Xiaomi’s meteoric rise is no small feat. The Chinese company started as a smartphone maker in 2010 and has since grown into a multibillion-dollar consumer electronics empire, selling everything from power banks, keyboards, and vacuums to WiFi routers and rice cookers. By 2020, the electronics company generated approximately USD 40 billion (RMB 245.87 billion) in revenue, with Xiaomi smartphones accounting for around 11.4%of the global smartphone market.
According to a report by INSEAD, the extraordinary growth of the conglomerate was built on the company’s unique collaboration-based strategy of “strategic coalescence.” By leveraging mutually beneficial relationships with consumers and partners, the report’s authors argued, the company developed a sustainable competitive advantage which led to its spectacular growth.
Xiaomi’s collaborative approach was partly the result of its investment in a portfolio of consumer electronics makers to manufacture its products. This strategic move has also made the tech giant one of the most successful early-stage investors and incubators in China’s tech landscape.
In fact, between 2014 and 2016, many of these portfolio firms generated annual sales growth of 100%, with some hitting 200%. Several of them, including smart wristband maker Huami and air purifier manufacturer Zhimi, even recorded a big jump in annual revenue from zero to USD 158 million (RMB 1 billion) over a three-year period.
Yet, a few years after Xiaomi burst onto the scene with smartphones, the brand seemed to have lost its shine. Besides market growth challenges, the conglomerate was also plagued by internal issues, including rivalry between portfolio companies as well as limited resources.
Rivalry and other challenges
A major concern that surfaced internally was the competition between Xiaomi’s portfolio companies, which resulted in an adversarial culture.
Price wars were common. An employee from a portfolio firm told 36Kr that Xiaomi would negotiate prices with multiple suppliers before choosing one. As a result, companies vying for contracts often bid below cost, which led to losses.
At other times, when newly launched products raked in considerable sales, suppliers would rush to emulate its success by replicating a similar product at a lower cost.
“When others see the progress you’ve made, they would ‘hunt you down’ and compete with you,” said a team member of a portfolio company interviewed by 36Kr.
There were other issues that threatened the success of the smartphone giant, including employee poaching between portfolio firms. One major concern was overlapping product designs—Xiaomi’s portfolio companies were making near-identical products. For example, the technology giant was sourcing from five different suppliers—Dreame, Yunmi, 3irobotix, Roborock, and Silver Star—to produce a vacuum cleaner of the same design.
In 2018, Qu Heng succeeded Liu De as Xiaomi’s new general director. This marked a timely move by the company to revive its flagging fortunes.
Qu’s priority was to tackle the growth plateau of the business. Despite its early success, Xiaomi was facing a big problem—revenue growth of its products had stalled in China. For example, hit products like vacuum cleaners and air purifiers were reaching market saturation after having captured a 33% share of the domestic market.
To put company growth back on track, Qu directed key resources to units and teams that would maximize returns and value for the company. To this end, Xiaomi slowed investment into new startups. Instead, financial resources were diverted towards scaling up operations of existing hardware suppliers. Firms with the most potential, including those with secure supply chains and much-needed skilled labor, were prioritized and allocated resources.
At the same time, Qu looked into other supply chain problems that caused disruption to business operations. He restructured project teams to improve supply chain efficiency and capacity. Tighter controls were also imposed on production and delivery scheduling.
Under his stewardship, the group also reshuffled its multi-brand product portfolio. From 2019 to 2020, products across the group were reclassified into three categories: mobile phone and related products, such as power banks and wearable devices; home appliances that form the IoT network; and gadgets like mini-robots with cutting-edge technology which were yet profitable. As a result, the total number of stock-keeping units (SKUs) across the group was reduced from 1,500 to 600.
A quality management system was also established to ensure product quality. All suppliers in the ecosystem were graded based on the quality of their products. Under the grading scale, A was the best and D the worst. Manufacturers with better scores were more likely to be awarded new projects. On the other hand, firms found with quality deficiencies were fined. This change was also part of Xiaomi’s renewed focus on quality as it moved into the global high-end smartphone market.
Between a rock and a hard place
Since the restructuring took place, there have been marked improvements in business operations. A CEO of a sub-brand told 36Kr that the group’s hardware makers were now paying more attention to producing “good products.” Also, employee poaching was banned, which resulted in less internal competition.
In its endeavor to regain a competitive edge, the conglomerate also primed itself for the next leg of growth. To drive this, top management decided to make a concerted push into electric vehicles. “How should we build a smart ecosystem around vehicles?” Lei Jun, founder and CEO of Xiaomi, posed the question in an internal memo.
Preparations are well underway in building up the new EV unit. To kick things off, Xiaomi picked the leading companies from its portfolio of hardware makers to start work on the auto supply chain. Dreame Technology, a vacuum maker incubated by Xiaomi, has put together a small team to support Xiaomi’s research and development on car motors, an insider told 36Kr. Meanwhile, Segway maker Ninebot and air purifier manufacturer Zhimi are reportedly in talks to collaborate on EVs.
Nevertheless, with plans to pump USD 10 billion into its EV division over the next ten years, Xiaomi’s new venture is likely to raise questions about the future of the suppliers left out in the cold.
As more resources are expected to be deployed to EVs, these portfolio enterprises, especially the smaller ones, will face intense pressure to grow or get left behind. Bigger firms like Dreame and Ninebot, which have an average annual revenue of USD 160 million (RMB 1 billion), can get easy access to funding, talent, and resources. However, for the majority of suppliers, which generate annual revenues between USD 47 million (RMB 300) to USD 79 million (RMB 500 million), they have to fight tooth and nail for scarce resources, on top of the squeeze from low profit margins.
Sandwiched between low sales and loss-making contracts, smaller firms find themselves between a rock and a hard place.
Meanwhile, companies that attempt to break out of the Xiaomi ecosystem might find the odds stacked against them. This was what happened to Su Jun, founder and CEO of Zhimi, who tried to launch his own brand following slow business growth.
“I used to believe that good products can become popular as long as they are cheap,” said Su, who realized that competing on low cost was not enough. “I neglected other factors such as Xiaomi’s large fan base, its huge sales channels, strong marketing ability, and wide network of products.”
Over the past few years, many consumer electronics brands competed fiercely to become part of Xiaomi’s network. Those who made it underwent intense transformations, in turn reshaping how Chinese product designers and electronics manufacturers approach their work. The result was an industry-wide elevation in the way ideas become products, as well as changes in the relationships between some of the brightest minds in China’s tech scene.
This article first appeared on 36Kr. KrASIA is authorized to translate, adapt, and publish its contents. The original text was translated and adapted by Arete and Julianna Wu.