Disintermediation & DisruptionSuling 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 3rd 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 (3rd), Lenovo (4th), Huawei (5th), Yulong (8th) and ZTE (9th).

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

www.mi.com

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

Chronicle of Events 2010.6: Founded in Beijing 2010.8: MIUI 2010.12: MI Chat (1 million users in 1 month) 2011.8: MI 1 Smartphone ($330), bbs.xiaomi.cn (37 million

users) 2012.8: MI 2 Smartphone (11 million units sold in 11 months) 2012.11: Xiaomi Box ($50) 2013.7: Red Mi ($150) 2013.8: Hugo Barra (Google Android VP) joined Xiaomi 2013.9: MI 3 Smartphone (the World’s fastest Android

smartphone) 2013.10: MI TV ($500) 2014.7: MI 4 Smartphone 2015.1: 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

2010.12: $40 million at valuation of $250 million

2011.12: $90 million at valuation of $1 billion

2012: $216 million at valuation of 4 billion

2013: market valuation of 10 billion 2014.12: $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?