Madhur  Singhal  March  2014  

 

The  next  genera6on  of  Xiaomi's  growth  story:  Capturing  the  Indian  Smartphone  Market  

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Executive summary

Xiaomi experiencing rapid growth due to success in Chinese market •  >5 billion handset revenue in 2013; targeted to sell 40m units in 2014 •  International expansion imminent next step

India poised to be 2nd largest mobile market after China by 2017 •  India is fastest growing smartphone market globally with smartphone shipments projected to increase

to 156m units by 2017 (28m units shipped in 2013) Feature phones still dominate Indian market share, as handset prices decline

•  Smartphone penetration < 20% •  Xiaomi needs to focus on the conversion of featurephone users and building service capability

Competition in the Indian handset market is dominated by Samsung and Micromax •  Driving brand awareness over domestic brands will be a challenge for Xiaomi •  Xiaomi needs to address Micromax's weakness in after-sales service in its value proposition

Indian consumers are highly price conscious and heavily content-focused •  Strong growth in the 'affordable' and 'mid-range' smartphone segment, priced between Rs 5-25k •  Xiaomi's ability to customise content, form partnerships and understand user behaviour is critical

Xiaomi should partner with Flipkart and consider controlled retail and operator partnerships •  Partnering with trusted e-commerce leader Flipkart, adopting cash and carry model is recommended •  Distribute in 5 cities leveraging specialized retailer and single operator partnership to control supply

Xiaomi's India market entry strategy uncovered....

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Positioning Xiaomi for future success High-growth and increasing smartphone penetration make India an attractive market to enter

Xiaomi experiencing rapid growth •  Success in Chinese market •  International expansion imminent next

step

Sales growth driven by rapid adoption •  >5 billion handset revenue in 2013 •  Targeted to sell 40m units in 2014

Indian mobile market opportunity is ripe

•  Poised to be 2nd largest mobile market after China by 2017

Product and service proposition is prime •  Xiaomi well positioned to capture market

share within 3 years with right mix of product and distribution

Prioritize growth and entry opportunities •  Understand Indian market dynamics •  Evaluate market and best mode of entry

given competitive landscape

Focusing on identification and execution •  Identify target segment, product and

channel strategy •  Utilize Xiaomi forums and feedback

sources to identify consumer ‘pulse’

Next Steps

Context Objective

Speed is critical for Xiaomi to penetrate the dynamic Indian market

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Xiaomi to adopt 3 pillar strategy to guide Indian market entry Target Indian consumer with multi-price handsets through e-commerce and selected channels

On what basis should Xiaomi enter the Indian mobile market?

Product & Price

•  Enter market with handsets Rs 5-25k, emphasizing importance of service-oriented

model •  Partner with local content providers and developer communities to build service

model

Channel Strategy

•  Immediately adopt e-tailer channel and build service ecosystem •  Consider specialized and controlled retail distribution across 5 key Indian metro cities •  Explore opportunity to market Xiaomi with single operator in India

Target Consumer

•  Understand Indian mobile landscape and •  Serve & educate new generation of phone users •  Learn from domestic players who have captured market share e.g. Micromax

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The Indian mobile market is primed for immense growth Indian smartphone shipments projected to increase to156m in 2017 while overall usage grows

Despite slower adoption of mobile internet, India is poised to be 2nd largest mobile market worldwide by 2017

India is fastest growing smartphone market globally...

... with 110m mobile internet users expected by 2017

1,284

420355303

233117

0

500

1,000

1,500

2006 2008 2010 2012 2014 2016 2018

India: 110m users by 2017

Japan 6% US 17%

China 33% 1,168

904

700

542

Growth in mobile internet users in India (M)

28293536

138

301

156

663848

183

458

0

200

400

600

+130%

+33%

+52%

+7%

+34%

+460%

India Brazil Japan UK USA China

2017 2013

Growth in global smartphone shipments (M)

Unit Shipments (M) Mobile Internet users (M)

Sources: "India's mobile Internet, Avendus September 2013; "Forecast Analysis: Mobile Devices, Worldwide,2009-2016, 1Q13 Update", Gartner September 2013

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Feature phones still dominate market share in India Driving smartphone conversion critical to success in the Indian market

