Xiaomi: The Future of Tech Innovation in China?

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• Posted by Andrew Braun , Joel Shannon

• on November 24 2014

If you’ve heard of Xiaomi, the Chinese mobile phone manufacturer, you probably know about it for either its Apple-esque design and business model or for its recent rise to the top of the smartphone market in China. What’s behind the headlines, though, is a substantial shift in the Chinese tech industry, of which Xiaomi is one of the best representatives. It’s growing, it’s changing, and, most importantly of all, it’s innovating—though not quite the way you think.

We talked with Melissa Chau, a senior research manager with IDC’s Asia/Pacific Client Devices Group, who us that while Xiamoi haven’t made great strides in technological innovation, the Chinese mobile industry has developed some interesting marketing and sales tactics. Xiaomi isn’t reinventing the wheel—just the way it’s sold.

It markets high-quality phones at low profit margins, getting revenue through its online ecosystem and waiting two years (as opposed to the average six to eight months) to release a new version, thus increasing profits as older component costs go down. It has also used a flash-sale model (famous for selling thousands of units in seconds in India), developed an excellent user input process, and eschewed physical stores and traditional advertising for online sales and social media. All this seems to be working—Xiaomi went from having no revenue in 2010 to having $5 billion USD in 2014. 

Most interesting, however, is the fact that Xiaomi makes a product that, according to reports, would meet standards for a phone twice its price. With the stereotypical western perception that China’s tech industry sacrifices quality to low cost (ever roll your eyes at a “Made in China” sticker?), it comes as quite a surprise to see that there is a company providing both. Xiaomi is hardly the only one, though: OnePlus, Huawei, Lenovo, and others are all currently producing electronics with good build and software quality, and they are able to sell them very reasonably.

Out of that list, though, only Lenovo and Huawei have significant presences in overseas markets, and both of them have been in business for several decades. The fact that they produce quality products could be written off as them catering to more developed markets with higher expectations. The real indicator that something is changing is that Xiaomi and other startups like it are succeeding on such a huge scale domestically.

Chinese consumers, says Shaun Rein—author of the recently published book The End of Copycat China—in an interview with Sourcing Journal, are maturing, and are no longer obsessed with “bling and the same brands.” They’re opening up to a wider range of possibilities, and with the wider range comes more sophisticated standards. Both wages and prices are rising, meaning that pricier products with higher profit margins are no longer out of the question for the Chinese domestic market. Combined with the Chinese government’s steady deregulation policies and the country’s growing equality with the West in technological terms (there is less for them to copy and more incentive to innovate), you have a recipe for some serious progress on the home—and possibly the international—front.

In fact China’s global share of R&D is jumping forward: according to the National Science Foundation they grew from 2.2% of the world’s tech R&D to 14.5% between 2001 and 2011. This figure is currently rising at a rate of 18% overall per year, and is being paralleled by technology production.

China’s share of the world’s technology manufacturing went from 8% in 2003 to 24% in 2012. The fast-growing R&D industry, then, coupled with its already massive infrastructure and labor force, may have the power to push the country’s tech companies from Apple manufacturers to Apple rivals. They’re already winning domestically—Xiaomi has beaten out both Apple and Samsung in Chinese smartphone sales. “The world,” says Rein, “better get used to innovative global Chinese brands.”

To be too optimistic about this phenomenon, though, is almost as bad as not recognizing that it is occurring. Chau cautions us, saying that “Chinese companies were able to scale up quite quickly in the booming of smartphones we’ve seen over the past few years, but we’ve seen signs that it might slow down a little, so they’re getting a lot more aggressive.”

So yes, Chinese companies are becoming independent and are being pushed to seek high value margins on quality rather than low margins on quantity, but the shift hasn’t come yet—there’s a possibility that this trend won’t necessarily spread. China still, in many ways, lives up to its reputation as a cheap manufacturing center and, as a “fast follower.” Even Xiaomi, with all it has done to shake up the market, still gets sideways looks as an Apple impersonator. Even if China does become a powerhouse of innovation, though, it’s going to take Western markets some time to get used to the idea that they’re not buying knockoffs.

Though Chinese companies tend to flounder when they attempt to penetrate western markets, says Chau, the game could be changing—and Xiaomi, while its plans are still unclear, might be working on a strategy to become the spearhead. Lenovo succeeded with IBM; Huawei failed due to security concerns; but Xiaomi VP (formerly a Google VP) Hugo Barra, who thus far has been a success, nonetheless announced plans to expand to North America.

The long-term contracts and subsidized phones popular in the West, though, mean that Xiaomi’s affordability—its strength—will no longer be as important, especially in these well-developed, competitive markets. While the contract scheme, Chau says, is waning in popularity, it is far from a sure bet that this will open the gates for Xiaomi to ride in and demonstrate the viability of China’s tech sector. It will need to play a different game overseas.

For the immediate future, though, it is likely that Xiaomi and the rest of the transitioning Chinese tech universe will be concentrating on their real strength: emerging markets. China and India have huge populations and a lot of growth potential in the tech sphere—and Xiaomi knows it.

Will we be seeing Xiaomi and others in America and Europe? That’s harder to say, but given the clever way it’s driven sales in its other enterprises (though many debate whether the flash-sale model in India encouraged or frustrated consumers), it would almost be more of a surprise if Xiaomi didn’t come up with some clever way to become the first company to represent the new China.

The real takeaway is that anybody looking to tap the Chinese and Indian tech markets is probably going to be in for a tough time if these native tech trends continue; the rapid shifts in market innovation aren’t something anyone should ignore. For now, though, Western consumers aren’t likely to go over to a Chinese brand, regardless of value or quality—even if Chinese companies make it onto the markets, they’ll be attacking some solid positions.

Andrew Braun has an eclectic taste in music, a crippling addiction to change, and a time-consuming learning habit. He has held jobs as a writer, a web designer, a farmhand, a handyman, and a teacher, and plans to travel the world, teach, write, and work towards a master’s degree in political science.

Joel Shannon works as a digital content specialist with a focus on analytics at the Beaver County Times. He reads The New York Times, Quartz, the Verge, and Vice. And he literally lives at a coffee shop.