Is lack of innovation cause for Xiaomi’s plummeting sales?

A fresh analysis of the business of Xiaomi reflects the company’s worth to have dropped to $4 billion from a whopping $45 billion in December 2014. Considering it was not too long back in time, around Christmas 2014, when this smartphone company from China was celebrating receiving $1.1 billion in a funding round, something seems to have gone awfully wrong.

The serial investor and, also, one of the investors in Xiaomi, Yuri Milner, had predicted the valuation of this once world’s most valuable startup to double up in a short time. It was deemed to be unprecedented in every manner in terms of speed of growth, according to Milner.

Xiaomi sales plummet as Huawei takes the lead in China

Xiaomi sales plummet as Huawei takes the lead in China

Milner is expected to have the best knowledge in matters like these, for his investment in Facebook 2009, three years before the social media hulk went public, helped him become a billionaire. Similar was the case when he invested in Alibaba, an ecommerce giant from China, in 2011 – three years before it went public. Unfortunately, Milner has been proved wrong in his judgement this time.

Xiaomi has failed miserably in being able to gather a strong hold in not only the smartphone market, but also in a range of connected devices it has tried establishing its name in, like VR headsets, umbrellas and even rice cookers.

According to the data released by research firm IDC, the sales of Xiaomi smartphones have seen a dramatic drop of almost 40% in second quarter of 2016, compared to the last year. Apple, too, suffered a similar decline in sales, while Xiaomi’s real competitors, Oppo, Vivo and Huawei, saw considerable growth. Surprisingly, even the size of the Chinese market grew by 4.6% in the same period.

Shortly after 12 months of valuation, Xiaomi not only missed its revenue targets twice, but also failed to meet its sales targets. According to analyst, Richard Windsor, the valuation of the company could further drop by 10-20% in the late 2016, leaving it at only $3.6 billion. It is the time for this Apple-of-the-east to introspect where did it all go flawed.
What really went wrong for Xiaomi?
Xiaomi had credited its success to their trump card – producing smartphones with premium hardware and features, which would obviously cost a fraction of those from Apple and Samsung. The problem arose when other manufacturers, too, jumped in the pool playing the same game. Unlike Xiaomi, the competitors, like Oppo, OnePlus and Vivo, were smart enough to come up with something fresh and innovative, like rapid charging, curved screens, exclusive content, dual lens cameras and finger-print sensors.

“I think Xiaomi’s current performance and growth in the smartphone space has stalled, as competitors with better R and D, vertical manufacturing expertise, and a wider distribution and geographic footprint has surpassed the brand,” Neil Shah, analyst with CounterPoint Research told IBTimes UK. Xiaomis inability to innovate independently is one of the key reasons.

Various moves from the company like delaying the release of advanced Mi Note 2 smartphone to favor RedMi Note 3 all suggest that the company is trying to focus on the ultra-budget front of the market, ignoring the clear indications of being ready to pay more from the Chinese customers. This all has, in a way, showcased the company to be confused in prioritizing its actions and identifying the change in the market conditions.

Global expansion dreams and lack of loyalty
Xiaomi does not have a patent portfolio to enter European market, which has in a way flawed the very basis of Milner’s ideation behind investing in it – it is successful in handful of Asian countries, it will be a huge success in Europe. For a long time, Xiaomi has been accused of copying hardware from the giants like Apple and Samsung and it will readily face criticism in the form of patent lawsuits the moment it will set its first foot in Europe.

It has already faced sales bans from Ericsson for infringing its patents in its second largest market, India. Of course, signing patent deals with QualComm and Microsoft is proving to be of no great use to it.

Customers, especially Chinese, are hailed to have no brand loyalty and are very savvy. That is the reason why Xiaomi could not retain the new customers it was once being able to convince.

Even though smartphones have always been the lead product for Xiaomi, the company has always suggested that it sees its future more broadly, as essentially an e-commerce company for a whole variety of products, Jan Dawson, chief analyst at Jackdaw Research told a popular online source.

While all that would have sounded smart considering the global smartphone market was expected to see its annual sales growth to slow down to 3.1% in 2016, Xiaomi has just not been able to make any of the investments pay off.
More trouble for Xiaomi?
As Steve Millward wrote on the Tech in Asia blog, “Xiaomi is in deep s**t, and it is difficult to see a way back. I don’t see much of a recovery coming for Xiaomi in the future.”. Numbers from CounterPoint Research suggest that smartphones contribute up to 85% to the company’s revenue, while the rest comes from its software and services division. This implies the investments from companies like Ninebot, the Chinese company that bought Segway, are yet to pay off and it is still vague if it ever will.

Things look rather worrying for Xiaomi, who seems to have all its plan sound puzzling. Even its life-guard strategy seems out of place as the company pendulums between a content, apps and service driven environment with its heart in smartphones to a hardware-based connected everything ecosystem.