Can beaten Xiaomi reclaim its crown?

“Shao-mee", Jain told one of the writers of this story, a few months after he had joined.

He went on to exude a confidence anyone would have been sceptical of. “We will build a brand, and it will be nothing like you’ve seen before. The devices will sell themselves," he had said.

They did. The company cracked the market with the now-commonplace ‘flash sales’ strategy where a limited number of units are put up for sale online. Xiaomi’s phones started selling within minutes. In 2016, the company crossed a billion dollars in revenue. In 2018, it sold over 41 million units, toppling South Korean phone maker Samsung to become India’s No.1 smartphone brand. Defying pundits, the company, whose name was shortened to the easier sounding Mi, stayed in pole position for five consecutive years.

Its fall, however, has been equally dramatic. By the December quarter of 2022, Samsung had reclaimed its position as the top smartphone brand. Xiaomi’s marketshare continued to slide in the first two quarters of 2023—the company slipped to the third position behind Vivo, another Chinese phone maker. Unlikely, Xiaomi can top the pecking order at the end of this year.

Xiaomi is facing multiple headwinds. There is regulatory pressure from the Indian government following rising tensions with China; there’s a shift in the phone market with consumers preferring more premium smartphones; strong demand in offline stores, an area still considered to be Xiaomi’s weakness, is impacting sales; an exodus of executives across the board has added to the woes.

Jain, the face of the company for many years, left in January this year. A new management is in place and a bounce back strategy is being chalked out for 2024. But rivals, including Vivo, have smelt blood. They aren’t sitting idle either. The big question is, can Xiaomi repeat the magic of the past and reclaim its crown.

But first, let’s understand what fuelled the company’s meteoric rise in India.

The Rise

The rise was the result of a number of enablers coming together.

The company worked on high-demand low-supply mismatch—the flash sales model we mentioned before. This, in turn, created exponential word of mouth marketing for the brand. By the time it launched in India, it was already called the ‘Apple of China’, having become popular for selling iPhone lookalike devices for a-tenth of the price. Xiaomi capitalized on this fervour and launched its first device in India, the Mi3 in July 2014.

The go-to-market strategy was through digital marketplaces. Mi3 caused the website of Flipkart, India’s largest online marketplace, to crash. The first lot of 10,000 phones was sold out in minutes. A week later, another lot of 10,000 phones ran out of stock—this time in seconds. By the end of the year, it had sold a million units. Xiaomi had arrived.

Xiaomi caught up with Samsung, the market leader back then in terms of volume market share, by 2017-end. It overtook the South Korean rival the next year and continued its ascent for the next five years.

“They exploited the digitalization trend and introduced the concept of flash sales as a marketing tool," said Sanyam Chaurasia, technology market analyst at Canalys, an advisory firm. “For a new player, e-commerce platforms provided a jumpstart as they could penetrate the market quickly in a cost-effective manner instead of the offline retail channel route which takes more time."

The composition of the market was also very different back then. Annual smartphone sales in India were in the range of 60 million units in 2014—comparable to a good quarter’s sales today. Besides Samsung, the dominant players were local brands like Lava, Gionee, Karbonn and Micromax. These were considered weak in technology and the onset of transition to 4G provided the opening for Xiaomi to exploit it.

“Riding on the experience from China where 4G had already started, Xiaomi got its product strategy right," said Tarun Pathak, research director at Counterpoint Research, a market research firm. “They were striking the right chords by riding on the trends driving the market."

Features such as dual and triple cameras, better chipsets and more storage memory helped Xiaomi stay ahead of rivals.

By 2020, the company was so well entrenched, that even the wave of anti-China sentiment, following the clashes in Galwan, did not impact its prospects much. It did lose market leadership to Samsung in the third quarter of 2020 but the company bounced back in the very next quarter.

Other companies did not anticipate online sales to take off in the way they did, said Navkendar Singh, associate vice president at IDC India, another market research firm. “Even Vivo and Oppo were focused on offline and Samsung took time to understand the shift," he added.

The Fall

This brings us to the question: what went wrong?

Just like there were multiple factors that propelled Xiaomi to the top, there is more than one reason for its fall.

While the company survived the wave of anti-China sentiment from consumers, regulatory challenges hit it hard. In December 2021, the income tax department carried out searches in the company’s premises on tax evasion charges. Then, in April 2022, the enforcement directorate questioned Manu Jain on the Foreign Exchange Management Act (Fema) violations. Allegedly, the company remitted foreign currency to three overseas entities in the guise of royalty, violating the central bank’s guidelines. The company refuted the allegations. A fortnight later, the enforcement directorate seized ₹5,551.27 crore belonging to Xiaomi Technology India Pvt Ltd under the provisions of Fema and issued show cause notices to Jain and other executives.

