Assesment of the Xiaomi phenomenon before the global storm is starting on Sept 5

Follow-up: Xiaomi announcements: from Mi3 to Xiaomi TV [‘Experiencing the Cloud’, Sept 5, 2013] with detailed information links and videos about the two market leading SoCs used in Mi3:
NVIDIA Tegra 4 with 4+1 Cortex-A15 CPU, 72 GeForce GPU and the absolutely unique Chimera™ solution for HDR (High Dynamic Range imaging) photography and video recording
Qualcomm Snapdragon 800 with the high-end Krate 400 CPU cores and Adreno 330 GPU
(Actually the benchmark performances are roughly equal although Qualcomm needs for that a much higher frequency.)

The news came yesterday declaring not less than
A new Android chapter [Hugo Barra on Google+, Aug 29, 2013]

After nearly 5½ years at Google and almost 3 years as a member of the Android team — the most amazing group of people I’ve ever worked with in my life — I have decided to start a new career chapter.

In a few weeks, I’ll be joining the Xiaomi team in China to help them expand their incredible product portfolio and business globally — as Vice President, Xiaomi Global.  I’m really looking forward to this new challenge, and am particularly excited about the opportunity to continue to help drive the Android ecosystem.

It has been an amazing ride and true honor to be part of the Android team at Google, and I especially want to thank +Andy Rubin , +Hiroshi Lockheimer , +Sundar Pichai and +Vic Gundotra for their phenomenal support and mentorship over the years.

+Android team, I will truly miss you all!

To which co-founder and president of Xiaomi Corporation Bin Lin responded on his facebook account on August 29:

I am truly grateful to have Hugo joining Xiaomi to help lead our international business.

Being Google’s VP of Product Management for Android, Hugo has a deep understanding of Xiaomi’s unique business model of building a fully compatible Android OS (aka MIUI) by embracing the openness of the internet, building top performance device with great user experience, and selling direct to consumers at substantially lower price. We’ve achieved some level of success in China market. Hugo is the best person to drive this globally.

Being ex-Googler myself, I’ve always made sure that Xiaomi shares many of the believes as Google Android. For instance, we believe in protecting the Android ecosystem and therefore our handsets have always passed Android CTS [i.e. achieving Google Play compatibility]. We believe in top performance device and eCommerce sell-direct would benefit consumers. We are committed to drive the Android ecosystem moving forward.

Welcome to Beijing, Hugo!

Last time we have seen Hugo Barra at a press event in San Francisco with
Google’s Nexus 7 goes full HD [CNETTV YouTube channel, July 24, 2014]:

The all-new HD Nexus 7 tablet is thinner and lighter than previous versions and sports an HD screen with 1,920×1,200-pixel resolution.

News were first leaked in: Android’s Hugo Barra Departs Google for China’s Xiaomi [AllThingsD, Aug 28, 2013 at 5:15 PM PT]

What’s going on? After Sundar Pichai expanded his Chrome responsibilities to Android as well, and Andy Rubin left the Android scene, so Hugo Barra became the #1 man in Google’s Android efforts, he is leaving for a much less influential Chinese maker of Android forked smartphones? What is the sense for him to have such a move?

In what follows below I will be able to give all the well justified reasons for that. Moreover, thanks to my earlier posts analyzing the Xiaomi phenomenon in all details, I will be able to convince every reader of this post in the most concise way that Hugo Barra was absolutely right about his decision to move to Xiaomi, as an even bigger thing is on the Horizon than what Google may become in the future.

Let’s start with the all-new RMB799 ($130) low-end superphone segment of Xiaomi: Xiaomi Red Rice (Hongmi) review
[a Xiaomi video on Youku via phonezilla2013 YouTube channel, Aug 21, 2013]

More information: UPDATE Aug’13: Xiaomi $130 Hongmi superphone END MediaTek MT6589 quad-core Cortex-A7 SoC with HSPA+ and TD-SCDMA is available for Android smartphones and tablets of Q1 delivery [‘Experiencing the Cloud’, Dec 12, 2012; Aug 1, 2013]

Note: Xiaomi Red Rice (Hongmi) manufacturing cost (BOM) has been estimated by TrendForce to be $84.7.  See the press release, also included here in the very end of this post.

