Combining hardware, software and new retail is making Xiaomi a lot of money

Since releasing its first smartphone in 2011 and becoming an overnight sensation in China, Xiaomi has been a curious case study for startups. The company started out in software, making a modified version of the Android mobile operating system that closely mimicked Apple’s iOS in design. To help promote its software and services, it branched into hardware. This is a familiar story to anyone working in consumer technology today.

Since becoming a hardware company, Xiaomi has started making seemingly everything. It moved into smart home products and other Internet of Things devices, and it now sells backpacks, luggage, sofas and umbrellas that are no smarter than your average household goods. Xiaomi has become a lifestyle brand.

Xiaomi is best known as a budget brand, but it’s looking for a valuation of up to $70 billion (USD) in its upcoming initial public offering in Hong Kong. This has raised eyebrows of some investors who don’t know what to make of the company. Xiaomi is trying to convince investors that it’s a one-of-a-kind company. Ultimately, though, it is still a company built on selling low-margin products.

In spite of this, Xiaomi has proven that it can still turn a profit. The company turned a small profit in 2016, but saw a $6.9 billion net loss in 2017. The losses continued into the first quarter of 2018, but after subtracting a one-time cost, it had $162 million in profits. Aggressive expansion using a low-price strategy to win over consumers is reminiscent of another low-margin company: Amazon.

Amazon and Xiaomi are very different companies, of course. Xiaomi does resemble the e-commerce giant another way, though. After finding incredible success through online retail, the company realized its future requires a brick-and-mortar strategy.

Back in 2016, Xiaomi had a wakeup call in the form of losing market share to competitors Huawei and relative newcomers Vivo and Oppo. The latter two brands are both owned by BBK Electronics, and they each pursued expansion through setting up physical stores around the country. It turns out many consumers still enjoy being able to see a product in person before purchasing it and don’t want the hassle of dealing with online flash sales whenever a new phone comes out, a staple of Xiaomi’s early growth strategy.

Now Xiaomi is opening up tons of new stores across China. It recently opened a new 700sqm Mi Home Experience store in Nanjing, its largest yet. It has also opened up stores in India, where the company’s largest market outside China.

The design of Xiaomi’s store isn’t going to help the company shed its copycat image. They closely resemble the design of Apple Stores. Xiaomi has long copied design elements from Apple in its smartphones and other products. This doesn’t bother the company’s fans, though.

Is all this enough to justify a $70 billion valuation? Time will tell. So far, Xiaomi’s formula has been working well for the company. However, it remains highly dependent on smartphone sales in its home market. International expansion has also proven difficult for Xiaomi with the exception of India, where it it overtook Samsung in 2017 to become the largest smartphone vendor.

Xiaomi’s IPO is still the most anticipated IPO in some time. It was at one time considered the world’s most valuable startup. So however the IPO goes, it will likely be seen a success for the Chinese company once considered an underdog. It’s a testament to Xiaomi’s impressive growth and turnaround over the last couple years through the use of a smart new retail strategy. It’s not the kind of thing every startup can emulate, but Xiaomi’s strategy is is something for every startup to study.

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