All this happened at a particularly bad time for the company—the demand for smartphones had begun to taper. In the second quarter of 2022, sales recorded a sequential decline, which deteriorated into a year-on- year decline the next quarter. Since then, sales have fallen for four consecutive quarters. In the build-up to the festive season last year, Xiaomi was carrying high inventory—that hurt.

Meanwhile, the sales mix of smartphones changed (see chart). Entry level phones, where Xiaomi ruled, are a declining market. Xiaomi phones start at ₹6,999 and the bulk of their sales are generated in the sub- ₹25,000 category.

“If the entry level segment starts growing, Xiaomi is likely to benefit the most as well. However, I do not see that happening at least in the immediate future," said Singh of IDC.

The company’s product portfolio itself was bloated. There are 14 smartphones listed on Xiaomi’s website, five of which are out of stock and possibly being phased out. Another 17 are listed on its sub brand Redmi’s website; six of them are out of stock. This could have been a fallout of the supply chain shortages during the pandemic when chipsets were hard to get but demand was high. Xiaomi expanded the range by adding products depending on chipset availability.

Xiaomi also missed a trick. While the company was ahead when it came to the transition to 4G, it is playing catch up now with 5G. Phones enabled with 5G are typically pricier and Xiaomi did not adequately spend on brand building to lure the premium buyers, something Samsung managed well.

“The biggest challenge for Xiaomi will be to sync with the new pace of the market while also increasing its mind share in the premium segment," said Pathak of Counterpoint.

Rise again?

Xiaomi’s recipe for a comeback is built on fixing all the issues it is facing, starting with decluttering its portfolio. It wants to become a leaner and more nimble organization while expanding its offline footprint.

“We are going to the market this year with a significantly cleaner and leaner portfolio," Xiaomi India’s president Muralikrishnan B told Mint during a recent interaction. The number of models it will bring to market in 2023 could be pared by a fourth.

There is also an increased thrust on affordable 5G handsets. On 1 August, it launched the Redmi 12 5G at ₹11,000, making it one of the cheapest 5G phones available in the country.

Meanwhile, Xiaomi has expanded its offline presence. Yet, it is highly reliant on online sales—this channel accounts for 66% of its sales. In comparison, for Samsung, 57% of sales are generated in offline stores. Beefing up offline stores is critical for Xiaomi since consumers prefer buying the more expensive phones from a physical retail outlet.

“We are aware that we are lagging behind on our offline presence. So, we are beefing it up," Muralikrishnan said.

The results would take time to show. Unlike five years ago, the competition is tougher now and the demand has slowed. It is going to be a slow and hard grind. Muralikrishnan realizes this and is in no hurry to be the No. 1 this year.

“We are placing more long-term bets for 2024 and beyond. If they play out as intended, we will go back to where we came from," Muralikrishnan said.

Even if Xiaomi reconnects itself with the pulse of the market, there is one major uncertainty that might upset its calculations—India’s regulatory framework. How the regulatory framework shifts will have a major bearing, going ahead. “We can’t read the mind of the government but it is clear that if you are not adding more value to your operations in India, there will be some action. Xiaomi needs to be wary of that," said Singh of IDC.

Xiaomi claims to have made good progress towards localization in phone assembly. Currently, the company’s domestic value addition is between 17% and 18%, depending on the model. Xiaomi has localized battery charger, cable, camera modules, front and back covers. This year, it is working on display modules, fingerprint sensors, vibration motors and multiple die-cuts, besides PCB bare-board and battery cells.

“Our goal for 2023-26 is to increase value addition by 50% by broadening and deepening components sourced locally," Muralikrishnan said. “Now, around 35% of non-semiconductor bill of material is sourced locally. In two to three years, we want to double it to 70%," he added.

Xiaomi outsources its assembly operations to six electronicsmanufacturingservices companies in India.

“The brand can always make a comeback. They are focusing on stabilizing the operations first instead of driving the highest volumes. The new strategy of focusing on 5G in the affordable segment ( ₹10,000– ₹15,000) seems to be good," said Pathak of Counterpoint. “This is a very crucial period for Xiaomi and could be one of the most challenging," he added.

On 4 August, when the Redmi 12 5G went on sale on Amazon India, the entire lot was sold out on the first day itself. As per Xiaomi, the model became the largest selling 5G phone in the country.

To bounce back, the company will need many more such days.