CELLPHONES: Xiaomi’s Growth Sputters
Bottom line: Xiaomi’s rapidly falling sales growth is the result of many factors that reflect its youth and inexperience, and the company should pause and return to its early strategy or risk seeing its slowdown accelerate.
Media are swarming to the latest sales figures from sputtering smartphone sensation Xiaomi, which has just announced first-half data that looks mediocre to downright bad, depending on how you look at it. The company is trying to put a positive spin on the data, saying its first-half sales rose 33 percent from a year earlier. But one media report points out the latest 6-month sales were actually down from the second half of 2014, marking the first-ever sequential decline for this rapidly sputtering smartphone superstar.
This latest data shouldn’t come as a huge surprise, but instead marks a continuation of a steady stream of signals that point to a rapid reversal of fortune for Xioami. I’ve previously said the company and its charismatic CEO Lei Jun are at least partly to blame for the negative publicity they are now receiving, since they built up huge expectations over the last 2 years through a non-stop series of lofty announcements and other high-profile publicity stunts.
All that said, the real question that people should start to ask is whether Xiaomi is really a special company like its role model Apple (Nasdaq: AAPL), or perhaps just a flash in the pan that could crash and burn just as quickly as it shot to fame. I was initially of the former opinion, perhaps naively believing Lei Jun’s story that positioned Xiaomi as a designer of hip and trendy but affordable smartphones. But I’m increasingly moving to the latter camp, as Xiaomi abandons many of the early business practices that gave it the hip and trendy image and helped it avoid the “made in China” stigma.
All that said, it’s far too early to forecast an imminent downfall for Xiaomi, and instead we should look at the latest figures to see what they mean. The company said it sold 34.7 million smartphones in the first half of the year, up 33 percent from a year earlier but down slightly from the 35 million phones it sold in the second half of 2014. (English article; Chinese article)
The company previously said its first quarter sales rose by 36 percent to 15 million units. So if we do a little math, we can calculate that its sales grew by about 31 percent in the second quarter, pointing to a rapid slowdown for a company that was previously used to triple-digit growth. Xiaomi previously said it was aiming to sell 100 million smartphones this year, but later lowered that target to 80-100 million.
Target Reachable, But Increasingly Tough
The company sold 61 million smartphones last year, so it would need to post about 33 percent growth to hit the lower end of this year’s target of 80 million smartphone sales. That goal looks possible but increasingly difficult if the growth rate continues to slide during the important second half of the year.
The company is likely to get a boost from its launch in Brazil, slated for later this month (previous post). But it will continue to struggle in India, it’s second largest market, due to a patent dispute. It is also facing headwinds in an ultra-competitive China market where overall growth is slowing. Adding to those woes are previous reports that say technology issues might delay the roll-out of Xiaomi’s newest fifth-generation model, which will also hurt sales. (previous post)
So, what’s the bottom line in all this? The answer appears to be that Xiaomi’s rapid ascent is quickly running out of steam and the company needs to stabilize its situation to prevent further erosion. If I were advising Xiaomi, I would suggest it put the brakes on its expansion and some of its other recent initiatives, and try to return to its roots as a hip and trendy name focused on Internet-savvy young buyers. That may mean sacrificing a few percentage points of growth over the next year or two, but could put it on more solid footing over the longer term.
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