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Why are Xiaomi phones so cheap?

Michael Kan | May 19, 2014
Xiaomi's unique business model is propeling the company outside its home base in China

To boost awareness, the company has relied on social networking sites, the press and its own customers, known as Mi fans, to help spread the word. The resulting exposure may not be on the level of what Samsung or Apple has, but the practice lets Xiaomi focus on young consumers already accustomed to using the Internet and buying products online.

Limited quantities
Whether or not you can actually get your hands on a Xiaomi phone is another matter. When the Mi 3 initially went on sale last October, the first batch of 100,000 units sold out in less than two minutes. It would be another seven days before the company made available another 100,000 more units, which were then immediately sold out again.

Releasing only a limited quantity of phones each week has been a staple of Xiaomi's business that's helped keep costs down. The company faces less risk by managing a smaller inventory. It also lets Xiaomi gradually ramp up production as component costs decline over time.

But the obvious drawback is that eager consumers have to wait, which may result in lost sales. Last year, the company's Hongmi phone received 7.4 million pre-orders after the device had been announced, despite the limited supplies.

A Kindle-like business model
In the long term Xiaomi wants to generate revenue, not purely through hardware sales, but through software. The idea is similar to the way Amazon is releasing low-price Kindle tablets to motivate customers into buying more ebooks and other digital content.

In Xiaomi's case, users can purchase themes for their phone that can alter the user interface's look. This can be done by purchasing the company's Mi credits online. How Xiaomi will further draw revenue from software sales is unclear. But releasing more phones into the market will lay the foundation. This year, Xiaomi is aiming to sell 60 million smartphones, and already sold 11 million units in the first quarter.

International expansion
Xiaomi products have at times been called Apple knockoffs. But the company's business model is putting pressure on rival vendors. "A lot of people are trying to replicate the Xiaomi model," said Nicole Peng, an analyst with research firm Canalys. Chinese vendors including Huawei, ZTE and others are also building similar high-end products for low prices and using online channels to drum up sales, she added.

As for Xiaomi, the company plans on taking that same business model outside of China. This year, it's targeting 10 foreign markets including countries in Southeast Asia as well as Brazil, Mexico and Russia. One day Xiaomi could come to the U.S. using the same approach, said Hugo Barra, former Google executive and now Xiaomi vice president, last month.

 

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