If you haven’t heard of Xiaomi in any of the latest tech market reports, you’ll probably hear about them some time soon. Xiaomi has been making cheap smartphones in China for years now, and after several good years, they’re looking to globalize. One of the biggest sticking points to Xiaomi in the market, though, is how do they keep producing such high-end smartphones so cheaply? It’s their strong combination of well spec’d phones and low prices that drove them to over 60 million sales last year, which resulted in Xiaomi replacing Samsung as China’s top-selling smartphone company as well as becoming the world’s third top selling phone maker at the same time.
The Chinese company’s flagship Mi devices typically retail for around $300 – it’s new Mi Note Pro will be $500+, their first phone to break the $500 barrier – while the more affordable Redmi family is sub-$150. These are all insanely cheap phones when you compare them to Apple or Android devices, where Apple’s top-of-the-line iPhone sells for over $1,000 off contract, while the Samsung Galaxy and Note devices are also priced similarly. So why can Xiaomi be so aggressive with its pricing?
Many theories have been put forward, including that Xiaomi prices phones at cost and makes money on other services. Hugo Barra, the company’s VP of international, gave Techcrunch a peak at their special operations in an interview in Beijing last week. Apparently, according to Barra, Xiaomi is able to make price concessions thanks to a smaller portfolio and longer average selling time per device. Additionally, Xiaomi continues to sell older devices (and tweaked versions of them) at reduced prices, even after it releases newer models.
“A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts. The Mi2 and Mi2s are essentially the same device, for example,” Barra explained. “The Mi2/Mi2s were on sale for 26 months. The Redmi 1 was first launched in September 2013, and we just announced the Redmi 2 this month, that’s 16 months later.”
That’s a big deal, mainly because the longer runway for devices allows Xiaomi to leverage its suppliers to get better component deals.
“The vast majority of the components [in our devices] are still the same, so in terms of supply chain and component sourcing, we’re on the same supply contracts as Redmi 1, which means we’re still getting the same discounts on components,” he explained. “We can continue to ride the cost curve, so the importance of having a very small portfolio is significant — the fact that we only launch a few products each year, and (the fact that) we only have two product families.”
These dynamics requires a great deal of dedication to devices for two to three years, and it isn’t just about making price cuts. Xiaomi maintains software updates, spare parts and other services that customers require, longer than most companies normally do. There are additionally other factors that go in to the cost structure, including Xiaomi’s lean, online-only marketing focus and it’s close proximity to manufacturing plants in China. But of greatest importance is the management of components and supply chain partnerships.
Xiaomi has big plans for expanding their market share outside of Asia this year, which will make its pricing model and supply chain management more important than ever. The company sells its phones using an online-only model in most markets, though it’s recently been testing operator partnerships outside of China. It is currently running a limited trial in India, and has found partners in Taiwan, Malaysia, and Singapore.