The top 3 reasons why Xiaomi lost its crown in China

Xiaomi lost its crown as China’s largest smartphone maker in 2016, ending a reign that lasted two consecutive years. The unicorn, now ranking in fifth place, saw its shipments plunge to 41.5 million in 2016, down 36% year-on-year. Here are some reasons why this happened.

smartphone shipment

Xiaomi’s online store strategy

Beijing-based Xiaomi adopted an online store strategy ever since it was born in 2010. Although gradually shifting towards offline sales, its online store maintained dominant status: Xiaomi’s online to offline sales ratio is around 70: 30, according to the company.

This online strategy worked in 2014 and 2015, when Xiaomi was the largest smartphone company in China by shipment, according to IDC China.

The trend of growth halted for Xiaomi in 2016. As the market for smartphones in first and second tier Chinese cities had gradually became saturated over the previous few years, smaller cities and rural areas increasingly drove smartphone sales growth. Openness to online shopping and internet infrastructure in China’s rural areas are far behind those in megacities.

Xiaomi, currently at a low point, is set to change. Lei Jun, Xiaomi’s founder and CEO, in July last year delivered a talk and emphasized that the company will focus on running its own offline retail stores over the next 5 years. It will open 1,000 offline stores over the next three to four years to target consumers in small cities and rural areas.

Xiaomi offline store. Photo from Miui.com.
Xiaomi offline store. Photo from Miui.com.

An absence of high-end smartphones

Xiaomi has prided itself for its smartphones’ cost performance, claiming to offer high quality consumer products at a lower cost. For the past few years, consumers have had the impression that Xiaomi smartphones are worth buying, because they are cost efficient, not because they are premium products.

The market was influenced by the wave of “consumption upgrades” over the past few years in China, where a growing tribe of wealthy consumers have been looking for higher quality, higher status products. When it comes to smartphones, such people tend to use the newest iPhone, with a capacity that is definitely not 16G.

In preparing to fill its absence in the high-end smartphone market, Xiaomi last year released a concept smartphone, MIX, designed by the famous artist Philippe Starck. Its 6.4-inch display screen takes up as much as 91.3% of the size of the smartphone’s front panel, creating a nearly “frameless” smartphone.

Xiaomi MIX smartphone. Photo from Lei Jun’s Weibo.
Xiaomi MIX smartphone. Photo from Lei Jun’s Weibo.

Supply chain management problems

Chinese smartphone makers faced stockout problems in 2016, as major phone components – including screens, processors, and memory banks – became more expensive, and went out of stock. Lei Jun delivered a speech in January and said that Xiaomi had been confronted with stockout problems for four months due to supply chain issues.

Xiaomi, founded in 2010, is a relatively young company compared to other top five smartphone makers such as Huawei and BBK Electronics Corporation (BBK), the company behind OPPO. Huawei in 2003 set up its phone business branch; BBK was founded as early as 1995.

Locations also matter. If China is the world’s factory, its southeastern province of Guangdong is China’s factory for consumer electronics. The province, awash with smaller electronics suppliers, is also home to Huawei and BBK.

It’s predictable that offline stores will maintain a domination in the market in 2017. Will Xiaomi see better sales results this years? We’ll have to wait and see.

(Top photo from Xiaomi.com)

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