Will these mascots travel?

Photographer: Brent Lewin/Bloomberg

Xiaomi's Passage to India

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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When I started hearing stories about Xiaomi a few years ago, it seemed like China was ready to produce its first big global brand. The electronics company had built an Apple-like cult following in the country and had managed to stand out in a market already overcrowded with cheap mobile phones.

Xiaomi started out making nice, low-cost devices that consumers loved, and now it makes ultra-low-cost (and fairly attractive) fitness trackers, cameras and connected home gadgets that compete with products from Jawbone, GoPro and Samsung. Venture investors have poured money into Xiaomi, valuing it at $45 billion. That’s more than Uber and more than the market caps of companies like Delta Airlines and Salesforce.com.

To live up to that big valuation, Xiaomi has to expand well beyond China. The company runs on razor thin margins and generates hardly any income. It kept prices low in China by eschewing retail stores and selling directly to its customers.

The thinking goes that if Xiaomi can just get its devices into a huge number of hands, it should be able to find a way to make money later on software and services that support those devices.

Sound familiar? It’s the classic Silicon Valley playbook: Scale first and monetize later. Xiaomi is less like Apple and more like Snapchat.

In pursuit of all of that, Xiaomi has expanded into India, Southeast Asia and Eastern Europe. It’s opening up an online store in the U.S. to sell accessories. Last year the company became the third-largest smartphone seller in China. It posted year-over-year unit sales growth of 252 percent in the third quarter of 2014, says Jeff Orr, the practice director for mobile devices at ABI Research, a technology research firm. 

Xiaomi’s numbers are impressive and its products get great reviews, so what in the world could stop the Xiaomi machine from marching inexorably forward?

Look no further than India’s 173 million mobile Internet users, who represent one of the fastest-growing mobile markets outside of China. Xiaomi covets India, but the online retail strategy that worked for Xiaomi in China isn’t working there.

The company has cut a deal to sell devices in stores run by Bharti Airtel, the country’s largest telecoms operator. This week, media in India reported that Xiaomi is also selling devices in the New Delhi locations of the MobileStore, a big electronics retailer.

All well and good, but selling through retail stores could pose a challenge to Xiaomi’s business model. As my colleague Brad Stone wrote in his profile of the company, Xiaomi founder Lei Jun believes that holding inventory is a huge risk that can kill margins and sink a company. So Xiaomi eschews retail stores and sells directly, which helps it keep prices low. Once it begins relying on brick-and-mortar retailers, which take a cut of sales, that could quickly turn Xiaomi’s thin margins into losses.

Xiaomi is also attracted to India's stores because it doesn't have the brand recognition and power there that it already enjoys in China. It’s so well known in China that it doesn’t just sell online there, it creates a mania for its devices. Product announcements are followed by the drip-drip-drip of a few hundred thousand devices being pushed out through flash sales. Xiaomi's phones and tablets sell out in seconds, feeding an ensuing consumer frenzy, great word-of-mouth, and abundant media coverage.

While Xiaomi says that its products sell out online in India, too, people there seem less enamored with the company and its products.

This may be why Xiaomi is entering the U.S. cautiously, by trying to create consumer and media buzz by setting up online stores that sell accessories -- but no Xiaomi phones. It seems to be working. The Verge has already reviewed the company’s MiNote, saying it’s “the best phone you can’t have.”

Will that desire translate into sales in a country that is pretty much divided between Apple and Samsung? Will Xiaomi customers anywhere but in China chase the company’s products as if they were prizes?

I’m pretty bullish on Xiaomi becoming a big brand, and some of the challenges it faces in India may not exist in other markets. India has its homegrown handset makers like Micromax and Lava that could carve out a homefield advantage not unlike the one that Xiaomi has in China. India’s horrible infrastructure also makes e-commerce a huge challenge for companies like Xiaomi that are used to and dependent upon selling directly to consumers.

As the world waits for Indian Prime Minister Narendra Modi’s infrastructure and market reforms to take hold, I think it’s a good idea for Xiaomi to do what it can to establish a presence in such an important market, even if it means taking some losses.

Yet even if India poses unique challenges to Xiaomi, the company still faces obstacles in other markets like the U.S. that could force it to play a very different hand than it's accustomed to playing in China. Until Xiaomi can prove it has the ability to adapt, it's too early to say whether or not it’s positioned to become a dominant global titan.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Timothy L. O'Brien at tobrien46@bloomberg.net