SMARTPHONES: Brick-and-Mortar Xiaomi Eyes 2017 Comeback

Bottom line: Xiaomi stands a better than 50 percent chance of stabilizing this year and reversing its 2-year-old decline, based on its push into brick-and-mortar retailing and positive reviews for its newest higher-end model.

Blame it on the Internet. That seems to be the message coming from Xiaomi, the smartphone maker that’s in a bit of an identity crisis, trying to explain its rapid descent over the last 2 years following a meteoric rise in 2014. A couple of other reports are also saying the company is preparing to roll out its own processor later this year, and have charismatic chief Lei Jun criticizing rival Huawei for lacking the “internet sensibility” needed to succeed in the online era.

That’s quite a bit of news coming from Xiaomi, most or all of it streaming from a forum where Lei was kicking off the Year of the Rooster with some big talk for a company turnaround this year. From a purely operational perspective, Lei seems to be pinning the blame for Xiaomi’s rough road over the last two years on a lack of brick-and-mortar stores to promote his company’s smartphones.

Xiaomi rose to prominence on an Internet-only sales model that served two purposes. On the one hand it greatly reduced costs, since it effectively cut out a lot of middlemen and also negated the need for costs associated with real-world stores. The approach also added to Xiaomi’s cache as a cutting-edge company, since it promoted a cool and trendy online image by eschewing stodgier traditional stores.

But now Lei is saying the lack of such a real-world retail presence ultimately undercut Xiaomi’s growth potential, since lots of people still like to buy their smartphones in such places. (Chinese article) Accordingly, Xiaomi began playing catch-up with its rivals last year, and now has 51 stores, with an aim to boost that to 200 by the end of this year. Lei adds that each should be able to generate 10 million yuan in annual sales, which would translate to about 2 billion yuan, or nearly $300 million, from those channels alone.

I’m no expert on this kind of thing, but Lei’s assertion that real-world stores are essential to any global smartphone aspirant certainly does have a certain logic. Everyone likes to talk about how big e-commerce is in China, and that’s certainly true for cheaper everyday items. But the reality is that the pricier the purchase, the more likely the buyer will want to see and try out the item before plunking down his hard earned cash.

Processor Debut

Next there are the two other smaller items, led by an unsourced but probably accurate report saying Xiaomi will roll out smartphones powered by its own processor, called Pinecone, within a month. (English article) This plan has been reported previously, and others said to be developing their own processors include Xiaomi rival Huawei.

I’m a bit skeptical of such efforts since Xiaomi has no experience in the area, and there are already plenty of good products on the market from third-party vendors like Qualcomm (Nasdaq: QCOM) and Mediatek (Taipei: 2454). The one exception, of course, is Apple (Nasdaq: AAPL), which has developed its own processors and was once the company Xiaomi liked to compare itself with.

But the last 2 years have shown that Xiaomi is still quite a ways off from becoming its role model and has a lot to learn in terms of product development. Accordingly, these new processors will probably have to go through at least 3 or 4 generations before they can finally compete with the big boys. But of course the bigger question is whether Xiaomi can last that long.

Finally there are Lei Jun’s comments that Huwei lacks the internet sensibility to thrive over the long term in today’s smartphone market. (Chinese article) Strangely enough, I actually sort of agree with Lei’s logic, as smartphones are increasingly becoming as much a lifestyle product as they are a piece of computing hardware. Huawei certainly excels at the latter, but is hardly known as a lifestyle brand, unlike Xiaomi.

Lei has shown he’s quite capable of the lifestyle element of the smartphone equation, proving himself a master at slick marketing campaigns. His big shortcoming was on the hardware side, and perhaps the lack of brick-and-mortar stores was also a factor.

Lei is certainly a fast learner, though the global growth he will need to really revive Xiaomi’s prospects took a big blow last month with the departure of the former Google (Nasdaq: GOOG) executive who was leading that push. (previous post) At the end of the day, I’d say Xiaomi stands a better than 50 percent chance of stabilizing in the year ahead, based on the brick-and-mortar push and also positive reviews for its latest model. I’m a bit more dubious about the Pinecone processor initiative, which may ultimately end up on the scrapheap of smartphone history.