Disintermediation & Disruption Suling Zhang

Xiaomi Case

Smart Phone OS Market Share “The bulk of these Android players are squarely focused on the sub- US$200 space, driven by demand at increasingly value-oriented consumers.” - IDC

Smart Phone Shipment

Hyper-competitive Smart Phone Market  Android average selling price: US$230 in third quarter, down from US$267  The strength of the long tail of regional and local vendors  8% decline in the top 5 collective share  1.4 billion smartphones to be shipped worldwide in 2015  9.8% compound annual growth rate for the 2014–2018  Average selling price of US$297 worldwide in 2014, dropping to US$241 by 2018  Each generation of flagship phones shows less and less differentiation from its predecessors

China Mobile Phone Market (source: Statista, 2015)

China Mobile Phone Market  Largest smart phone market  37% of the global aggregate  High level of saturation  75% of users access Internet through cell phone  Slower growth (64% in 2013, 14% in 2014)  Growth spurred by consumers switching to 3G and 4G smartphones  70% of clients using 2G cell phones  58% owners in 3 rd or lower cities  In Tier 1 cities consumers are attracted to sophisticated devices with a luxurious brand image  Chinese consumers tend to prefer handsets with larger display screens.

Players in China Market  Xiaomi: 14% (5.1% of world market, the 3rd largest)  Samsung: 12%  Competition:  Foreign companies’ influence in China is declining year by year as the market share of Chinese companies continues to rise.  China is Apple’s largest market (36%). Apple is planning to triple the number of Apple retail stores in the next two years.  Samsung has been the best at producing phones that are ‘good enough’,  Local companies benefit from cheaper production costs, a close partnership with local operators and providing applications tailored to Chinese consumers  Half of the top ten world manufacturers are now Chinese: Xiaomi (3 rd ), Lenovo (4 th ), Huawei (5 th ), Yulong (8 th ) and ZTE (9 th ).

Q: Is 2010 a right time to create Xiaomi in China?  timing by analyzing:  Customers trends: demographics, life style, values  Technology trends  Competition landscape  Questions to ask:  Can I come up with the right product and business model?  Do I have the capability to execute it?

Four Important Parties to Heed to  Supplier  Computer processors, sensors, displays, user interface devices, open source software, common functions, cloud storage and processing, open data  Combiner:  Drones  3D printing  Investor  Users:  co-innovators, esp. DIY users  market experimenters  Lobbyist

Founder Team

Founder Jun Lei  Founder of Kingsoft  Founder of Zhuoyue  Successful angel investor  11.6 million followers on Weibo

Image: a hip, cool company that understands what the younger generation wants.

Chronicle of Events  : Founded in Beijing  : MIUI  : MI Chat (1 million users in 1 month)  : MI 1 Smartphone ($330), bbs.xiaomi.cn (37 million users)  : MI 2 Smartphone (11 million units sold in 11 months)  : Xiaomi Box ($50)  : Red Mi ($150)  : Hugo Barra (Google Android VP) joined Xiaomi  : MI 3 Smartphone (the World’s fastest Android smartphone)  : MI TV ($500)  : MI 4 Smartphone  : MI Note ($540)

Xiaomi Strategy  Fast growth from a niche market to a mass market  Create a blue ocean  Disrupt the market leader from all sides  Great products at affordable price customized to clients needs

Xiaomi Tactics  Quality: Tongrentang  Use same components and assemblers as the industry leaders  Customized Android system for Chinese users  Efficiency: Walmart, Costco  Operating cost around 4%  Focus on three core products  Direct sell online and social networking websites  7500 employees  Hire the best/most productive  Deliver more than the customer expected: Haidilao

What factors should be eliminated that the industry has taken for granted? Eliminate What factors should be reduced well below the industry standard? Reduce What factors should be created that the industry has never offered? Create What factors should be raised well beyond the industry standard? Raise Four Actions to create a Blue Ocean

Formulating your Blue Ocean business model  Buyer utility  Price  Finding the price which attracts the largest market  Cost  Simplify your operation  Change design  Find partner  Restructure price  Acceptance

Build an User Community  Motto: born for the fans  Initial 100 users are key  Users submit ideas, experiment with different ways of using the product and spread word-of-mouth  Sample ideas: filter calls, alert wifi free riders  Encourage interactions with users  Founder team at least 15 minutes to interact with users on forum  Engineers to interact directly with fan and feel they are working for fans  Ride the wave of social media  11m users in Xiaomi BBS, 10m in QQ space, 30m followers in Weibo, 3m followers on Wechat  Offline activities for fans:  Mi Fan Festival, Same city Mi Fan Meeting, MIPop Award

Xiaomi Marketing  Image brand: Young, Cool  Create an atmosphere of Losers’ Counterback  Good at telling stories  Use opinion leaders  Celebrity like product launch event, fans attended  Create your own language  E.g. F code, MIPop

Xiaomi Box Brothers

Xiaomi Flash Sales  MI1: 300,000 units preordered in half day  M12: 100,000 units sold in 2 minutes  Red Mi: 100,000 unites sold in 1.5 minutes  Red Mi Note: 2.2 million preorders in 3 minutes  Q: Will Flash Sales continue to work for Xiaomi?

MI Smartphone Sales Trajectory Expansion into 6 countries: 1m Xiaomi handset in US, 1m in India

Financing History  : $40 million at valuation of $250 million  : $90 million at valuation of $1 billion  2012: $216 million at valuation of 4 billion  2013: market valuation of 10 billion  : $1.1 billion at valuation of $45 billion

Fast Rate of Innovation  Idea generation  Users generate ideas more than just beta testing and being focus groups  Research & Development: open source software, cloud computing, off-the-shelf component, specialized parts become commodities as billions of smart phones sold.  Funding: crowdfunding, abundance of VC (Downes & Nunes, 2014)

Unconstrained Growth  The declining costs of information  Large database of standardized information on marketing, sales, and other transaction data, user feedback, performance comparison  Give consumers great leverage  Companies cannot hid behind slick marketing campaigns  Lower transaction costs for new products  Exponential growth of new transactions  Users no longer divided into pioneers, early adoption, early majority, late majority, laggards  Q: strength of brand weakens?

Xiaomi’s Evolution towards an Xiaomi Ecosystem  Build an ecosystem of related hardware connected on a single software platform with value-adding services and contents  Smart hardware: MI Band, MI air purifier, MI camcorder, MI Router, MI Mobile Charger, headsets, iHealth, wifi generator  Smart appliances: Midea  Content  Online video webites: aiQiyi and Youku  Social networking service MiChat  Movie, game studios  Games: 14Q4: monthly revenue RMB200 million  Education, domestic services, map  Operating system: MIUI  Cloud storage  Proprietary software  Goal: make another 50 Xiaomi, investing in 100 hardware companies  Q:How would the smaller companies compete?

Challenges  Optimizing sales and profits while curbing the downside risk of excess or insufficient inventory.  Patents  Stiff competition at all fronts

Xiaomi’s Patent Challenges  Global patent system  More than 100 patent disputes by smart phone suppliers by 2013  Tit-for-Tat global patent war on daily basis  patent litigation and patent purchase costs smart phone markers up to $20 billion between 2011 and 2012  Patent spending by Google & Apple exceeds R&D spending  Patent pool, cross licensing

 Can Apple be disrupted by Xiaomi?  How will Xiaomi be Disrupted?