Back in 2014, Xiaomi, a Chinese smartphone company (which was also called the Apple of the East once upon a time), was looking unstoppable when it closed a funding round of $1.1 billion. At that time the company was valued at $45 billion.
Fast forward some eighteen months. Currently its estimated value has fallen to $4 billion according to business analysts and research firms.
This begs the question. How did it end up with less than a tenth of its original value?
What Went Wrong
From 2014 till now Xiaomi’s smartphone sales have plummeted. The company’s smartphone market share has likewise seen a massive decline. The rest of the products offered by Xiaomi (such as wearables and more) has failed to generate enough revenue to cover the losses that stem from the smartphone side of their business.
According to the research firm IDC, Xiaomi’s smartphone sales dropped by 40% in China. This is during the second quarter of fiscal year 2015-2016. The Chinese smartphone market grew by 4.6% and while Xiaomi saw losses in sales, its competitors in the low to mid range category (Huawei, Oppo, Vivo) grew significantly.
How Did It Go So Wrong?
When Xiaomi was gaining fame around 2 years ago, the reason for its success was the fact that the Chinese smartphone company offered high spec Smartphones at low and attractive price points. These phones were comparable to flagships in terms of specifications. This offered them a competitive advantage over other smartphone vendors which did not match them in price/specifications.
Eventually Xiaomi’s competitors caught up and offered similar specifications for similar prices. They also went a step ahead and offered unique features.
Take the example of Oppo and Oneplus with their fast charging tech, Vivo with curved screens and Huawei with dual camera setups and fingerprint sensors to name a few.
Neil Shah, an analyst at Counterpoint Research adds:
I think Xiaomi’s current performance and growth in the smartphone space has stalled, as competitors with better R&D, vertical manufacturing expertise, and a wider distribution and geographic footprint has surpassed the brand, Xiaomi’s inability to innovate independently is one of the key reasons behind its decline.
Expansion Plans Not Bearing Fruit
Investors were also hopeful about Xiaomi and its expansion to other territories where the company could potentially become a global force competing against Samsung, Apple and other big name smartphone makers in various markets.
However, Xiaomi’s expansion plans were cut short due to their lack of a patent portfolio. This opened a lot of legal problems for Xiaomi in other markets. Samsung and other vendors have accused Xiaomi of copying their hardware and features from the start. Even in one of its biggest markets, India, the company faced a sales ban due to being accused of infringing upon Ericsson’s patents.
The Chinese smartphone vendor is unprepared to head out into the international markets where it would be slammed by various patent infringement lawsuits and similar problems.
Cutthroat Chinese Market
Customers in China have almost no brand loyalty when it comes to smartphones. As soon as a better alternative is available they will move on to that new phone. This means that every time Xiaomi plans to release a new flagship or midrange phone, they face challenges when it comes to maintaining brand loyalty amongs Xiaomi customers in China.
As mentioned earlier, other smartphone vendors offer similar specifications but with their own unique features to differentiate them from the crowd which has hurt Xiaomi.
Final Nail in the Coffin
85% of Xiaomi’s revenue comes from smartphone sales. This is an alarming situation for the company especially when sales in their biggest markets are declining and their revenue plummeting. That too when the company is so reliant on its smartphone division for its profits.
Resultantly, such a development causes investors to panic and withdraw their investments fearing loss, thus contributing more to further decrease in Xiaomi’s value.
The Chinese company’s future is still uncertain. Xiaomi predicted a sales figure which was too fantastical and unrealistic for it to achieve with 80 million smartphones in FY 2015. It’s obvious why they would fail to meet their target the first time around.
With competitors innovating faster and introducing phones at the same price points, investments in other companies yet to pay off and a heavy reliance on smartphone revenue, which is declining massively, Xiaomi’s future seems quite grim right now.