CELLPHONES: Rapid Slowdown Pushes Xiaomi To US, Europe

By newsdoug on May 21, 2015

Bottom line: Xiaomi’s rush into competitive western markets with beta testing of new online stores hints at internal concerns over the company’s rapidly slowing growth, and is likely to meet with a lukewarm reception.

The upwardly mobile Xiaomi is making its latest moves on the global stage, with word that it’s beta testing online stores in the US, France, Britain and Germany. The planned move into the US was previously disclosed earlier this year, with reports that Xiaomi would start by selling accessories like earphones. (previous post) But this addition of 3 major Western European markets hints that Xiaomi is moving ahead aggressively with its global expansion, and could even start selling its signature smartphones in some or all of those markets by year-end.

Xiaomi is accelerating its move into these lucrative but also highly competitive new western markets as it comes under growing pressure to maintain its breakneck growth that has given it a rich valuation of $45 billion just 5 years after its founding. That pressure is evident in a second headline, which says Xiaomi’s smartphone sales rose by just 50 percent in this year’s first quarter, far less than the triple-digit growth rates it has become used to in its relatively short life.

I’ll start this Xiaomi round-up with my own amused observation that it’s just a bit strange that the company is entering the US and Europe by selling accessories rather than its core smartphones. After all, it doesn’t really make a lot of sense to buy an accessory like a smartphone case or an earphone if you don’t own the core product, which in this case is Xiaomi’s trendy smartphones. But that’s exactly what Xiaomi is doing with this strategy, since its smartphones aren’t yet available for sale in the US or Europe.

The latest reports say that Xiaomi is conducting a beta test this week for its online accessory store this week in the 4 western markets. (English article) Only 4 products are being offered for now, including a pair of headphones, 2 portable battery models, and the company’s wristband fitness tracker. There’s no additional word on when an official launch might come, but we could probably see something in the next 2-3 months if this beta test is successful.

Meantime, another media report is quoting Xiaomi’s charismatic chief Lei Jun saying his company sold nearly 15 million of its smartphones in the first quarter of this year, up just 36 percent from the 11 million it sold in the first quarter of 2014. (Chinese article) This is clearly a case where the numbers speak for themselves, as this latest growth figure is far lower than the 227 percent sales growth that Xiaomi reported for all of 2014. (previous post)

Xiaomi was already starting to experience a slowdown in the fourth quarter of last year, so this further deceleration in the first quarter isn’t a complete surprise. But the rapidness of the slowdown could be somewhat alarming for investors who gave Xiaomi $1.1 billion early this year with the expectation that the company would be able to maintain its triple-digit growth rates for at least 2015 and hopefully into the next 2-3 years.

Xiaomi’s sudden slowdown owes at least partly to a setback in India, which has become its second largest market after China. A patent dispute there forced it to stop selling some of its models in the market late last year, hurting its global expansion plans. But the fact is that Xiaomi is facing stiff competition from a resurgent Apple (Nasdaq: AAPL), as well as a host of homegrown Chinese rivals led by Huawei, Lenovo (HKEx: 992) and ZTE (HKEx: 763; Shenzhen: 000063).

The combination of stiff competition and huge expectations have put big stress of the company, forcing it to abandon its online-only selling strategy first in India and earlier this month in China. (previous post) Against that backdrop, this particular preparation for a move into the US and Western Europe looks a bit hasty and has slight overtones of desperation as the company looks for ways to jump start its stalling growth. Such a move seems destined to run into problems, and I expect we could ultimately see Xiaomi’s smartphone launch fizzle in the west as its growth permanently settles into double-digit territory.