With its insatiable demand for data services, India has become one of the most sought after telecom markets for handset players across the globe. It is also characterised by the highest levels of price sensitivity. As a result, it has, not surprisingly, become home to several Chinese handset players in recent years. In addition, the ongoing surge in the uptake of 3G/4G services has given the much-needed fillip to smartphone proliferation in the country.
To leverage this opportunity, China-based Xiaomi is gearing up to take on the other global players in India and acquire a bigger share in the country’s smartphone market. It has announced investments worth $500 million in the country over the next three to five years. It has invested a similar amount since its entry into the market in 2014.
In the past two years, the company has covered significant ground in India, recording $1 billion in revenue during 2016. As per a Strategy Analytics report, Xiaomi has emerged as the most preferred smartphone brand for Android users who are looking to buy a new device in 2017, stealing a march over global majors Samsung and Apple. In the survey, while Xiaomi gained 26 per cent votes for the most preferred smartphone brand for 2017, Samsung and Apple recorded 12 per cent each. Also, Xiaomi featured among the top three handset vendors in the country during the fourth quarter of 2016, recording a 125 per cent year-on-year growth.
Key focus areas and strategies
The company that started operating through an online-only platform in India has now adopted the offline model as well. This is because the online market in India constitutes only one-third of the total addressable market. The urban users, who drive online sales, constitute only a small fraction of the total user base. On the other hand, although the proportion of smartphone buyers in Tier 2 and 3 cities has been growing, these customers still prefer to visit a store to make a purchase.
This offline model will also get a major push with the introduction of the goods and services tax (GST) as it will take away the value-added tax (VAT) advantage from online sellers. Currently, most of the online sellers sell from low VAT markets such as Bengaluru and Hyderabad, where VAT on smartphones is as low as 5 per cent, as against the national average of around 10-12 per cent. However, GST will make the taxes uniform, thus compelling handset players to rework their sales strategy.
To this end, Xiaomi has adopted a direct-to-retail offline model. Under this model, distributors sell directly to retail stores, bypassing several partners in between, to ensure a common pricing across platforms. It has also partnered with four big retail chains in South India – Sangeetha, Poorvika, Big C and LOT – and is in talks with several others. Xiaomi may also set up company-owned Mi Home stores in India. It already has a huge established chain of these stores across China. Xiaomi aims to significantly expand its offline presence in India to reach an offline sales share of about 50 per cent.
The company’s sales strategy is complemented by its strong manufacturing base in the country. Currently, almost 75 per cent of its smartphones sold in India are locally manufactured at its plant in Sri City, Andhra Pradesh, which was established in August 2015. Recently, it announced another manufacturing plant in the same area, in partnership with Foxconn. As a result, more than 95 per cent of Xiaomi’s Indian sales will be supported through local manufacturing. According to Xiaomi, it will now have a combined production capacity of one phone per second during operational hours.
Challenges and the way forward
Despite a successful run in the Indian market so far, the company faces stiff competition in the market. It’s annual growth, though impressive (running in triple digits), is largely on account of a small user base. While global majors like Samsung and Apple enjoy a strong user loyalty, other Chinese players and local Indian manufacturers are also catching up fast. As per IDC statistics, rivals Oppo and Vivo are just a few percentage points behind in terms of market share and their sales are growing at equally impressive rates. Meanwhile, the country is yet to shed its perception of Chinese products being poor in quality.
Also, feature phones remain a threat to smartphone adoption in India in the medium term. Improved functionalities, coupled with compelling prices, have prevented feature phones from fading away.
Challenges notwithstanding, India is clearly one of the important markets for Xiaomi as is evident from its future plans. Besides, putting in half a billion dollars worth of investments, the company aims to create 20,000 jobs in the next three years by enhancing its manufacturing capacity. Xiaomi also hopes to double its revenues to up to $2 billion in 2017.
With 4G services taking off in a big way, the Indian smartphone market presents immense opportunities for all players. Xiaomi with its strong growth strategies and focus on India is well-placed to leverage these opportunities in the face of growing competition.
Akanksha Mahajan Marwah