November 21, 2014    4 minute read

Is Xiaomi the Apple of the East?

   November 21, 2014    4 minute read

Is Xiaomi the Apple of the East?

In a country famous for producing the iPhone, an unlikely contender for the title of most prolific Smartphone maker has arisen. Founded just 4 years ago by a self-described Steve Jobs acolyte, Xiaomi has experienced a meteoric rise in recent years and entrenched itself as a major Smartphone vendor in China, with plans to expand internationally primarily into the remaining BRIC economies.

In conjunction with its distinct pricing strategy, Xiaomi’s strong position in heavily populated and rapidly growing emerging markets has resulted in a tripling of its global Smartphone shipments for the third quarter on a year-over-year basis, rising to 17.3 million units up from 5.6 million. This obvious success of Xiaomi and its founder Lei Jun’s Jobsian habit of dressing in black turtlenecks and blue jeans, makes it almost inevitable that foreign media such as the New York Times would dub Xiaomi as the ‘Apple of the East’.

Earlier this month, Bloomberg reported that Xiaomi are in talks for a round of funding that would value the company at approximately $50 billion. This would give Xiaomi a price-to-sales ratio of 0.24, assuming estimated annual revenues of $12 billion and a multiple of over 4 times projected sales. Apple in comparison has a P/S ratio of 0.33 or a multiple of only 3 times projected sales, thus emphasising the extent to which investors believe in Xiaomi’s future growth.

So what does Xiaomi itself think of the constant comparisons to Apple? In a 2013 interview, CEO Lei Jun stated that he dislikes the description of Xiaomi as China’s Apple and that ‘the core problem is people don’t understand Xiaomi.’ This sentiment has been vocalised on numerous occasions since Xiaomi rose to prominence in Western markets – especially by local commentators in Asia. Rather than being a mobile company, as is commonly cited in the media, Lei Jun argues that Xiaomi is in fact an Internet company and more akin to companies such as Google and Amazon.

Lei Jun likened Xiaomi selling mobile phones to that of Amazon selling Kindles; both Amazon and Xiaomi sell their hardware at near manufacturing cost in order to establish a large user base where they then profit from high margin software sales. Xiaomi has adopted an aggressive price point for their Smartphones of between $100-$330, compared to $600 for Samsung’s high end Galaxy models and about $1000 for Apples new iPhone 6. Samsung Galaxy devices and Apple IPhones are largely unaffordable to the average consumer in emerging markets, a fact that Xiaomi has exploited in its aggressive pricing strategy. Cheap but powerful devices as well as a successful marketing strategy – including limited run flash sales – have helped to differentiate Xiaomi from other Chinese Smartphone manufacturers.

Xiaomi reported an unprecedented demand when it launched its Mi3 in China, India and Singapore. In India 10,400 units were sold out in 2 seconds, over 100,000 units were purchased in China in 2 minutes and in Singapore consumers were frustrated by a stock shortage after just 2 minutes of selling. Some have criticised Xiaomi for using scarcity marketing to create artificial shortages subsequently increasing the luxury appeal of their phones. However is this any different from Apple? Apple was accused of using the same tactic with their IPhone 6 Plus model this year to create an impression of phenomenal demand.

Regardless of whether Xiaomi has achieved their impressive track record to date through innovation or imitation, as some skeptics have accused, Xiaomi must now look to the future and continue their growth in order to assuage the doubts of present and future investors.

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