Xiaomi’s growth model is already showing cracks

After crowing about how strong it is in India, and how loyal
its MiFans are, Xiaomi Corp can’t hold on to top spot in the
smartphone maker’s second-largest market.

Old nemesis Samsung Electronics Co pipped it in the June
quarter after ceding the lead to the Chinese company two
quarters prior, according to data released Tuesday night by
Counterpoint Research.

What should worry Xiaomi, and its investors, is that
fellow Chinese brands OnePlus and Honor both posted stronger
growth during the period.

Now that Xiaomi is a listed company, these numbers are more
than just an academic exercise.

Dig further into the data and you’ll discover something
of greater concern. Xiaomi’s growth was even
more dependent on cut-price phones than in the past. Over
two-thirds of shipments were in the sub-10,000-rupee ($150)
category.

By comparison, Samsung took first place despite just 42% of the
devices it sold being in that price range. In other words,
there are plenty of consumers willing to pay for more
expensive devices.

Xiaomi likes to pretend that hardware profits don’t matter. And
we shouldn’t forget the red herring that founder Lei Jun threw
out back in May, when he made a song and dance about limiting
net-income margins on devices to 5%.

If we’re to believe that, then we need to buy into the view
that Xiaomi’s future is in the platform business, where it can
sell ads and other services. Underpinning this strategy is
getting Xiaomi devices into as many users’ hands as
possible, which is why selling smartphones on the cheap looks
like a reasonable trade-off for investors.

Yet cheap doesn’t buy loyalty. Samsung is proof of this. After
all, who’s the more loyal customer: Someone who
pays $150 for a smartphone, or someone who pays more than $500?
Apple Inc knows the answer.

That OnePlus shipments climbed 284%, according to
Counterpoint, and Honor  posted a 188% increase,
highlights just how little loyalty Xiaomi has bought with its
low-price strategy – notwithstanding that its own 112
percent year-on-year growth is impressive.

If Xiaomi can’t provide investors with reasonable hardware
margins, and doesn’t garner much loyalty among MiFans upon
which to build its internet business, then investors need to
ask what the company really does offer.