SMARTPHONES: Xiaomi Eyes US, Following Microsoft Alliance

Bottom line: Xiaomi could launch in the US within the next 12 months and benefit from its recent tie-up with Microsoft, but it will face a big uphill battle due to stiff competition, lack of name recognition and unexciting models.

Xiaomi eyes US — again

Following several recent false starts, fading Chinese smartphone sensation Xiaomi is saying it’s aiming to enter the tough US market soon. We’ve heard similar talk before, and at one time such a move would have been quite exciting and controversial when some were comparing Xiaomi to a China’s homegrown answer to Apple (Nasadq: AAPL). But Xiaomi’s star has faded considerably over the last year, partly due to intense competition in China but just as much due to a reputation for shoddy quality and unexciting phones.

The latest word of a new play for the US comes from Xiaomi’s global sales chief Hugo Barra, whose defection from Google (Nasdaq: GOOG) made global headlines 3 years ago when the Chinese smartphone maker was on a rapid rise. Since then Xiaomi has emitted periodic signals that it was preparing to enter the US smartphone market, and it already sells some accessories there like earbuds.

But previous reports have also indicated that Xiaomi was quite worried about potential patent lawsuits in the US, which prompted it to delay any entry to the market. Now Barra is saying that the US is a market his company can no longer afford to ignore, and Xiaomi will enter the market “in the near future”. (English article)

He didn’t give any timetable, but said Xiaomi will use similar marketing tactics that once made it one of China’s hottest tech companies and even prompted comparisons between charismatic CEO Lei Jun and Apple’s Steve Jobs. Those tactics relied on generating buzz through formation of online fan clubs, and also using an online-only sales model that helped to control costs while also adding to the cool and trendy image.

But Xiaomi always suffered from one major problem, namely that its products couldn’t live up to the huge hype it created. Many of my friends have owned Xiaomi phones at one point or another over the last few years, and nearly all say they are prone to break down and don’t have any distinguishing features from many other brands in the crowded space.

Tumbling Sales

Xiaomi’s sales in China have tumbled as the company lost its luster, and fell 38 percent to just 10.5 million units in this year’s second quarter, according to data tracking firm IDC. Barra said those numbers weren’t accurate,  noting that Xiaomi shipped just under 7 million smartphones in June alone. But that number appears to be a global figure rather than for China only, and he didn’t provide any figures for specific markets.

A move into the US would mark the latest extension of Xiaomi’s globalization drive begun 2 years ago, as it looked outside its home market to continue its breakneck growth. The company began its global march in Southeast Asia and India, and has done relatively well in the latter. But it fared far worse with another move into Brazil, where it reportedly withdrew from the market in May due to poor results. (previous post)

Barra has been exploring a potential US deal for a while, and met with a major regional distributor as early as 2013. Later reports early this year said that mid-sized US carrier US Mobile was offering Xiaomi phones under some of its plans, hinting that maybe the company had entered the market in uncharacteristically low-key fashion. But Xiaomi quickly responded that US Mobile was not an authorized seller of its phones, and it had no plans to enter the market. (previous post)

The latest reports point out that Xiaomi may feel bolder now following a recent tie-up that saw it acquire nearly 1,500 technology patents from Microsoft (Nasdaq: MSFT), as the software giant abandoned its smartphone business. (previous post) That move led me to speculate that perhaps Microsoft was giving the patents to Xiaomi for little or no cost, and in return was possibly receiving Xiaomi equity that would make the pair strategic partners.

Such a partnership would indeed work to Xiaomi’s favor for a play into the US, since Microsoft would be an invaluable ally in such a move. It’s also possible Xiaomi is developing some newer, more unique models after receiving the Microsoft patent portfolio. We’ll have to see some of those new models before saying how well a US bid would ultimately fare. But even if it comes out with better models, Xiaomi will still face a huge uphill road in the US due to fierce competition and lack of name recognition.

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