erien c e. C e n g ag e L e a rn in g re se rv e s th e rig h t to re m o v e a d d itio n a l c o n te n t a t any tim e i f s u b se q u e n t rig h ts restric tio n s re q u ire it.