Why Xiaomi Can’t Succeed Without India

by Anil K. Gupta

from <Harvard Business Review>

Just five years after its launch, Xiaomi, the Chinese smartphone maker, has become the world’s most valuable startup. Its market value of $46 billion (as of June 2015) is larger than that of Uber, Snapchat, or even Palantir.

Last year, Xiaomi overtook Samsung to become the leader in the Chinese market. The company uses direct sales from its web site; social media; fan engagement; and weekly updates to its Android-based operating system to get ahead of rivals. It sells smartphones comparable to Samsung’s high-end models at prices that are 30-50% lower. That’s partly because Xiaomi subsidizes hardware prices, according to analysts, by selling software and services through a proprietary apps store.

Strangely, Xiaomi has made no secret of its belief that India — China’s neighbor and biggest geopolitical rival in Asia — is central to the realization of its global ambitions. India has already become Xiaomi’s second largest source of revenues, after China, just a little more than a year after the company entered that competitive market.

During a visit to India in late April 2015, Xiaomi’s CEO Lei Jun launched the India-designed Mi 4i smartphone — the first time Xiaomi has debuted a new product outside China. He wooed the Tata Group’s Ratan Tata to become an investor in the parent company. Lei Jun also said that Xiaomi intends to become more Indian by setting up a R&D center, a manufacturing facility, and a data center there, and by investing in local companies.

India will, most likely, play four roles in Xiaomi’s global game plan.

1. Xiaomi could grow faster in India than it did in China. While the Chinese market is close to saturation with over 70% smartphone penetration, the corresponding number for India is less than 20%. Given their lower per capita incomes, Indian customers are more price conscious than their Chinese peers, and will be drawn to Xiaomi’s products. Success in India will give Xiaomi not only revenue-growth, which will help sustain its valuations, but also the economies of scale to drive down component costs — important for the company to maintain its cost advantage.

2. India provides Xiaomi with a learning opportunity. In order to succeed outside China, Xiaomi must figure out how to tweak its business model. For instance, Google dominates the Android app store globally, which prevents the Chinese company from using app store revenues to subsidize smartphone prices. Figuring out how to win profitably in India, which is predominantly Android territory, will dramatically increase the prospects for success in other emerging markets. In addition, India provides Xiaomi with an opportunity to experiment with new products and business models.

3. Market leadership in China and India, the two biggest markets for low-priced smartphones, is critical if Xiaomi is to keep competitors at bay. They will imitate its business model: Lenovo is already experimenting with online-only sales of Motorola cellphones, a business it recently acquired. However, staying ahead in both China and India will provide Xiaomi a prestigious global edge.

4. Given India’s pool of technical talent, Xiaomi will get an opportunity to create a second R&D hub as well as an English-speaking technical support center there. The latter will be critical to service Xiaomi’s new markets outside China and India.