As we’ve mentioned in previous posts, it isn’t always easy for US companies, particularly tech companies, to break into the Chinese market. However, in revealing its fourth quarter sales numbers, Apple has successfully become the largest smartphone maker in terms of units shipped within China. Over the past 10 years, Apple’s revenue in the Asia Pacific region has increased steadily as a share of its total revenue (Figure 1). After Apple began breaking out Chinese revenue as a share of total revenue in 2011, it became clear that the Chinese market was a crucial source of revenue for Apple in the region, making up over 20 percent of Apple’s total revenue of nearly $75 billion in its latest financial report.
Figure 1: Apple’s revenue in Asia Pacific, 2004-2014
Note: China includes China, Taiwan and Hong Kong
Source: Bloomberg and Apple first quarter report
At an average price of $707 in the Chinese market, Apple’s iPhone 6 clearly targets the high-end Chinese consumer. Apple’s smartphones have nevertheless grown to capture the largest share of the smartphone market in China, by focusing on targeting the market for larger phones, contracting with China’s largest wireless network China Mobile, and increasing the number of stores.
Not far behind, Chinese firm Xiaomi Tech, which was founded in 2010, also has the distinction of being the world’s most valuable startup, valued at $46 billion following its last round of funding, where it raised $1.1 billion (US ridesharing company Uber was valued at $41 billion in December). At an average price of $302, Xiaomi’s Mi4 is clearly a more affordable smartphone choice than the iPhone. While mid-range smartphone makers like Xiaomi have been criticized for copying rather than innovating when creating their smartphones, Xiaomi’s business model, which focuses on brand loyalty, consumer feedback and control of sales, is responsible for creating space for its products in the Chinese market.
Like Apple, Xiaomi has moved to create a cultural following around its products, but has built this loyalty not by offering a necessarily superior product, but by advertising through social media. Rather than attempt to sell the overall brand through traditional advertising, Xiaomi has created social media forums for each of its products (each individual product has its own Weibo and WeChat accounts), as well as community platforms for users to discuss products and to provide design feedback for the company. Additionally, Xiaomi makes all of its sales online directly through its website, rather than in the traditional retail market, allowing it to sell its products at near-wholesale prices To prevent oversupply relative to demand for its products, the company most frequently uses “flash sales” which provide a self-imposed weekly quota of smartphones for sale.
Unlike Apple’s fully integrated software, one of Xiaomi’s potential weaknesses is that the Mi4 runs a version of Google’s Android system. Since Google’s App store Google Play is currently blocked in China, Xiaomi has also been able to build a successful app store of its own on the Android network. While Xiaomi’s customized version of Android maximizes its simplicity of design, its potential for innovation is limited by this lack of direct control over the operating system, as any Xiaomi network of applications is dependent on Google’s existing infrastructure. Additionally, Xiaomi faces strong competition from domestic internet giants Tencent, Baidu and Alibaba’s well established internet products.
As it currently stands, Apple and Xiaomi have been concurrently successful in China because they target a different segment of consumers. Going forward, it is not clear that this business model, which has been successful in China, will translate in to other emerging market economies as Xiaomi seeks to become a global low-cost smartphone manufacturer. In its recent expansion to India, Xiaomi faced backlash from Indian consumers for severely underestimating demand for the Mi3 phone, making only 20,000 phones available to 200,000 consumers in an August flash-sale. While this launch shows that there is a large market for mid-range smartphones in India, without customer loyalty, Xiaomi’s social media based marketing strategy will be increasingly ineffective. As Xiaomi expands globally, it also risks clashes with Apple over its similar design elements. Finally, Xiaomi is no longer the only Chinese mid-range smartphone maker; other smartphone makers, such as Huawei, have introduced their mid-range smartphones. Since Xiaomi is no longer the only mid-range smartphone maker, to maintain its segment in the market, the company will have rely on reputation and brand loyalty to stay successful.