why xiaomi will rule asia (but maybe not the world)

Technology

102 | GlobeAsia December 2014

X iaomi has not been traditionally known as an innovative company and up until a few months ago it was a brand many outside

of China were unfamiliar with. Even those that followed technology and smartphones generally viewed Xiaomi as a poor approximation for Apple. Then this October research firm IDC released a report naming Xiaomi the number three smartphone seller globally.

In a minuscule amount of time Xiaomi was able to not only make an impression but has actually become a force to be reckoned with in the world of smartphone manufacturers. But how did a largely unknown company explode with such ferocity in the marketplace so as to come out of nowhere to win the bronze in the smartphone wars? All this is impressive in and of itself, but with rumors of a huge infusion of additional cash flying about, does Xiaomi have a shot at the gold?

Some context: The Mi4 launchIn the interest of context, Xiaomi fortunes really took off with the launch of the enormously successful Mi4 in August. The launch boosted their third-quarter numbers (almost 17.3 million smartphones sold) putting them behind only Samsung and Apple in the smartphone marketplace with Samsung taking the top spot and Apple following behind.

The fact that Xiaomi is so close on the heels of Apple must make some people at Cupertino very worried. For many years Xiaomi and its CEO were seen as Apple copycats, but with these numbers they have gained some serious legitimacy. The brand has become famous for producing quality products at reasonable prices

and this strategy has served it extremely well, particularly in the developing world.

A report from the Financial Times early in November quoted unnamed sources saying Xiaomi was in talks with investors to raise almost $1.5 billion in new funds at an astronomical valuation said to be in excess of $40 billion. Just to put this in perspective, that kind of valuation would exceed Sony and Lenovo put together. While negotiations are still ongoing, this would match Facebook’s cash injection in 2011 and would be the largest such deal in recent memory.

Similar products, wildly dissimilar strategiesA growth rate like this for a company not particularly known for innovative products is really remarkable, and if you’re wondering how this could happen, the short answer is that while the devices themselves may bear a striking similarity to their competitors, almost everything else about Xiaomi from the way it promotes its products to the way it distributes and supports them screams innovation.

Xiaomi thundered into this industry because its strategy was very distinct from other smartphone manufacturers. In particular Xiaomi has made a business out of focusing on emerging markets while most manufacturers like Apple continue to see their main market as the US. Smartphone users in developing countries have long felt like second-class citizens, wrestling with higher prices and even worse customer service from the big manufacturers but Xiaomi appears to buck the trend, and this has made all the difference for the company.

Consider Apple’s re-launch of the iPhone 4 in India in early January. Apple was roundly criticized both in the press and online for using India as a dumping ground for a model that was four years old at prices that were thoroughly uncompetitive with what was available on the market. The criticism was fair and the re-launch met with about the same enthusiasm as Ebola in West Africa - although with significantly less market penetration.

Why Xiaomi will rule Asia (but maybe not the world)

In a minuscule amount of time Xiaomi was able to not only make an impression but has actually become a force to be reckoned with in the world of smartphone manufacturers.

December 2014 GlobeAsia | 103

Jason FernandesTech commentator and the founder of SmartKlock.

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Compare that with Xiaomi’s recent launch of the Redmi 1S in India. Xiaomi showed its understanding of the price-conscious Indian market by offering the best price/performance ratio that consumers there had seen in a long time. In return, the company was rewarded with a tremendous response and a plethora of free publicity.

As smartphone sales in the developed world drop, manufacturers will increasingly be judged on their ability to grow and maintain markets in the developing world, where market saturation is not yet a problem. Indeed Lin Bin, co-founder of Xiaomi, showed a keen understanding of this when he was quoted in Business Line saying

that the “Chinese smartphone market is nearing saturation while in India the market is just beginning to grow.” With its massive growth in China and its insanely popular flash sales in India, Xiaomi does appear to be poised at the precipice of greatness.

Xiaomi is not a hardware companyProbably the most intriguing thing about Xiaomi is that the third largest seller of smartphones in the world does not see itself as a phone manufacturer or even a hardware company at all.