Source: "The Mobile Consumer" – A Global Snapshot, Nielsen February 2013

Device usage by customer segments

100% 50% 0

Ages 45-64 34% Ages 35-44 29% Ages 25-34 19% Ages 16-24 14% Female 34% Male 18%

100% 50% 0

51% 63%

75% 82%

57% 74%

Featurephones Smartphones

100% 50% 0

80% Ages 16-24 70% Ages 25-34

Ages 45-64 87% Ages 35-44 86%

% of segment

76% 85%

Male Female

100% 50% 0

12% 14%

6% 9%

7% 13%

China

India

Xiaomi has an opportunity to capture the next generation India's smartphone users

Whilst China is a mature smartphone market, India's conversion to "smarter devices " is evident

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Competition in the Indian handset market is fierce Market share dominated by Samsung and homegrown player Micromax

Xiaomi's success in India will largely depend on its ability to differentiate itself in the same segment as Micromax

Micromax emerging as a

dominant player with market share

>20%, growing significantly

40%

10%

0

20%

30%

50% 43%

32%

Samsung

+1,683%

Market Share %

13%

Sony

5% 8%

Karbonn Micromax

23% 24% 30%

+305%

Others

1% 6%

Nokia

5%

11%

2013 2012

Source: "India's mobile Internet", Avendus September 2013

Karbonn, a local entrant is

rapidly gaining marketshare

Top 5 players in Indian Smartphone market

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Lessons to learn from homegrown Micromax Like Xiaomi in China, Micromax is a useful blueprint for success in the domestic market

Micromax emerging as strong player in mobile market

Xiaomi to address Micromax's poor after-sales service by offering consumers extended warranty

490200

2,400

3,168

1,001

4,000

2,500

1,800

0

1,000

2,000

3,000

4,000

5,000

Karbonn

1,500

Micromax

4000+

1,486

Lava Intex

425

+113% Revenue (Cr)

2013 2012 2011

Micromax is expected to emerge as market

leader with revenues > 4000 Cr in 2013 and

could threaten Xiaomi's entry into Indian market

Revenue of leading Indian mobile brands

Key Success Factors

Rural market focused •  ~72% of population is rural •  30-40% tele-density in rural areas Building connect with consumers •  Focused on branding and long-lasting

relationships

Extensive distribution network •  65 super distributors, 1500 micro-distributors,

100,000 retailers + chain exclusive outlets •  Limited/No e-commerce channel use Supply chain •  Agile, adaptable and aligned supply chain

India-wide Value-for-money •  Adapted offering for Indian market and

achieved higher localization 30/106 models are dual-SIM and range

from Rs 1k-14k

Source: ”Supply chain lessons for the new millenium: A case for Micromax Informatics”, Integral Review , December 2012

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Indian consumers price conscious and value-driven Critical for Xiaomi to understand and appeal to the Indian consumer's preferences

Xiaomi positioned well to compete against other OEM's with superior handsets across multiple price points

Source: www.91mobiles.com

80%

60%

40%

20%

0

100%

22%

38%

6%

5%

2012

40%

29%

21%

5% 5%

Basic phones (< Rs2k)

Feature phones (Rs 2-5k)

Affordable phones (Rs 5-15k)

Mid-range phones (Rs 15-25k)

High-end phones (> Rs25k)

2013

29%

100%

80%

60%

40%

20%

0 Samsung

46%

19%

20%

19%

20%

30%

31%

Nokia

15%

Micromax

69%

25%

6%

25%

Sony

33%

42%

Rs 5k-15k

> Rs 25k Rs 15k-25k

< Rs 5k

RedMi: Rs 7,500-10k

Mi3: Rs 18-24k

Mobile launches by price segment indicate preference for affordable segment

Samsung and Micromax are key players in these growing segments...

"Affordable" segment represents the fastest

growing (80%+) segment

New Rs 3000 Xiaomi handsets

(Mid-2015 onwards)

Indian Mobile Launches by price segment

Major Indian mobile players - Sales by price segment

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Which phone would you buy?

Price (Rs) 6,950 7,999 (Target Price) 8,299 Internal Storage 4GB 1GB 4GB

Processor Dual core,1200 MHz, Scorpion Quad Core, 1500 MHz, Cortex A7 Dual Core, 1300 MHz

Dual-SIM Yes Yes Yes

Camera Megapixel 5 MP, 2592 x 1944 8 MP, 3264 x 2448 5 MP, 2592 x 1944

Display Size 5 Inch 4.7 Inch 5 Inch

Resolution 480 x 800 720 x 1280 (312 ppi) 480 x 854 (196)

Source: www.91mobiles.com

Karbonn A111 Smart Micromax A77 Canvas Juice Xiaomi Hongmi

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Smartphone battle shifting from hardware to services As price of handsets decline, competitors are focusing on building software ecosystems

What is their software play?

