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Xiaomi enter U.S. Market With Accessories And Sells Out

Xiaomi is a busy company. The fast-growing Chinese smartphone maker, which is valued at $45 billion, sold 61 million handsets last year, mostly on its home turf. It’s now going after other big markets like India, and testing the waters in the United State andEurope.

This week, Xiaomi opened up its Mi online store for U.S. and Europe consumers. Everything sold out within 30 minutes, suggesting Xiaomi’s affordable-yet-high-quality formula resonates with consumers in the West.

Mind you, the Mi store didn’t offer Xiaomi’s slick smartphones to Americans or Europeans. It sold four accessories: two battery packs for $10 and $14 respectively, a pair of headphones for $80, and a fitness tracker for just $15. Shoppers snapped up a combined 200,000 units, before the store’s virtual shelves were empty.

“There’s a market for lower price point, mass market, high quality goods in the U.S. and Europe,” said Hans Tung, managing partner at venture capital firm GGV Capital, who was an early investor in Xiaomi. “This was a huge number — you just don’t see that with U.S. products.”

Tung is also an investor in Wish, a mobile shopping application that sells cheap goods mostly sent directly from China, and which just recently raised more than $500 million at a $3 billion valuation.

Xiaomi is using its Mi store as a way to test the appeal of its brand in the West well before it attempts to sell phones to U.S. and European consumers. At an event in San Francisco in February, Hugo Barra, the former Google executive who is now in charge of Xiaomi’s global expansion said that getting phones certified in the U.S. and setting up logistics for their distribution will take time.

The four devices sold in the Mi store were built by Chinese startups that are part of Xiaomi’s growing ecosystem. Their quality is nothing to sniff at. 1More, the maker of the headphones, was founded by Gary Xie, a 10-year veteran of Foxconn who worked on manufacturing major U.S. devices like the Apple's AAPL +0.92% iPod and Amazon’s Kindle. Zimi, which makes the power packs, sold 20 million of them last year. The companies are among an expanding stable of Chinese hardware makers that offer low-cost products that are comparable in quality to anything a U.S. company has to offer.

Xiaomi plans to incorporate more of these device makers into its ecosystem as long as they follow “the Xiaomi way,” which includes listening to customer feedback, responding with updates quickly, and working collaboratively with other Xiaomi partners.

“The startups need to believe in the Xiaomi way of doing things,” said Tung.

Additionally, Xiaomi will sometimes invest a minority share into one of these companies. Xiaomi already has around 100 partners — mostly in hardware — and invested in 30 so far. (Tung has invested in several of the Xiaomi partners, like 1More and Zimi.)

Tung said the idea of working with an ecosystem of device partners came from Xiaomi CEO Lei Jun in 2013. Jun, who founded Xiaomi in 2010, realized the company needed to sell more than just phones to satisfy China’s technology-hungry consumers but would lose focus if it tried to diversify too quickly.

“If Xiaomi tries to do everything themselves, it’s going to be hard to scale,” said Tung.

Xiaomi and its ecosystem partners are able to keep its devices cheap by cutting expenses like marketing and by relying on the sale of services to go along with the devices.

“We have no sales and marketing overhead,” said 1More CEO Gary Xie. “The whole team only does one thing, listen to customers opinion. And the more customer recommendation, the better we do. Everybody is just focused on product, and this product gets more people coming. A single bad comment matters a lot.”

This approach sits in stark contrast to the Apple and Samsung, who rely on high-margin devices.

“It’s much more flexible and the supply chain is much more cooperative,” said Tung. “Samsung has more of a Japanese tradition of totally controlling the market.”

There are some trade offs in partnering with Xiaomi, notably that manufacturers have to share a large chunk of their revenue with the company. But the partnerships allow the startups can scale much faster than any U.S. hardware startup ever could and ride on Xiaomi’s coattails.

Tung advises hardware startups to follow Xiaomi’s low-cost model and to emulate its go-to-market strategy which is launch in China, before jumping to other high volume markets in Southeast Asian, India and Brazil. “Everybody in the U.S. cares about high margin and wanting to be the next Apple of their category,” said Tung. “But that doesn’t make sense. If you make it more affordable, more people are going to try it out.”

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