Xaiomi’s CEO Lei Jun has been at pains to point out that Xiaomi makes the majority of its money not on

devices but on its software and mobile ecosystem. Statistically Xiaomi’s users are more engaged, spending more time on apps than those users owning competing devices. This is a key metric since the company’s principle focus where revenue concerned is with the software itself and not its devices.

Xiaomi’s phones run a highly customized version of Android called MIUI that includes Xiaomi’s own Play Store competitor. Certainly not chump change, the company makes almost $4.9 million monthly from apps and themes sold on its store.

Unlike most smartphone manufacturers, who have traditionally developed software only

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to sweeten their hardware offerings, Xiaomi views its devices simply as carriers for their software. Judging from their monthly incomings, the strategy has thus far worked out fairly well for Xiaomi.

Unique distribution channelsXiaomi has repeatedly said it spends almost nothing on marketing, passing on those savings to consumers. If the numbers are to be believed, this seems to resonate with its customers whose response has been overwhelmingly positive. The company also uses exclusive deals with retailers online to cut down on distribution costs.

In another highly controversial strategy, Xiaomi has been using flash sales to sell its products, sometimes running out of inventory seconds after the flash sale has begun. While this has certainly caused a fair bit of dissatisfaction among consumers who missed out, it has also undoubtedly built a massive amount of free publicity and buzz for the company and its products.

With many companies it seems like they are simultaneously courting new customers while trying desperately to avoid previous unsatisfied ones. In contrast, as Lei has himself said in interviews, Xiaomi’s strategy is all about the fan base. Xiaomi is distinct in that they build informal support groups online for their customers where new and old customers interact and share tips and tricks amongst themselves. This works to build trust because potential customers are often uniquely sensitive to feeling like they have been corralled into informational blind spots only to be marketed to.

A case in point is Xiaomi’s entry into the island nation of Singapore. The company created a separate page dedicated to Xiaomi Singapore where it worked hard to build community

trust and create transparency. This has no doubt contributed to the company’s massive success in that country.

Xiaomi has also turned the tide by taking after-sales service very seriously. Many smartphone buyers are deeply concerned about warranty service because for many in the developing world smartphones are expensive big-ticket items. In India alone, the company has already set up 36 service centers in 20 cities.

While Apple has a pretty decent reputation with regards to after-sales service, many other manufacturers are sorely deficient on this point. At least anecdotally, my personal experience in dealing with Samsung’s warranty service has completely put me off their products, so realistically Xiaomi only has Apple to contend with on this point.

Xiaomi will likely struggle in some marketsUnfortunately for Xiaomi, quite a few of the strategies that made it successful in Asia are not transferrable to the West. Cheap handsets in a carrier-subsidized market like the US are not likely to sway any buyers. Even the incredibly powerful Nexus 5 was unable to buck this trend. While the Nexus had all the

right features and even a fair price, customers in the US are accustomed to buying carrier-subsidized or free phones. This is not an option for Xiaomi unless it finds itself a US carrier to partner with very closely.

Xaiomi’s flash sale method may or may not be successful in the west but its customer service strategy will likely make less of an impact in North America where customers already expect and receive a high degree of service.

Probably more troubling given how Xiaomi makes its money is how popular existing ecosystems like Google’s Play store are in North America. The buy-in for Google and Apple’s store is huge whereas Xiaomi will have a hard time convincing anybody to switch to their customized MIUI app store.

Regardless of how it does in the West, Xaiomi’s $1.5 billion cash infusion will be enough to firm up its hold in the developing world and there is still plenty of growth to be had in emerging markets like India, Indonesia and Brazil. Sources close to the company have said that the infusion will be used to grow emerging markets and Xaiomi has proved they can do that really well.

Given what they’ve done thus far it would be fascinating to see how Xaiomi adapts when it enters the US market. Whatever they do will likely be a strategy nobody has really tried there yet but it is unlikely they have a shot at the top spot anytime soon. Still, the smartphone market has proved fickle in the past; one night’s belle of the ball is the next morning’s pariah. Both Blackberry and HTC have had their time in the sun but are now quite shriveled up, still on their feet, but on life support. It could go either way for the company but with a war chest like Xiaomi’s I wouldn’t count it out any time soon.

Smartphone users in developing countries have long felt like second-class citizens, wrestling with higher prices and even worse customer service from the big manufacturers but Xiaomi appears to buck the trend, and this has made all the difference for the company.