•  Made no big breakthroughs on hardware but invested in boosting services •  Siri (importance of virtual assistance) •  Removing Google maps (wanted control over maps) risking alienating loyal

users at the expense of building own service platform •  “In the next five years, our software division will earn more than the

hardware. The future lies in the internet—I’m 200 percent convinced of that.” •  Made Rs 100cr (USD 17m) in 2013 through its app store •  Built powerful services including Cloud, Skype, Xbox, Outlook •  Range of service developers to create Windows 8 solutions •  Building re-vamped Nokia music service and Navteq navigation in cars

•  MIUI store and weekly upgrades and available ROMS •  Specialized apps and custom themes •  Multiple consumer feedback forums

Xiaomi stands as the gadget capturing imaginations that are brilliant software and service solutions wrapped in desirable hardware

Major player

Source: www.tech.fortune.cnn.com

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Content is king in Indian market Xiaomi success will be driven by ability to localize, form partnerships and understand user behaviour

Bollywood Sports

•  Cricket most popular sport in India followed by over 1 billion people

•  Large revenues generated through sponsorships, endorsements and TV

Music

Localized Content Category Ideal Partner/s

Revenue Model

Partnering with local content providers and incorporating into the

Indian version of the MIUI is key

CONTENT PARTNER REVENUE SHARE + DEVELOPER REVENUE + SPECIALIZED APPS & CUSTOM THEME REVENUE

•  World largest film industry

•  Part and parcel of the Indian story post-independence

•  Over 1000 films produced every year

•  Mainly Hindi music driven by film industry

•  ~720m Hindi-speakers in India

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Superior after-sales support is key to winning customers Forum and consumer feedback suggests that consumers are ready for Xiaomi in India

English Translation: Dear admin, do you not know when Xiaomi will be coming to India?... They have even hired the VP of Google to help grow their efforts internationally…Please hurry and bring this company to India so that they can ‘kick everyone else’s butt’!

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Xiaomi to partner with key Indian e-tailers and distributors A phased approach is critical to drive customer adoption quickly at scale

State of the Market

•  Retail e-commerce closed to foreign entrants

•  Target early adopters and the emerging affluent

•  Open market sales most prevalent in India (85%)

•  95% subscriptions are pre-paid

•  High-priced handsets generally tie-up with operators

•  Currently operators do not sell sell bundles

Recommendation

•  Sell on Flipkart direct to consumers

•  Partner with selected retail channel covering 5 cities.

e.g. Croma Electronics

•  Single operator partnership

(e.g. Airtel) to explore ways to leverage existing stores and consider bundling options

Benefits

•  Supply chain control •  Fastest go-to-market •  Easy setup •  Logistics support •  Identify early adopters and

access to target consumers •  Trusted established partner

•  Supply chain control •  Reach to mass market •  Direct customer relationships •  People can afford phones

but don’t always have the payment instrument to purchase online (only 5% credit card penetration)

•  Supply chain control •  Network of stores •  Direct customer relationships •  Invest marketing dollars

behind MIUI and ability to educate consumers

E-Commerce Retail Distribution Operator Leveraged

Further exploration and analysis on options required

E-Commerce Retail Distribution Operator Leveraged

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Logistics Partner

3rd Party

In-House

Control of Product Distribution

In-House

Trusted and

proven

Time to implementation High Low

E-Commerce Model* Retail Cash & Carry

Speed of execution and implementation make the ‘Cash & Carry’ model most attractive for Xiaomi entry into India

Partnering with Flipkart is the ideal e-commerce entry Despite Xiaomi’s successful online channel, adopting "cash and carry model" is recommended

Motorola sold 20,000 Moto G devices in India via Flipkart in 1

hour

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Mitigating Actions

•  Xiaomi has the capability to compete head-to-head in the lower priced handsets and can easily bring to market handsets that are in the $50 range

•  Xiaomi is driving the sales of accessories, and has the capability to expand to new devices such as tablets and wearable technology

