Hugo Barra’s three big problems at Xiaomi

March 21, 2014
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Hugo Barra poses with Foxconn CEO Terry Gou

Hugo Barra poses with Foxconn CEO Terry Gou

It was a busy week for Xiaomi’s head of international expansion, Hugo Barra. Late on Monday, the former Googler posted a picture of himself with Foxconn’s boss and then some 20 hours later, he was in Hong Kong launching Xiaomi’s flagship and announcing a retail partnership with Hutchison’s telecom arm, Three. What are the significance of these two events? Read on to find out.

After spending four weeks with Xiaomi’s $134 Redmi phone, a few thoughts crossed my mind. The phone is an example of corner cutting done right. Basically, the Redmi is a device that can stand shoulder to shoulder with the Moto G, but for almost $100 less than what Motorola’s affordable wonder costs here in South East Asia.

It is the same story with their flagship smartphone, the Mi 3. For less than half of the off contract price of the Galaxy S4 you can get a device with a Snapdragon chipset that, on paper, is only bested by the chip found inside the Galaxy S5.

It seems that the only thing standing between Xiaomi and worldwide domination is availability, right?

Not so fast — there are three major obstacles for Xiaomi’s international expansion, three tricky problems that Hugo Barra needs to solve to find success.

Xiaomi Redmi (2)

The Xiaomi Redmi

HardwareZone

Locally relevant content

The reason Xiaomi is able to sell their devices at such low price points is their unique business model. Xiaomi does not expect to make the bulk of their revenue through the sales of their devices. Instead they rely on users purchasing stuff from a number of media stores preloaded on their devices.

The problem is, even after four weeks with the phone, I have yet to spend a dime in any of Xiaomi’s stores. It might be a different story if I was fluent in Chinese but currently I find it hard to find anything that is interesting enough to purchase.

If they want to make their devices available in many more countries, they need to provide more content that is locally relevant to their users.

No brick and mortar presence

The second problem is also related to their unique business model. They prefer to produce devices in discrete batches (usually in the tens of thousands) and sell them directly to users through their website and a number of different channels. This allows them to minimize costs usually associated with managing inventory and distribution channels.

This is not a problem in developed regions, but it could be challenging in less developed markets where credit card penetration is low. In large markets like India, Indonesia, Vietnam, and the Philippines, it is still rare for young people to have credit cards. There are millions of potential emerging market consumers that Xiaomi is in danger of alienating if they stuck to their direct sales approach.

Production capacity

The third major obstacle that Xiaomi needs to overcome is that even with their current approach, they are already having serious problems in meeting demand. In Singapore, their first batch of Redmi phones was sold out in eight minutes, while the Mi3 was out of stock in just two minutes. It took them more than two weeks to get the Redmi back in stock, whereas the Mi3 is still listed as out of stock.

Some analysts think that this is Xiaomi’s tactic to create the illusion of scarcity. However, their president, Lin Bin, admitted in an interview with the Wall Street Journal back in February, “When we began producing phones two and a half years ago we were making only tens of thousands a month, but now we’re at three million a month. This speed shows the limits of the supply chain… This is one thing people complain about. People say that [our limited sales of phones] is intentional, but actually it’s not.”

Potential solutions?

On Tuesday, during a launch event for the Mi3 in Hong Kong, Xiaomi’s Global Vice President and former Googler Hugo Barra announced through a Google Plus post that Xiaomi is now in partnership with Hutchison Wampoa Ltd.’s mobile carrier Three to distribute the phone in Hong Kong. Hutchison has transformed six of their flagship Three stores across Hong Kong into “Xiaomified retail experiences”.

Furthermore, Barra mentioned, “We would love to partner with Hutch in other markets, for example, Indonesia and Vietnam where Xiaomi is planning to roll out products in the coming months.”

One of the stores where Three will promote Xiaomi's products

One of the stores where Three will promote Xiaomi’s products

This is a departure from company’s usual approach and could be a clue as to how Xiaomi is planning to make their push in less matured (but rapidly growing) markets across Asia. Having brick and mortar presence should allow them to reach out to millions of emerging market consumers which are prime targets for their cost effective line up.

As for Xiaomi’s issues of catching up with demands for their phones, another Google Plus post from Hugo Barra offered an idea as to how they are going to solve it. In a post previous to the one mentioned earlier, Barra showed a picture of himself shaking hands with Foxconn’s chairman and CEO, billionaire Terry Gou. In the post, Barra thanked Gou and the Foxconn team for hosting Xiaomi in Shenzhen, and hinted at Xiaomi’s plan to expand to South America.

Lin Bin has said that Xiaomi wants to sell 40 million phones this year (up from 18.7 million in 2013), and it seems that Foxconn could be the key to reaching that goal.

Their problem with the lack of locally relevant content in the MiStore might not be solved yet, but at least we now know how they are going to tackle the other two obstacles standing in their path to global expansion.

What do you think about Xiaomi coming to your local market?

 

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