QUAD 3 / DETAILED CASE STUDY, ANALYSIS AND STUDENT RECOMMENDATIONS ON XIAOMI
APPROACH AND ADAPTABILITY FOR POTENTIAL MARKETS
REVIEW THE CASE STUDY – XIAOMI ENTRY TO INTERNATIONAL MARKETS – NOTE THIS CASE
STUDY IS SHARED FOR ACADEMIC PURPOSES ONLY AND YOU ARE STRICTLY ADVISED NOT TO
FORWARD
AT THE END OF YOUR READING, ANSWER THE FOLLOWING QUESTIONS
EACH ANSWER 100-200 WORDS.
SECTION A – HISTORICAL
1. Why does Xiaomi need to enter international markets
2. Why does Xiaomi need to enter Taiwan, South Asia and India
3. How did Xiaomi enter the markets
SECTION B – CURRENT
1. In light of the present global geo-political situation, what challenges does Xiaomi
face
2. What challenges does Xiaomi face in India
3. What are your recommendations to overcome this situation
4. As an advisor to Xiaomi what are your recommendations on:
a. Entry to new markets
b. Expansion of product lines
c. Strategic alliances in key countries
Microsoft Word - QUAD 3 - assignment 02.docx QUAD 3 / DETAILED CASE STUDY, ANALYSIS AND STUDENT RECOMMENDATIONS ON XIAOMI APPROACH AND ADAPTABILITY FOR POTENTIAL MARKETS REVIEW THE CASE STUDY – XIAOMI ENTRY TO INTERNATIONAL MARKETS – NOTE THIS CASE STUDY IS SHARED FOR ACADEMIC PURPOSES ONLY AND YOU ARE STRICTLY ADVISED NOT TO FORWARD AT THE END OF YOUR READING, ANSWER THE FOLLOWING QUESTIONS EACH ANSWER 100-200 WORDS. SECTION A – HISTORICAL 1. Why does Xiaomi need to enter international markets 2. Why does Xiaomi need to enter Taiwan, South Asia and India 3. How did Xiaomi enter the markets SECTION B – CURRENT 1. In light of the present global geo-political situation, what challenges does Xiaomi face 2. What challenges does Xiaomi face in India 3. What are your recommendations to overcome this situation 4. As an advisor to Xiaomi what are your recommendations on: a. Entry to new markets b. Expansion of product lines c. Strategic alliances in key countries IF THERE ARE SIMILAR SUBMISSIONS – THE ONE REVIEWED LATER WILL GET LOWER MARKS Microsoft Word - XIAOMI CASE STUDY.docx W17235 XIAOMI: ENTERING INTERNATIONAL MARKETS1 Miao Cui, Yan Zhao, Sitara Aziz, and Mimi Xiao wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e)
[email protected]; www.iveycases.com. Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-04-27 On January 15, 2016, Jun Lei, founder, chairman, and chief executive officer (CEO) of Xiaomi Technology Corporation Ltd. (Xiaomi) in Beijing, delivered a speech at Xiaomi’s annual meeting. Lei summed up the company’s performance over the past year but expressed that he was not happy; the company’s efforts had failed to fulfill Lei’s expectations, and it led him to reflect on his entrepreneurship journey.2 Six years earlier, 14 people had come together at Zhongguancun Science and Technology Park to start Xiaomi.3 In time, Xiaomi emerged as the leader in the Chinese smartphone market, storming its way to the top. Xiaomi had adopted Lei’s “flying pig” theory—the importance of seizing the right opportunity—and Lei’s belief that the Internet was a new methodology that required an advanced way of thinking—focused, extreme, rapid, using word of mouth, and user involved. Xiaomi’s approach became a model for entrepreneurs and venture capitalists to learn from and emulate.4 However, there was fierce competition in the smartphone business in China. It was not long before Xiaomi encountered opposition from its allies and partner companies. Their products, slogans, and release conventions all attacked Xiaomi. Some engaged in Pengci marketing 5 that targeted Xiaomi; some companies outright claimed that their products were better than Xiaomi’s. As Xiaomi lost ground, it was further subjected to queries, insults, and slander. Even the accomplished and powerful chair of Gree Electric, Dong Mingzhu, joined the melee.6 Xiaomi’s overseas market encountered troubles, and the Xiaomi brand suffered a trust crisis. Taiwan fined Xiaomi for misleading consumers with incorrect sales figures, and the company was sued for product patent deficiency in India.7 These problems left Lei feeling dejected.8 How could Xiaomi meet the challenge of increasing its sales in the international markets? XIAOMI When Lei was a student at Wuhan University, he was impressed by the image of Steve Jobs presented in the book Fire in the Valley and was determined to start his own international corporation.9 After being CEO at Kingsoft Office for a number of years and an angel investor, Lei began to pursue his dream, which he Page 2 9B17M045 had conceptualized 20 years earlier. He saw a space between the costly international-brand smartphones and the inexpensive made-in-China phones, and he started Xiaomi with some of his like-minded friends to enter that space.10 The company’s name—the Chinese word for “millet,” a nutritious and inexpensive Chinese staple—reflected the founders’ interest in providing useful products that were affordable. Core Hardware Products Xiaomi smartphones (including Xiaomi pads), Xiaomi TV (including Xiaomi set-top box), and Xiaomi router were the first business ventures. 