Then let’s see (note the Sept 5 warning on the illustration which is from Xiaomi itself):

Previous
segments
Aug 16, 2011: Aug 16, 2012: April 9, 2013:
USD$326.6 Xiaomi smartphone Xiaomi 2 Xiaomi 2S
USD$249.9 Xiaomi 1S Xiaomi 2A

image_thumb5[1]

Detailed further information and market analysis:
Xiaomi, OPPO and Meizu–top Chinese brands of smartphone innovation [‘Experiencing the Cloud’, Aug 1, 2013]
The Upcoming Mobile Internet Superpower [‘Experiencing the Cloud’, Aug 13, 2013]

Note: Only when you read The Upcoming Mobile Internet Superpower post (not only the e-book included there) completely (i.e. with the follow-up and global analysis parts) your understanding of the all-new Xiaomi Horizon could be sufficiently complete. It is only possible to give as a teaser certain crucial facts here:
– “The broader vision of Xiaomi, Lei [the founder and CEO of Xiaomi] pointed out, is to ship more than 100 million smartphones annually for one model by 2016” that was published in China Daily back 15 months ago. With Hugo Barra now in charge of Xiaomi Global it will be easy to achieve that, even far overcome.
– There is a new (maybe final before an IPO) round of financing said to be disclosed also on Sept 5 by Xiaomi. The amount was rumored as being not less than $2B and “from Chinese internet and mobile services firm Tencent (0700.HK), with Russian investment firm Digital Sky Technologies (DST) acting as an intermediary”. DST already invested $90 million into Xiaomi in Dec 2011, and another $216 million in Dec 2012.
– Then, DST is controlled by Russia’s richest man Alisher Usmanov with ~20B of private wealth and an additional ~13B wealth of its two business partners also controlled by Usmanov via 100% voting rights in his USM Holdings empire. USM Holdings has three groups of assets in its portfolio: Internet (with DST and a complete Mail.Ru Goup), Telecoms (with Megafon, Russia’s second largest mobile operator in terms of revenue and subscribers and the market leader in the mobile data segment, as well as Yota, the leader of the mobile broadband sector in Russia), Media and Steel & Mining.
Tencent is controlled by Naspers (33.9%) which also heavily invested into the Mail.Ru Group earlier (29%), and might have some minority share of DST itself, indirectly via Tencent definitely (getting not less than 10.26% of DST with a $300M investment into it in April, 2010). Although Naspers’s CEO, Koos Bekker has a personal fortune of ‘only’ $580M (mid’12, so now closer to $1B probably) but has been the unquestioned leader and decision maker of the company, which has a market capitalisation of about $57B (mid’12, now much higher). Also Tencent’s own market capitalisation is not less than $88.6B (Aug 15, 2013).
–  Also, Venture Capital Dispatch reported in January this year that “DST Global counts Chinese e-commerce giant Alibaba and online retailer JingdongMall [pre April 2013 360buy] as part of its Asian portfolio. DST, alongside other private equity firms like Silver Lake agreed to buy shares in Alibaba at a tender offer of $1.6 billion in 2011. That same year, DST Global also participated in a $1.5 billion third round of funding in Jingdong [pre April 2013 360buy] , with media reports stating that DST bought a 5% share in the online retailer for $500 million. … DST Global spent around $1.5 billion on both of those deals, said [DST partner John] Lindfors [responsible for the Chinese market].”
(AND THE FACTS DO NOT END HERE BUT ARE GOING TO EVEN HIGHER ECHELONS OF GLOBAL CAPITALISM. GOLDMANN SACHS AND LARRY SUMMERS ARE THE MOST NOTABLE EXAMPLES. BUT DO NOT FORGET J.P. MORGAN EITHER WHICH IS HAVING A 5% OWNERSHIP OF TENCENT AS WELL. So read The Upcoming Mobile Internet Superpower post completely.)

Now an additional focus on Xiaomi’s design and user experience leadership must be emphasized here, out of all that above (the illustration below is again from Xiaomi):

image_thumb2

Xiaomi MI2 Product 3D View [Xiaomi China YouTube channel, Aug 25, 2013]

Xiaomi Fans Festival: MIUI V5 Design Concept [MrMiui YouTube channel, April 9, 2013]

Xiaomi One Minute Show 01 Smooth MIUI [Xiaomi China YuTube channel, May 22, 2013]

