SMARTPHONES: Switcharoo Scandal Swallows Xiaomi

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Bottom line: Xiaomi’s latest scandal involving false promotional claims will deal another blow to its rapid rise, increasing the likelihood that it will miss its already-reduced target for smartphone sales this year.

Xiaomi caught in bait-and-switch scandal

Smartphone maker Xiaomi started this year on a high note, after scoring a major new fund-raising late last December that gave it an impressive $45 billion valuation just 4 years after its founding. But it seems there was only one direction to go from there, as the company has been dogged by a steady series of minor scandals, product delays and disappointing sales figures ever since.

The latest headlines of a Xiaomi scandal reflect just how much momentum the company has lost this year. The reports  center on allegations of false promotions for the company’s Hongmi Note 2, after consumers noticed the new low-end smartphone came with a cheaper screen than originally promised.

Before this year, Xiaomi had become a master at charming both the media and consumers. The company’s name was a regular fixture in the news, as reporters gobbled up slick publicity campaigns masterminded by Xiaomi’s charismatic founder Lei Jun. Consumers were equally charmed, competing fiercely to buy smartphones sold only online and whose numbers were cleverly kept low in a strategy known as hunger marketing.

Fast forward to the present, when Xiaomi’s sales growth has dropped sharply and the company is rapidly losing momentum in its home China market, which accounts for the big majority of its revenue. At the same time, Xiaomi is rapidly losing the hipster image that was a large factor behind its success, as it abandons its online-only and hunger marketing strategies in a bid to meet its lofty sales targets for the year.

These days the company’s product launches don’t attract nearly as much attention and hype as the used to. The number of headlines involving Xiaomi are also far fewer, and the ones that do come are just as likely to be negative as positive.

That’s certainly the case with the latest flurry of headlines, which stem from news of false claims related to the Hongmi Note 2. According to the reports, Xiaomi had said in earlier promotional materials that the new model would use screens made by Japan’s Sharp Corp (Tokyo: 3128) or Taiwan’s AU Optronics (Taipei: 2409), both well-known brands with reputations for high quality. But when consumers got their phones, they discovered the models contained screens manufactured by the relatively unknown company Tianma. (Chinese article)

Large-Scale Returns

The revelation has led to calls for buyers to sue Xiaomi for false advertising, and has also triggered a large volume of product returns for the Hongmi Note 2, according to another report citing front-line market research. (Chinese article) There’s no additional detail on the volume of the returns, but the reports point out that Xiaomi previously said it sold 800,000 Hongmi Note 2 handsets in the first 12 hours after they went on sale last month.

Xioami was quick to issue a statement saying the issue was the result of mistaken labeling on some promotional materials related to the Redmi Note 2. But that didn’t seem to placate angry consumers who felt betrayed by the company. This mini scandal is just the latest setback for Xiaomi, dealing another blow to its chances for achieving its 2015 sales target of 80-100 million phone sales this year. (previous post)

At the end of the day, Xiaomi really has no one to blame besides itself for all its recent troubles. The company set hugely unrealistic expectations for itself with its nonstop publicity and early success, which captivated both consumers and media hoping to spot China’s first trendy high-tech brand. But Xiaomi is quickly learning that big expectations also carry huge risk, since even relatively small problems like this latest scandal suddenly become big news for such a high-profile company.

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