11 Xiaomi then developed a smartphone operating system in collaboration with users of its online forum. The phones were also marketed through Xiaomi forum and sold online at MI.com, which made Xiaomi phones the first Internet smartphone brand. Xiaomi continued to market, sell, and develop through these Internet platforms.12 Xiaomi smartphones achieved terrific growth, increasing from a sales volume of 300,000 handsets in 2011 to sales of 70.8 million in 2015, an increase of over 200 times. This made Xiaomi the fifth-largest smartphone company in the world, after Samsung Group, Apple Inc., Huawei Technologies Co. Ltd., and Lenovo Group Ltd. Due to the popularity of the smartphone, the number of users of Xiaomi’s firmware operating system, Mi User Interface (MIUI), also increased to an astonishing figure of 170 million, spread over 156 countries around the world. Xiaomi box and Xiaomi TV also served as important ports to attract new users. This was facilitated by high-performance hardware configuration, a smooth operating system, and much original film and TV content. Xiaomi released its routers to create a cross-platform data centre, which enabled users to get data and information from different devices, whenever and wherever they needed. Mi User Interface Xiaomi’s Mi User Interface (MIUI) and its mobile Internet services were the second part of Xiaomi’s “software + hardware + internet” business ecosystem. MIUI was a firmware operating system for mobile devices, based on Google’s Android operating system.13 MIUI had two important features: it could be upgraded swiftly, using either a developer’s version that was upgraded weekly or a stable version that was upgraded monthly; and the coding was available as software that could be installed on any Android phone, which meant that not only Xiaomi phones but also other Android devices could switch to MIUI. In addition to providing access to the Internet, MIUI offered Internet-based services, such as intelligent call notification, free Wi-Fi,14 unknown number identification, and an application store.15 MIUI also offered comprehensive Internet-based services such as Xiaomi Lifestyle, which offered retail products and discounts at restaurants, theatres, and other venues; Xiaomi Entertainment, which provided mainly games and films, plus some TV content;16 and comprehensive financial services for loan financing. All these features had enough potential to generate more income sources for Xiaomi. In 2015, the revenues from Xiaomi Internet services reached CN¥3.82 billion (US$564 million),17 which was a 150 per cent increase compared to the previous year.18 Smart Hardware Investment Xiaomi planned to invest ¥33.9 billion (US$5 billion) in 100 smart hardware companies. Lei pinned his hopes on the smartphone, which was the mandatory device that connected all household computerized Page 3 9B17M045 equipment in the internetworked Internet of Things. Xiaomi gradually built a hardware ecosystem that focused on mobile devices (smartphones and tablets), set-top boxes for televisions, and smart routers. By early 2016, Xiaomi had invested in 55 smart hardware companies, including Huami (wearable technology such as the Mi Band), Qingmi Technology Co. Ltd. (hardware interface devices such as patch boards and cables), Ninebot Inc. (personal transportation devices), Lanmi Technology (Bluetooth devices such as headphones), Zimi Corporation (power banks), Zhimi Technology (air purifiers and fans), and Yunmi Technology (water purifiers). By mid-2016, Xiaomi had already made cumulative shipments of 24 million Mi Band units, making Huami the second-largest smart wearable devices company in the world. As a result of the popularity of the Mi Band, Huami raised ¥237.3 million (US$35 million) in its Series B round of financing; Huami was seeking to start a new round of financing with a valuation of ¥6.8 billion (US$1 billion).19 Development of Xiaomi