A brief introduction of the brand new smooth MIUI v5.
0:04 This is our smooth MIUI v5
0:07 You can feel the smooth animation effect from every detail of MIUI v5
0:11 when switching the list in apps like Contacts or App Market
0:18 Feel the smooth switch of the background in the interface of Music
0:22 even the tiny volume icon is smoothly optimized as well
0:25 Your playlist, album photo and lyrics are perfectly combined
0:31 Switch between the camera and gallery swiftly and smoothly
0:37 When you open a photo album, you can see photos smoothly blossom on your screen
0:43 You can also have a quick and smooth slide when there are a lot of photos in your album
0:48 All the icons vibrate smoothly after reordering
0:51 We also redesigned the animation of deleting apps
0:55 You can feel the smooth animation everywhere in MIUI v5
1:00 What do you think of MIUI v5?
1:03 For more Xiaomi One Minute Show, please visit Xiaomi Community
Note: The Xiaomi community is on https://www.facebook.com/xiaomichina. The other shows are available when one click on the “YouTube” in the header (not all of them are one minute long). The “proper” One Minute Shows I found on XiaomiHK: currently 11, unfortunately all in Chinese.

There is also a MIUI community around the world which will make Barra’s job much easier. With ‘MIUI fan clubs’ – already available in 23 countries 15 months ago – the localization problem has been well solved. These fan clubs are producing MIUI ROMs for modding a range of already existing phones. And the results are quite good:
MIUI 5 on Samsung Galaxy s4 !!! (Review) [TheExilimus YouTube channel, July 28, 2013]

Note: this is why 20+ million MIUI users were indicated on the previous illustration by Xiaomi vs. 15+ million Xiaomi phone users.

Moreover, MIUI is continously evolving, and updated every Friday based on feedback from its users. The latest example (full description of the update):
MIUI ROM 3.8.30 Update Highlights [MrMiui YouTube channel, Aug 29, 2013]

1. Added the option of “Limit mobile data usage” in Browser 2. Added support for transfer of complete contact info and notes with images in Transfer … Find MIUI here (http://en.miui.com/) Facebook:https://www.facebook.com/miuiromchina Twitter: https://twitter.com/#!/miuirom Google plus: http://gplus.to/miuiofficial

Also the marketing hype generated by Xiaomi should be emphasized separately here as well. It is best demonstrated by this:
Xiaomi 2012 Conference Start Show [Xiaomi China YouTube channel, Aug 27, 2013]

What kind of company Xiaomi is, after all?
Explanation: Xiaomi CEO: Don’t call us China’s Apple [Reuters TV YouTube channel, Aug 15, 2013]

China’s Xiaomi has sparked a frenzy with a low-cost smartphone that may help the tech firm widen its lead over Apple in the local market — but CEO Lei Jun says it has very different ambitions.

Based on this interview Reuters published its news article For China’s Xiaomi, it’s what’s on the inside that counts [Aug 16, 2013] from which the following excerpts are the most relevant ones here:

Xiaomi looks a bit like Apple but is really more like Amazon with some elements of Google,” Lei said in an interview in Beijing, dressed in a blue shirt, blue jeans and brown shoes.

The mobile phone is only the carrier,” Lei said. “Microsoft used to sell Windows in a box with a CD in it. Does that make Microsoft a paper box company?”

The 43 year-old chief executive said it was high time for the Apple comparisons to end and the rivalry with local tech giants Alibaba Group Holding, Baidu Inc and Tencent Holdings Ltd to start.

Xiaomi currently makes around 20 million yuan ($3.27 million) a month in revenue from its mobile Internet platform, which includes a game centre, an online marketplace and a social messaging app that competes with Tencent’s popular WeChat.

In the first half, that figure was equivalent to less than 1 percent of monthly revenue, company data shows.

Lei estimated mobile Internet revenue may rise to as much as 150 million yuan [$24.41 million] a month by the end of next year as Xiaomi develops what he called its software ecosystem.

He declined to give specific details, but said Xiaomi had the hardware it needed to expand into online services.

Xiaomi selling mobile phones is like Amazon selling Kindles,” he added.

This points quite clearly to the expansion of Xiaomi’s application (and operations) portfolio towards the e-commerce. Only this way would be possible to increase the current annualized revenue of about $40 million from the mobile Internet platform to about $300 million in just one a half year. This also means that in the long-run Xiaomi is going to be a mobile e-commerce company with affordable mobile devices offered as well, and not a premium device company, like Apple. Similarly, there are fundamental differences of the same kind from the business model of Samsung as well. Even more, this means an all-encompassing disruption of the whole industry.

