19 August 2019
Time was that Xiaomi could do no wrong with its product launches. Photo: Bloomberg.
Time was that Xiaomi could do no wrong with its product launches. Photo: Bloomberg.

Xiaomi pushes all the wrong buttons with chip suppliers

For a while there rising handset maker Xiaomi could do no wrong. Its Xiaomi 1 and Xiaomi 2 smartphones were smash hits and the company’s chief executive, Lei Jun, appeared to be the master of hunger marketing. But now the company’s latest offering, Redmi Note, is leaving customers wanting more for all the wrong reasons.

The Redmi Note came out a week ago and boasts an octa-core processor and 5.5 inch monitor — all for just 799 yuan (US$129). Its one big minus, though, is its failure to support 4G exactly as the mainland mobile world is making the shift to the new standard.

Xiaomi’s tense relationship with chip suppliers is said to be the fault in the system.

Given the rapid rate at which mobile technology changes, chip makers are the kingmakers in the handset industry. These manufacturers decide when, to whom and how many units they want to sell, basically dictating the pace that handset makers roll out product.

Xiaomi used to have a close relationship with one of its shareholders — chip giant Qualcomm, which enabled the mainland upstart to high-end features for a great price when it launched the Xiaomi 1 and 2. Qualcomm treated Xiaomi as an ally and used it to showcase its latest technology, giving Xiaomi shipment priority and charging it lower fees.

But ties quickly soured after Xiaomi opted last year to source chips for its low-end Redmi line from Qualcomm rival Taiwan-based MediaTek. This decision to switch main suppliers is the key reason why Xiaomi has still not been able to launch a 4G smartphone; Qualcomm is the only manufacturer that makes all-in-one chips for all networks, from WCDMA to CDMA and LTE.

Surprisingly, none of this makes MediaTek a winner. At first, MediaTek thought it had secured a big break by landing the fast-rising brand as its client, seeing it as a way to burnish its reputation among other handset makers. Back then, Redmi used a 4-core MT6589T chip, MediaTek’s flagship product. But things went awry after Lei positioned Redmi as a low-end product and set a maximum retail price of 800 yuan. 

The low pricing left very little room for profit and many potential MediaTek clients ditched the chip. Stung by the experience, MediaTek went with TCL for the first launch of its octa-core chip last month.

Xiaomi’s success has come down to a simple formula: parts and components futures + hunger marketing. The four-year-old startup skillfully generated strong demand for its products by keeping tight control of supply to create temporary shortages. Customers were willing to order and pay in advance, handing Xiaomi greater control over its inventory. And that is a big added advantage.

There’s usually a one-month gap between the product launch and actual delivery. By taking orders first and then purchasing parts later, Xiaomi achieves great savings because prices of electronic parts usually drop as output capacity ramps up and technology changes. Lower costs mean higher margins — it’s that simple.

These two combined factors have worked well for Xiaomi. The group sold 18.7 million units last year, prompting Lei to double the sales target this year to 40 million units. Lei is without doubt a sales expert, but a healthy supplier relationship plays a key part in Xiaomi’s success too.

Timing is everything in this 4G rollout and Lei’s top priority should be to mend Xiaomi’s broken relationship with its suppliers. There are packs of emerging brands waiting to take Xiaomi’s place and Lei has no time to waste.

– Contact the writer at [email protected]


EJ Insight writer

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