•  Xiaomi currently has a range of devices targeted at different market

segments •  Xiaomi can leverage its track-record and success in China to

compete with Samsung in India •  Xiaomi can localise content and software and services •  Xiaomi to develop strong relationships with trusted partners in India •  Xiaomi to develop longer-term on-ground capabilities •  Be selective about partners in retail/open market

•  Xiaomi to work with an established partner e.g. Flipkart and helping them to build e-commerce channel by leveraging Xiaomi brand potential

Xiaomi is well positioned to mitigate risks having faced similar issues in Chinese domestic market

Threat

Competitive pressure from domestic players a key threat Despite positive outlook, Xiaomi must address some key issues to succeed in India

•  Domestic players in India will undercut Xiaomi’s business approach in increasing price pressure

•  Samsung is pushing into the middle tier to attract Xiaomi’s users

•  Potential loss of control over

supply chain

•  Consumer adoption of

e-commerce as a purchase channel

Source: "SWOT: Xiaomi, Mobile Devices, Worldwide", Gartner December 2013

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Formulate Branding & Marketing Strategy

•  Craft message library and A/B test to prior to launch •  Scale messages, build hype and listen consumers by engaging early adopters •  Idea 1: Contest giveaway Xiaomi devices at university e.g. Bangalore to build hype •  Idea 2: Run social media campaign to get feedback on what users want at launch

Next Steps & Execution

Build Traction in India

•  Develop network of partnerships with content providers e.g. Spuul, Eros, ESPN, Saavn

•  Build local tribe of developer community •  Hire on-ground personnel to roll-out in India 3 months post initial launch

Understand Indian Market Dynamics

•  Conduct detailed analysis on consumer behavior and validate target segment •  Develop better understanding of key competitors •  Determine long-term success factors specific to Indian market

Formulate Distribution Strategy

•  Determine most optimal retailer/s to partner with and most appropriate deal structure •  Understand how to deal with network operators and structure deal •  Deeper dive into channel logistics

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Appendices

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Parameters Cash and Carry model Retail Model Logistics Model Exchange control implications

•  No approval required •  Requirement to obtain an approval from FIPB

•  No approval required

Probability of the challenge by exchange control regulatory authorities

•  Low – on the assumption that there will be multiple third party vendors

•  The risk assessment could change to high in case the third party vendors are treated to be agents

•  Comparatively higher – the structure may be viewed as e-commerce on a B-to-C model in absence of third party vendors which is currently not permissible

•  No – since the third party vendors will purchase goods directly

Time frame for implementation

•  Can be implemented in a time efficient manner subject to identification of the multiple third party vendors

•  Relatively longer on a account of need to obtain an approval from FIPB which could take about 6-8 months

•  Can be implemented in a time efficient manner subject to identification of the third party vendors

Leakage of profit

•  To the extent of nominal margin to be retained by third party vendors

•  None – as all the profits reside within the group

•  To the extent of margin to be retained by third party vendors

E-commerce Models in India Comparative analysis of the alternatives

Changes: 1) reformatting – red box around cash and carry and stated this is best consistent with recommendation

Recommended model

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1.  Innovative marketing approach and online business model

2.  Innovative MIUI and ROM upgrades to cater to sophisticated users

3.  Xiaomi is building a growing tribe of fans in India (“Xiaomi Tribe)

4.  User feedback leads to flexibility

1.  Quality and after sales services cited as weak

2.  Availability of Google Play in India 3.  Low-cost “hardware as a distribution”

strategy that has been successful for Xiaomi in Chinese market may not be as effective in Indian market

4.  The marketing model that they heavily engage a core set of fans may not work outside China

Xiaomi's business model analyzed Strengths Weaknesses

Threats

1.  Domestic players in India will undercut Xiaomi’s business approach in increasing price pressure

2.  Samsung is pushing into the middle tier to attract Xiaomi’s users

3.  Potential loss of control over supply chain 4.  Relying on the adoption of e-commerce as

a purchase channel to sell Xiaomi products

Opportunities

1.  Expansion in retail channels and achieve mass-market coverage

2.  Converting feature phone users to Xiaomi and educating a new generation of consumers

3.  To build strong focus on user experience i.e. unique brand + MIUI ecosystem leads to value chain differentiation

4.  To create a new differentiated value proposition