Finally read this 3d party analysis:
TrendForce:Xiaomi’s New Red Rice Phone Takes China by Storm, Carries $US 85 BOM [press release, Aug 29, 2013]

(Note that Xiaomi’s own superphone segments are different as was shown above:
USD$326.6 for high-end superphones, USD$249.9 for mid-range superphones, and
?USD$130? for low-end superphones, with the latest question mark for the reason of not yet announced global prices – as the USD$130 equivalent RMB799 is China only price. Wait for Sept 5.)

image

According to global market research firm TrendForce, smartphone manufacturing costs are decreasing – in 2014, low-end devices that cost less than US$150 are expected to represent 14% of total smartphone shipments worldwide, up from 11% forecasted for this year. Mid-end smartphones, which cost between US$150 and US$450, are projected to account for more than 50% of shipments in 2014. Clearly, smartphone makers looking to expand their market share cannot overlook the low to mid-end sector. Fully aware of this, Chinese smartphone manufacturer Xiaomi has released a Hongmi, or Red Rice, a device with decent specifications and a low price tag of RMB799 [$130].

image

Taking a look at Red Rice’s hardware, its MediaTek MT6589 chipset accounts for 20% of total manufacturing cost. The 4.7-inch, 312 ppi IPS display by AUO represents 22% of cost and is a significant upgrade from the 220 ppi display commonly used in similarly priced devices. Based on component cost, total manufacturing cost for the Red Rice device is estimated at US$85 (4Q”13). With a retail price of RMB799, roughly equivalent to US$130, Xiaomi is profiting at a rate difficult for other smartphone makers to keep up with.

Xiaomi is not relying on traditional sales channels for its new device but turning to Internet retailers instead – the company hopes to garner revenue from software, advertising, etc., creating a new smartphone profit model. TrendForce believes Xiaomi is able to offer Red Rice at such a low price because the maker has a solid grasp on three important points of cost control.
– First, Xiaomi usually unveils new products very early, at least a quarter before the actual release date, which gives component cost time to decrease.
– Second, Xiaomi controls inventory better than its competitors. Using an Internet pre-order sales model, Xiaomi is able to get a more exact estimation for initial production, thereby avoiding risk if sales are not as strong as expected.
– Third, by marketing via social networks, Xiaomi cuts down on advertising costs, enabling the manufacturer to continue causing a stir on the market with each new device release.

Red Rice’s groundbreaking price will inevitably have an influence on other smartphone manufacturers’ pricing strategies, especially for low to mid-end products. Currently, Xiaomi’s main market is China. The company is eagerly expanding on foreign markets as well, but results have been limited. Whether Xiaomi’s low prices will have an effect on smartphone makers in other markets will depend on the Chinese manufacturer’s foreign sales.

TrendForce believes Xiaomi’s long-term strategy includes continued expansion on the domestic market as well as breaking into foreign markets with high price-performance ratio devices. As social networking platform services and software are the company’s main sources of profit, Xiaomi will need to develop new strategies to attract consumers in foreign markets. As the company’s recently closed funding round has skyrocketed its valuation, Xiaomi is financially set to expand in foreign markets, potentially by acquiring local businesses. Or, the funds could be used to improve manufacturing and ensure timely product delivery, a notable weakness of the growing company.

About Nacsa Sándor

Lazure Kft. • infokommunikációs felhő szakértés • high-tech marketing • elérhetőség: snacsa@live.com Okleveles villamos és automatizálási mérnök (1971) Munkahelyek: Microsoft, EMC, Compaq és Digital veterán. Korábban magyar cégek (GDS Szoftver, Computrend, SzáMOK, OLAJTERV). Jelenleg Lazure Kft. Amire szakmailag büszke vagyok (időrendben visszafelé): – Microsoft .NET 1.0 … .NET 3.5 és Visual Studio Team System bevezetések Magyarországon (2000 — 2008) – Digital Alpha technológia vezető adatközponti és vállalati szerver platformmá tétele (másokkal együttes csapat tagjaként) Magyarországon (1993 — 1998) – Koncepcionális modellezés (ma használatos elnevezéssel: domain-driven design) az objektum-orientált programozással kombinált módon (1985 — 1993) – Poszt-graduális képzés a miniszámítógépes szoftverfejlesztés, konkurrens (párhuzamos) programozás és más témákban (1973 — 1984) Az utóbbi időben általam művelt területek: ld. lazure2.wordpress.com (Experiencing the Cloud) – Predictive strategies based on the cyclical nature of the ICT development (also based on my previous findings during the period of 1978 — 1990) – User Experience Design for the Cloud – Marketing Communications based on the Cloud
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4 Responses to Assesment of the Xiaomi phenomenon before the global storm is starting on Sept 5

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