I couldn’t help a smile when reading about the latest scandal surrounding Xiaomi, which pertains to a new consumer lawsuit accusing the smartphone sensation of false advertising claims. Overinflated claim has become a symbol of Xiaomi, reflecting the kind of hype it regularly generates even as its actual products are described as quite ordinary and even sub-par.
Xiaomi’s hype contrasts sharply with its primary role model, Apple (AAPL.US), which has built a hugely loyal following based on products that most users agree are superior to those from its rivals and worth the big premiums that Apple charges. Meanwhile, a separate news item on Xiaomi shows the hype factor is still enough to attract big-name investors, with word that social networking giant Facebook (FB.US) previously sought to invest in the Chinese firm.
Both of these news snippets highlight one of Xiaomi’s greatest strengths, namely its ability to generate hype and buzz around its trendy line of smartphones, which are now the world’s third best sellers just five years after the company’s founding. But at the same time, the new lawsuit filed in Shanghai shows that such buzz can also be negative when a company like Xioami can’t live up to the hype and high expectations it creates.
Let’s begin with the lawsuit, which was filed by a woman surnamed Liu in a court in Shanghai’s Pudong New Area. The woman is seeking a relatively modest 16,000 yuan (US$2,580) altogether, covering everything from a refund for her Xiaomi smartphone to her legal costs. Other buyers could theoretically file similar lawsuits, which could become a legal headache for Xiaomi, but that seems unlikely in a country where such actions are relatively new and rare.
Instead, the more amusing and revealing part of this story is the reason for Ms Liu’s lawsuit, namely her feeling that she was duped by Xiaomi’s claims in some of its marketing materials. Among those were claims that its phones are “the best” among models using Google’s (GOOG.US) free Android operating system. The woman says there’s no basis for the “best” claim, and goes on to cite problems with her phone, including the fact that it often reset itself.
I had lunch recently with another former Xiaomi fan who made similar comments. After becoming a big fan of the brand, he quickly discovered his Xiaomi phone had many problems and discarded it after a year, switching to an Apple iPhone. He called Xiaomi the “fast fashion” of smartphones, comparing it to the cheap but trendy clothes that people often buy and wear only a few times from names like Uniqlo and H&M.
The “fast fashion” moniker may not be as sexy as Apple’s premier image, but it was apparently enough to attract the attention of Facebook co-founder Mark Zuckerberg when he made a high-profile visit to China in October. Media previously reported that Zuckerberg visited Xiaomi and its executives during that visit , and now new reports are saying he discussed the possibility of investing in the Chinese company at that time.
Additional reports cite Xiaomi co-founder Lin Bin as saying the speculation that Xiaomi refused the investment for political reasons and also to avoid offending Google are untrue. Obviously Xiaomi doesn’t want to offend any large potential future investor, and I would believe that it ultimately turned down Facebook probably because it got more favorable terms from other sources. Xiaomi landed its latest round of funding totaling US$1.1 billion in late December, in a deal that valued the company at US$45 billion.
Zuckerberg wants very much to bring Facebook to China, where it is currently blocked, and I’ve previously predicted he will finally get the green light from Beijing this year and enter the market via a joint venture with a local partner. Xiaomi could have been a potential partner, though its focus on devices rather than services makes it look like a bad fit. For that reason, I believe that Zuckerberg was probably more interested in making a more conventional financial investment in the company, and probably balked when Xiaomi laid out conditions that were too rich for his tastes.
Bottom line: A new lawsuit against Xiaomi highlights the lack of premium quality behind its trendy brand, though the firm could succeed in the shorter term as the leading maker of “fast fashion” smartphones.
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