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Xiaomi & The Supply Chain Behind the World's Highest Valued Smartphone Startup

Posted by Elementum News Desk | March 6, 2018

Xiaomi Is (Still) The Tech Startup to Watch

On April 6, 2015, the Guinness World Record for the most smartphones sold in 24 hours was broken. Setting the record at 2.1 million units was Xiaomi—the world’s third highest valued startup (following Uber and Didi Chuxiang, Uber’s Chinese equivalent).

Currently valued at $46 billion with $1.4 billion in funding, Xiaomi took the Chinese smartphone market by storm in 2010 when it was founded by Chinese entrepreneur Lei Jun. From 2013 to 2014, the number of units Xiaomi shipped in China grew 186 percent, while its total worldwide shipments grew 224 percent. At the end of 2014, Xiaomi edged out Samsung for the title of most popular smartphone in China—shipping 12.5 percent of all smartphones in the country.

But shortly after tasting success, Xiaomi experienced ups and downs as it competed against major brands like Apple and Huawei in an increasingly saturated Chinese market. After a slump in 2015 followed by a rebound the next year, Lei admitted that the firm had grown too fast, leaving room for more nimble players to outmaneuver it. Last year the company had a revenue target of $15 billion, which it reached ahead of time thanks to aggressive investment in Asia and India (where it’s now one of the highest-selling smartphones). Now, Xiaomi's CEO is looking to expand to the "final frontier"—the U.S. market.

 

High Quality Suppliers, Demand-Driven Manufacturing and Longer Device Lifetimes

From the outset of the venture, founder Lei Jun was focused on establishing and maintaining a high quality supply chain, and not without reason. Even among domestic consumers, there was a widespread perception that smartphone companies in China were only good for making knockoff Apple products. To gain any traction in the heavily saturated Chinese smartphone market, Xiaomi had to ensure that its products far exceeded those expectations.

To do so, Lei Jun went on an aggressive campaign to woo and cater to the highest quality suppliers in East Asia, averaging over 10 supplier meetings a day for the first five months of Xiaomi’s existence. In the end, his diligence paid off—Xiaomi now partners with the world’s most highly touted hardware manufacturers including Sharp, Foxconn, and Wintek. Some suppliers, including Qualcomm, were so impressed with Mr. Lei’s vision and diligence that they invested in the company itself, lending further credibility to the company’s supply chain and guaranteeing a continued supply of high-quality components.

Xiaomi’s ecosystem of suppliers and reliable manufacturing partners is intimately tethered to the company’s strict policy of demand-driven manufacturing, designed to keep the company’s inventory and up-front production costs as low as possible. In fact, in its early stages the only brick-and-mortar buildings that Xiaomi operated were its “e-commerce warehouses”, optimized to handle the fast-moving inventory necessitated by Xiaomi's model. Though Xiaomi saved money on inventory costs, the public was often left pining. Xiaomi's devices became notorious in Asia for selling out within hours of availability; in 2014, the company’s Singapore release of the Mi3 sold out in just 2 minutes.

Capitalizing on the scarcity value of this unmet demand, Xiaomi started keeping its smartphones on the market longer than most other manufacturers before releasing updated hardware. Samsung and Apple devices have 6 to 12 month life cycles, while Xiaomi’s devices stay on the market 18 to 20 months on average. The longer those smartphones stay on the market, the lower the cost to manufacture them becomes, allowing Xiaomi to initially sell devices nearly at cost, then see double digit margins develop later in the device’s extended lifecycle.

xiaomi_store.jpg

Xiaomi built its brand on an e-commerce model. Now the company is changing gears and opening brick-and-mortar stores as well.

 

Plans for the Future: Westward Expansion

Now, Xiaomi is looking to expand its market (and supply chain) out of China. Its next big target? The United States. The bid isn’t just about reaching an American consumer base. The company is also motivated by its hope of going public this year with an initial public offering of $50 billion. The company hopes sales in the American market will boost enough investment interest in the company to make this number attainable. If Xiaomi does go public, it will be the biggest technology company to do so since Alibaba in 2014.

“We’ve always been considering entering the U.S. market. We plan to start entering the market by end 2018, or by early 2019,” said CEO Lei Jun to the Wall Street Journal.

 

A Precedent for Success

This won’t be the first time Xiaomi beats the odds to capture a sizeable foreign market.

The company’s demand-driven manufacturing model was an issue during initial expansion into India. Though in 2015 more than 100,000 customers placed pre-orders for the Mi-4’s launch in India, Xiaomi only made 10,000 units available at release. To counteract the issue and scale up production, the company built an e-commerce distribution center in Bangalore. Localized distribution eventually helped them outcompete other startups in the region and gain brand recognition. Xiaomi is now India’s Number 2 smartphone brand with a 15.5 percent market share, second only to Samsung.

Having learned from its initial stumbles in India, the company has already bulked up its supply chain to produce more devices and lose its reputation for stocking out. It’s also offering new technologies like bezel-less smartphones to shed its image as a low-end manufacturer.

But similar to past experiences, the mobile phone manufacturer may face regulatory hurdles as it pushes to enter the U.S. market. When Chinese vendor Huawei attempted to expand overseas last year, plans fell through due to national security concerns. And as always, success in the U.S. smartphone market will also be contingent on Xiaomi's ability to court American mobile carriers. The company started selling accessories in the US a few years ago, which allowed it to begin brokering partnerships with retailers. It’s also preemptively entered into high-profile patent deals with both Microsoft and Nokia.

 

The Bottom Line

Xiaomi’s finely-tuned supply chain is the cornerstone upon which Lei Jun will continue building his mobile device empire. The company’s ability to make luxury-quality smartphones widely available in up-and-coming economies has helped it become the world’s highest-valued smartphone startup. By ramping up its supply chain in recent years the company has been able to make more phones available in a shorter time and offer more attributes for a growing global consumer base. It remains to be seen whether these changes will truly meet consumer expectations as Xiaomi breaks into new markets, or whether the supply chain will crumble under demand.



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