Only a few years ago, Xiaomi was worrying Apple Inc. (NASDAQ:AAPL) investors. Xiaomi had become the world’s third-largest smartphone manufacturer and was expanding into other products like fitness trackers, TVs and video streamers. It was valued at $45 billion, hired a prominent executive away from Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and planned an expansion into America.
Today? It has dropped out of the top five smartphone vendors list, marketshare in China has plummeted, the Google exec has jumped ship and some analysts are valuing the company as low as $3.6 billion.
What happened to Xiaomi and is its threat to Apple truly neutralized? Or are the troubled Chinese tech giant’s plans merely on hold?
Xiaomi’s Rapid Rise
Privately held Xiaomi was founded in 2010, released its first smartphone in 2011 and rapidly gained popularity in China. The company offered high-quality in its smartphones, with low pricing –a combination that led to it being the top-selling smartphone brand in China by 2014.
It came seemingly out of nowhere to capture the third place spot for worldwide smartphone sales that year as well. The feat was especially impressive given that Xiaomi was not selling its phones in the U.S. market.
Like Apple, Google and Samsung Electronics Co Ltd (OTCMKTS:SSNLF), the company wanted to expand into consumer electronics in general. That effort included the inexpensive Mi Band fitness tracker that vaulted Xiaomi into second place worldwide for wearable sales by 2015, behind only Fitbit Inc (NYSE:FIT).
The company pursued a strategy of investing in hardware startups, buying into dozens of companies making everything from smart lighting to headphones and TVs. While these products are not always Xiaomi-branded, they are designed to all work well together.
It also added software and services to the mix.
Chinese Competition
The success of Xiaomi spurred homegrown competition. Other Chinese manufacturers stepped up to the plate and followed Xiaomi’s formula. However, they did a better job of marketing to increasingly demanding Chinese consumers by charging a little more but offering more striking designs. One of these companies — Huawei — was good enough that Google partnered with it to build the Nexus 6P smartphone in 2015. Xiaomi’s phones seem lower quality than these competitors and rather than innovative, its designs are often seen as being too similar to Apple’s.
At this point, Xiaomi has been leapfrogged by its Chinese smartphone rivals. While Xiaomi has dropped off the global top five smartphone manufacturer list, China’s Huawei, Oppo and Vivo currently hold the third, fourth and fifth places.
American Obstacles
Key to Xiaomi’s ambitions were an expansion into the U.S. market. To lead that effort, the company hired Hugo Barra — the VP who oversaw Android product management — from Google.
However, Xiaomi’s U.S. push has failed to materialize. There are dozens of products Xiaomi offers online through its Mi Store (which carries only a fraction of Xiaomi’s and its partner companies’ gear), including eight different smartphone models, multiple smart TVs, VR headsets and even a self-balancing electric scooter. U.S. customers are limited to being able to buy a few sets of earbuds, a pair of headphones, a battery pack and a Bluetooth speaker.
A big part of the problem in moving into the U.S. market is that Xiaomi has taken advantage of China’s relatively lax approach to patents. In late 2014, it was banned from selling smartphones in India as a result of a patent infringement ruling (it has since resumed Indian operations). If Xiaomi tried to push into the U.S. with its smartphones at this point, there’s a good chance Apple and other tech companies would sue it into oblivion.
In an attempt to defend against this scenario, Xiaomi has begun buying up patents. Last year, it purchased 1,500 patents from Microsoft Corporation (NASDAQ:MSFT) relating to areas like wireless communication, multimedia and video, and the cloud.
No Longer a Threat to Apple?
At this point, Xiaomi is a paper tiger that is valued at as little as $3.6 billion. In 2015, it sold 70 million-plus smartphones, missing its initial goal of 100 million and then the revised goal of 80 million. It’s refusing to say how many it sold in 2016, but that silence speaks volumes. Hugo Barra bailed on the company a few weeks ago, joining Facebook Inc (NASDAQ:FB). A few months before leaving, he told Reuters that lower smartphone sales wouldn’t impact the company because it made no money on them:
“Basically we’re giving [handsets] to you without making any money… we care about the recurring revenue streams over many years. We could sell 10 billion smartphones and we wouldn’t make a single dime in profits.”
The problem with that approach is that as of 2015, smartphones still accounted for 95% of the company’s revenue. All those other products and services just don’t seem to be sticking.
Barra also told reporters not to expect Xiaomi to release a smartphone in the U.S. in 2017.
Xiaomi CEO Lei Jun posted a letter to employees on Facebook in January. In it, he admitted the company had pushed ahead too fast, cutting into its long-term growth, but says the worst is over.
The company’s revenue target is RMB 100 billion (roughly $14.5 billion) –the same as its 2015 target. In trying to be so much, so fast, Xiaomi has set itself up for some very challenging times. If treading water is the goal it has set for itself, Apple doesn’t have much to worry about.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
