Xiaomi shows willingness to adapt by pursuing offline model in India
The Chinese company has made a name for itself by achieving dominance through a unique online sales model, but has recently decided to ditch this approach in India by partnering with Bharti Airtel, India's largest telecom operator, and selling its phones through Airtel's retail outlets.
In order to win in a foreign market, a company sometimes has to be flexible enough to modify its business plan to suit local conditions, even if it means straying away from the very strategy that made it successful in the first place.
This is something that Chinese phone giant Xiaomi recently demonstrated when it announced that it will begin selling its next line of phones, the Redmi Note 4G, through retail outlets belonging to India's largest telecom operator Bharti Airtel. The telecom operator revealed that it would sell Xiaomi's 4G handsets in six cities through 133 stores.
"If this works out fine, we'll expand the partnership to other cities and other devices," Manu Jain, head of Xiaomi in India, told Reuters.
This is a radical departure from how Xiaomi does business. Its strategy of focusing only on online channels to sell phones has enabled it to sidestep exorbitant marketing and distribution costs that other phone brands like Samsung and Micromax have to consistently shoulder in order to attract eyeballs and wallets. Online sales also allow Xiaomi to avoid working capital headaches, not to mention managing supply chain pain points that can arise when pursuing a retail strategy.
Additionally, Xiaomi makes more money by steering its online customers towards its app store that sells all manner of fripperies, from user interfaces to games. Hugo Barra, the former Google executive and now head of Internal Operations, has admitted that the company's main intent is not necessarily to make profit on the phones themselves in the short run (even though it reportedly earns a handsome $100 profit for every Mi3 it sells, according to PC World), but rather to build an entire ecosystem.
Consequently, when Xiaomi first came to India in mid-2014, it adopted an online-only sales strategy that both enthralled and outraged Indians. Its Mi3 launch was so popular that 90,000 units were scarfed up in mere seconds over the course of a number of flash sales. Around 20,000 Redmi 1S phones vanished in under 4.2 seconds in another instance. And yet, the company garnered the wrong kind of attention when the hundreds and thousands of Indians who were unable to get their hands on these phones vented their spleen on social media.
So, it's probably a smart thing to try to satiate this unmet demand by partnering with India's largest phone giant and piggy-back on its far-flung distribution channel. But why go offline in the first place, especially if the online strategy is working so well?
In India, no matter how much you flog your phones online, being able to look at Xiaomi's line-up and touch and feel them is something that buyers ultimately crave. And while Xiaomi has proven to be wildly successful with the urban set, with 68 percent of the country yet to buy a smartphone and most of them in rural India, a hybrid strategy that includes an on-ground sales channel may ultimately trump a purely online one is going to be perhaps most crucial in terms of future growth. This is especially so for a company that is just one of 280 brands in the largest, most exciting, and furiously competitive smartphone market in the world. Google apparently has had a similar epiphany, as its Android One range of phones made by local manufacturers like Micromax and Karbonn have shifted from an online-only strategy and are now available in stores.
As far as Bharti Airtel is concerned, this could also augur a new way of doing business. The company has declared that consumers who buy the Redmi Note 4G could also instantly avail of a subscription to a high-speed 4G communications network where available via a SIM card slotted into the newly purchased phone. Those who have a 3G subscription will also be able to experience 4G services on their new Xiaomi phones.
In India, phones are purchased sans contracts from operators unlike their counterparts in the West, who subsidise plans. This is because Indian operators are wary of, and unable to determine, the creditworthiness of their clients in the absence of a nationwide ratings system. Reliance Communications, India's fourth-biggest cellphone operator, did test drive such a plan many years ago, but it was a resounding failure, since customers simply took off with their phones and were never to be seen again.
The next few years will be important for Xiaomi, as it will seek to justify the $45 billion valuation attained after a $1.1 billion funding round. India will undoubtedly become the most important cog in its machinery, as evidenced by the company's new research and development centre established in Bangalore. If all goes well with its partnership with Bharti, Xiaomi's Indian business could become even more of a success than it already is.