CELLPHONES: Alibaba-Backed Meizu Takes On Xiaomi In India
Bottom line: Meizu’s rapid India expansion could provide it with some relief from the overheated China market over the short-term, but will result in new price wars over the next 2-3 years as its domestic rivals make similar moves.
Freshly infused with nearly $600 million in new capital after a major investment from e-commerce giant Alibaba (NYSE: BABA), smartphone maker Meizu is getting set to take on higher profile rival Xiaomi outside China with a major new campaign in India. In many ways, this particular move looks like China’s way of exporting the rampant price wars that have plagued its smartphone market to other countries with similar demographics. In this case, Meizu is not only eying a country that has suddenly become Xiaomi’s second largest market, but is also planning to follow its rival into Southeast Asia.
China’s smartphone market has become incredibly overheated over the last 2 years, sparking a series of wars that have prompted manufacturers to routinely slash prices to levels that are now often at 500 yuan ($80) or less. Few companies will admit to actually losing money in the business. But I suspect that most are barely breaking even at best, and many are probably using accounting tricks to fool others into thinking they’re still profitable as they look desperately for new money to keep funding their operations.
Coolpad (HKEx: 2369), a popular domestic brand, became the first to get a lifeline from some of China’s cash-rich Internet players when it received $400 million as part of a joint venture it formed with security software maker Qihoo 360 (NYSE: QIHU) in December. Meizu, which has a similar profile, followed 2 months later when it received $590 million from Alibaba in exchange for an unspecified stake in the company.
Now we’re learning that Meizu plans to use its big new cash pot to embark on a similar global expansion to what Xiaomi has done. During my trip to Spain this week for a big trade show, overseas sales official Angela Jin told me Meizu actually began exporting more than a year ago. It now sells its smartphones in Hong Kong, Taiwan, France, Italy and Russia, though overseas sales generated a meager $1 million in revenue last year.
The company is hoping to change that record this year, and is currently on the cusp of several distribution agreements to sell its phones in India. It’s copying Xiaomi in quite a few ways, by selling its products online and also by offering its m1 note for the equivalent of $165, not too much more than Xiaomi’s popular Redmi low-end smartphone that’s now its best seller in India.
As to targets, Meizu is aiming to sell a relatively sizable 700,000 phones in India in its first year. That would translate to a cool $115 million in revenue from India alone, which would easily dwarf all of Meizu’s exports to other markets to date. Xiaomi also posted a similar performance in India, selling over 1 million phones there last year after entering the market last July.
Xiaomi ran into a road block in India late last year when a court ordered it to stop selling one of its models due to a patent dispute. But it continues to sell Redmi phones that are quite popular in the price sensitive market, and weren’t affected by the ruling. Like Meizu, Xiaomi also has a large cash pot after raising more than $1 billion earlier this year from western investors who don’t seem to mind pumping big money into just about any kind of Chinese tech company these days.
Meizu’s imitation of Xiaomi doesn’t stop at India, and the company also plans to follow its rival into other Southeast Asia markets like Thailand and Malaysia. China is already known as the land of copycats, so it’s not really surprising that companies are not only making similar products but are also copying each others’ business models. I expect we’ll see more of China’s lesser-known brands follow suit and launch sales in India and Southeast Asia, ultimately resulting in the same destructive price wars in these other markets that they’ve already created at home.
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