Bottom line: Xiaomi’s Brazilian retrenchment will ultimately become a withdrawal from the country, and reflects a lack of preparation and understanding when it entered the market a year ago.
The bad news keeps coming for sputtering smartphone maker Xiaomi, which is retrenching its Brazilian operation less than a year after entering the market. I have to admit that reports on this latest setback reflect a recent media fascination with any sort of failure for Xiaomi, which was once a media darling with its hip-and-trendy smartphones and slick marketing campaigns. But that said, this particular setback does look a bit more serious than some of the other recent bad news, as it appears to mark a big disappointment in a market where Xiaomi had big hopes.
Xiaomi first announced its plans to enter Brazil last July, as part of a global expansion aimed at extending its early success in India, another BRICS country. (previous post) That international drive was part of Xiaomi’s bigger campaign to extend its phenomenal growth from its first 2 years, fueled largely by huge early success in its home China market.
But since then Xiaomi’s China sales have stalled as its image faded and it faced huge competition from a crowded field of domestic rivals. Its India campaign also suffered a setback due to a patent lawsuit, and also from similar heated competition as many of China’s other smartphone makers piled into the market.
Against that backdrop, Xiaomi was placing big hopes on Brazil, since the market is far enough from China both geographically and demographically that most other Chinese brands haven’t gone there yet. But now Xiaomi is discovering that Brazil isn’t quite such an easy place to do business, with reports that it has temporarily halted its local efforts while it overhauls its strategy for the market. (Chinese article)
While it mulls its next steps, Xiaomi has reportedly stopped introducing new smartphone models to the market, and has also recalled its small local team back to China. The reports point out that Xiaomi isn’t the only Chinese brand to stumble in Brazil. They cite an unnamed industry executive saying that powerhouses Huawei and ZTE (HKEx: 763; Shenzhen: 000063) also failed to gain traction and actually pulled out of Brazil before recently re-entering the market. I suspect the unnamed official is a Xiaomi insider, who is trying to put a more positive spin on this latest company setback.
One of Xiaomi’s biggest obstacles in Brazil was the country’s high import duties, designed to encourage local manufacturing. Another factor was limited sales channels. The reports point out that only about 15 percent of smartphones in Brazil are sold online. That made life difficult for Xiaomi, which relies heavily on Internet sales to keep costs low.
My initial reaction to this latest setback is that Xiaomi should have anticipated most of these factors before it entered the market. But in its haste to expand and keep its sales growth humming, and also probably due to a certain element of hubris, it appears to have rushed into the Brazilian market without doing the necessary homework. The fact that Brazil is now in a state of economic and political turmoil probably didn’t help either.
News of the Brazilian retrenchment comes just a week after new data showed that Xiaomi’s sales in its home China market plunged 32 percent in this year’s first quarter. (previous post) That plunge looked particularly worrisome, since Xiaomi launched its newest flagship model in March, which theoretically should have helped to boost sales. The company managed to maintain flat global sales growth for the quarter due to contributions from other markets like India and Southeast Asia.
Xiaomi is probably trying to avoid alarming its investors by calling this latest Brazilian move a retrenchment rather than a withdrawal. But the company is also probably entering a new “cash-conservation mode”, since it realizes its inflated valuation may take a big hit if it tries to raise more money now. Accordingly, I doubt Xiaomi will be willing to make the big investments it would need to relaunch a new campaign in Brazil, and its retrenchment there could easily end up becoming a permanent withdrawal from the market.
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