Within its first five years, Xiaomi raised five rounds of financing (see Exhibit 1), and its valuation rose from ¥1.7 billion (US$250 million) to ¥305 billion (US$45 billion)—a whopping 179-time increase.20 This meant that Xiaomi had the highest valuation in the world among unlisted technology companies. Yuri Milner, the founder of Digital Sky Technologies Global (DST), who had invested in Facebook, Inc. and Alibaba Group Holding Ltd. (US$100 billion companies), assessed Xiaomi’s valuation as having the potential to reach ¥678 billion (US$100 billion).21 BACKGROUND OF THE SMARTPHONE BUSINESS Development Situation of Smartphone Unlike feature phones,22 smartphones had an independent operating system. The operating system extended a phone’s basic communication functions by allowing installation of new applications (apps). These enhanced functions mainly depended upon the development of mobile Internet. With the development of technology, smartphone functions became more and more powerful, allowing many tasks that were normally carried out on a desktop computer to be accomplished on the phone. The feature phone market was gradually being taken over by smartphones. According to the technology research firm Gartner, Inc., the total global sales of all mobile phones grew from 1.22 billion units in 2008 to 1.917 billion units in 2015.23 Shipments of smartphones increased from 140 million to 1.39 billion units, while global sales of feature phones decreased from 1.14 billion to 570 million units. The Internationalization of Smartphone Brands Samsung and Apple were the giants in the smartphone business. According to statistics provided by Canaccord Genuity Group Inc., in 2015, Samsung commanded 23.9 per cent of the world’s smartphone sales and Apple, 17.2 per cent.24 However, Apple garnered 91 per cent of the profits of the world’s smartphone sales while Samsung took only 14 per cent. Many smartphone manufacturers were incurring losses. Samsung’s core ability lay in its smartphone vertical industry chain. The company’s key techniques for manufacturing computer chips, random-access memory (RAM) data storage, screens, and other components gave Samsung advantages in product development, production, quality, and price.25 Samsung launched phones of numerous kinds and levels. Phones with different hardware and at different price points Page 4 9B17M045 were produced around the globe and heavily promoted with celebrities, sportspersons, and non-commercial advertisements. The phones were sold internationally through many channels (through agents and direct to consumers, who could customize their phones). After earning additional profits and establishing its production cycle, Samsung continuously reduced the prices of its old phones to stay in the market and developed new models to replace the old ones. In contrast, Apple used the strategy of single-product explosions, launching only two or three new phones each year. Apple’s general headquarters was situated in the United States. It focused on design and development of its products, purchased raw materials and components from more than 500 enterprises in 31 different countries, and completed the assembly process in Foxconn, China. The products were then delivered by air transport to various distribution centres around the world. After new products were released at a convention, Apple’s iPhones were sold through individual retail traders, mass retail traders, operators, and Apple stores. The relatively high price of iPhones and their consistent popularity around the world brought tremendous profits for Apple. The Internationalization of Chinese Smartphone Brands The first Chinese smartphone brands that tried to internationalize were Huawei and ZTE Corporation. They established good business relationships with foreign operators by providing telecommunications infrastructure or producing phones for them. Those foreign operators had abundant users, channels, and resources, which provided Chinese brands with many advantages in broadening their markets. Lenovo accelerated its internationalization in smartphones by purchasing Motorola, Inc. for US$2.9 billion. Lenovo acquired 2,000 patent rights owned by Motorola and enjoyed 16,000 patents owned by Google, in addition to acquiring Motorola’s mobile brand, trademark portfolios, and corporate relationships with more than 50 operators around the world.26 Coolpad Group Limited (Coolpad) increased its core competitive power by establishing