After suffering some pretty brutal quarters at the hands of compatriot competitors and a weakening global smartphone market, the Chinese startup trumpeted its return last week at an all-hands staff meeting. Shipments in the second quarter climbed 70 percent from the prior three-month period to 23.16 million handsets, founder Lei Jun said in a statement reported by Bloomberg News.
“To date, no other smartphone company globally had been able to resume growth after a decline in sales,” Lei said in a remark later tweeted by CFO Shou Zi Chew. That’s not quite true.
Neil Shah of Counterpoint Research subsequently tweeted a chart showing Motorola had managed a similar feat. Data from Bloomberg Intelligence and IDC indicate that such turnarounds aren’t unprecedented: Competitors have resumed growth in both shipments and revenue on both quarter-on-quarter and year-on-year bases. Shipment numbers from Gartner Inc. also suggest rebounds have occurred elsewhere. Xiaomi acknowledged a request for comment but didn’t provide clarification. Regardless, this is an impressive feat for the struggling electronics maker.
What’s fascinating is that the rebound came after the company ditched its online-only business model and embraced physical stores. Xiaomi has 123 bricks-and-mortar outlets and wants to expand that eightfold to 1,000 by 2019, according to a transcript of the company’s meeting last week.
This is not only a huge risk, but a total rewrite of a business model since copied by others including China’s OnePlus. By eschewing offline retail and selling direct, Xiaomi was able to control its marketing and distribution and slice margins to the bone. This resulted in astounding levels of price competition while the company churned out decent, well-designed handsets without the financial burden of factories or shops.
The approach wasn’t bulletproof, however. Despite moves into everything from scooters to fitness bands, the Beijing-based company still hasn’t built itself an effective ecosystem to keep customers locked into the brand. Apple Inc. is the best example of such a moat, and without one, Xiaomi’s competitors easily copied the tactic and stole market share.
That forced Xiaomi to get physical. With a 70 percent increase in shipments, it’s hard to argue with the efficacy of the change in tactic. Lei Jun is so convinced that he’s jumped back into forecasting — 100 billion yuan ($14.7 billion) in sales this year and 100 million smartphones next year — 18 months after complaining that making predictions was restrictive and morale-destroying.
It hardly needs pointing out that running your own stores is a costly burden on both the P&L account and the balance sheet. One must assume that Chew, a Goldman Sachs Group Inc. alumnus, knows that all it would take is a few tight quarters for the financial wheels to start looking wobbly.
So don’t be surprised if Xiaomi, valued at $45 billion in a 2014 funding round, starts tapping capital markets for another leg up.