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12 | GlobeAsia December 2014 A Media Holdings Publication

Columnists22 Steve Hanke Currency wars, the ruble and Keynes

26 Wijayanto Samirin Blackout

98 Jamil Maidan FloresA tale of two archipelagos: The Philippines and Indonesia

102 Jason Fernandes Why Xiaomi will rule Asia (but maybe not the world)

124 Keith Loveard Feeding the chickens

128 Scott YoungerRoads: Jakarta, Bandung and beyond

contentsVOLUME 8 NUMBER 12 / DECEMBER 2014

Special report120 The Mahakam block revisited With Total E&P Indonesie’s oil and gas contract with the government set to cease in 2017, what’s on the horizon for the Mahakam block?

event130 Lippo Group Fun Family Fair

Interview110 Empowering the youth of IndonesiaSocial enterprises are becoming popular around the world, as commerce is bal-anced against achieving social benefit.

112 A new era in online travel Kathleen Tan, CEO of AirAsia Expedia, shares how the internet and social media have shaped the way people do travel business in the digital era.

Special report118 The $61-billion propositionAs President Joko Widodo promoted Indonesia Incorporated at the APEC, ASEAN and G20 summits last month, an investment summit was held in Jakarta to discuss the opportunities and challenges of realizing $61 billion of US foreign direct investment in Indonesia.

Living the Good Life142 Island lifeDenverino Dante gets sand between his toes on a beach - indeed an island - all to himself.

Back Page144 Old Pekalongan City Hall

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Companies106 Driving innovationOne of the largest companies in the world, General Electric has been operating in the ASEAN region for more than half a century.

108 Starting from scratchRama Datau had to start from the bottom of the sprawling Gobel Group’s ladder, but he was earnest about learning the ropes and today he is part of a new generation driving the company forward.

106


Indonesian presidents do not travel economy class. Well not unless they are Joko Widodo.On a recent trip to Singapore to

attend his youngest son’s graduation, President Jokowi, as he is affection-ately called, and his family travelled in economy class on Garuda, causing a stir both at home and in the island republic. And while in Singapore he took selfies with his son’s classmates and had breakfast of nasi lemak with Singapore Prime Minister Lee Hsien Loong.

The president declined to use the official plane because he said he was on a private trip. He and his wife even paid for their own tickets. The Man of the People was truly living up his reputation.

GlobeAsia opened 2014 with then Jakarta governor Joko Widodo on its cover as the Man of the Year. We then predicted that he, more than any other Indonesian, would have the greatest impact on the nation in the course of the year. Thankfully we were not wrong.

Having said that, no one could have predicted just what an impact this humble man from Solo would have on the country and its people. He has not only redefined politics in Indonesia but is redefining how public officials behave and work. His

famous blusukan is now standard practice among politicians of any stripe.

It is no surprise that we close the year with President Jokowi front and center once again. He tops our Power 50 list not just because he occupies the number-one job in the land but because of the force of his personal-ity and the way he has transformed politics.

To say that he is a transforma-tional leader is not bluster. He has brought new blood into the cabinet, many of his ministers new to the game but successful individuals in their own right. The president is not shy of taking tough decisions as he showed by cutting fuel subsidies. And despite heavy criticism, he has stuck to his choices and his decisions.

That is the mark of a great leader. But he has a long way to go and many challenges to overcome including creating greater economic equality, combating nepotism and corruption, building infrastructure and maintain-ing religious and ethnic tolerance.

The Indonesian people have put much faith on his slim shoulders. A man of action, he is unlikely to fail them, at least not without trying.

Shoeb KagdaEditor in Chief

Editor’s NoteEditorialEditor in ChiefShoeb Kagda

Managing Editor Yanto Soegiarto

Deputy Editors Muhamad Al Azhari

Editor at LargeJohn Riady

Senior EditorAlbert W. Nonto

Contributing EditorsFarid HariantoSteve HankeScott Younger

ContributorsSuryo Bambang SulistoWijayanto SamirinFrans WinartaJason FernandesJohn Denton

Special ColumnistJamil Maidan Flores

ReportersVanesha ManuturiDion Bisara

Copy EditorGeraldine Tan

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