Xiaomi - Germany market entry marketing strategy - MBA, HULT International Business School

How Xiaomi could win in Germany

Friedrich Arnold | Marina | March 1st 2015

XIAOMI | International Marketing

Company Profile

2

1 Source [13]; 2 Source [18] picture source: http://www.mi.com/en/founder/

In 2015 Xiaomi is determined to face the competition with the following priorities1:

1. Product and service. Focus on product innovation, further improve consumer

relationship, continue producing high-quality, high-performance devices with great user

experience.

2. Ecosystem. Continue to work with more partners to create a strong and open

ecosystem moving forward.

3. Go global. This year, Xiaomi will enter more overseas markets. We believe everyone in

the world would appreciate the opportunity to enjoy technology innovation. Thus we

remain fully committed to our global business.

Bin Lin

Co-founder, President

About Xiaomi2 Key Facts1

» Founded in 2010, privately held

» Chinese market leader in the smartphone

category since 2013

» Xiaomi‘s primary smartphone brand is the MI

phone

» The majority of the firm‘s sales are done online

» Other products include: Tablets, smart home

» Phones sold in 2014: 61.12 MM (+227% yoy)

» Revenue 2014: RMB 74.3bn (+135% yoy)

» No. 1 mobile phone manufacturer in China

» Latest funding round: US$1.1bn at valuation of

US$45bn

World‘s most valuable tech-startup in Q1 2015

http://www.mi.com/en/founder/


Executive Summary

» The strategic opportunity for Xiaomi in the German smartphone category is to

gain 5% market share by Q1 2016

» Critical Strategic Insight: This opportunity arose from Xiaomi’s critical ecosystem

of competitive advantages enabling the manufacturer to create superior value to

German consumers for a lower price than the current market leader, Samsung.

» Strategic Alternatives:

1. Do not enter the German smartphone category

2. Enter the German smartphone category

» Recommendation:

Enter the German market, invest RMB 59 MM upfront to breakeven during the

2015 Christmas sales and achieve a 5% market share by Q1 2016

3


Competing in the German smartphone category requires an

offensive strategy that fits to a mature and saturated market

Category

4

See Exhibit 1 for forecast of smartphone sales in Germany

Smartphone category, Germany, y2014, MM units

The smartphone category is highly

developed (MDI of 92%) due to the high

penetration (102% of households).

159

242

Unmet Market Potential Category Demand New Penetration 2nd purchases

Secondary purchases (renewal, 2nd

device) dominate the demand with 63%

making it the main target for sellers of

smartphones.


The market attractiveness of the German smartphone

category is medium to low

Industry Analysis

5

1 Source [1]

Suppliers’

bargaining

power

Risk of new

Entrants

Buyers’

Bargaining

Power

Competitive

Rivalry

Risk of

Substitutes

» No systematically high influence of suppliers of

parts (mostly Asian low-cost manufacturers)

» Some suppliers own critical IP (e.g. Samsung)

Explanation Mitigation Strategy

» N.A.

» Samsung, Apple, and others compete in an

increasingly fragmented market

» Create sustainable competitive advantage

» Create, communicate and capture real value to

the consumers

» 70% of smartphones are sold through the

network carriers’ contracts1 – Therefore, the

major three carriers have high bargaining power

» Sell directly to consumers

» Partner with many smaller retail partners to

substitute the powerful one

» Generic barriers of entry (technology, supply

chain)

» EU-specific barriers (e.g. CE certification)

» Identify and overcome EU-specific entry barriers

» Next generation of wearable computers might

substitute smartphones

(e.g. Apple Watch, Google Glass)

» Focus on achieving profitability in the short-term

instead of pursuing riskier projects


If Xiaomi wants to step out of the fragmented and highly

competitive mainstream market, it first has to beat Huawei

Competitive Landscape

6

1 Based on growth of market share in mobile phone category 2012-2013, see Exhibit 2; Source [1]

Samsung Sony HuaweiApple

Rel. Market

Share (y2013)

Sales Vol. (y2013, MM EUR)

Growth

Trend1

» 2.02x

» 2,888

» 0.49x

» 1,427

» 0.35x

» 600

» 0.13x

» 375

Other brands w/o

significant market

share and growth:

» Nokia

» LG

» Motorola

» ZTE

» HTC

» Blackberry

The German smartphone market is dominated by Samsung that developed a lead in front of

Apple. Other brands compete for relatively low market shares with high risk of new entrants

(e.g. Huawei).


Xiaomi‘s flagship product‘s competitive strength compared

to the major competitors in Germany is medium

Technology benchmarking

7

1 source [2]; 2 Source [3]; 3 Source: manufacturers‘websites

Samsung

Galaxy Note 4Sony

Xperia Z3Huawei Ascend

Mate 7

iPhone

6 Plus

Battery life2

Camera

performance3

USPs

» 8h 43 min

» 15.9 MPix

Xiaomi Mi4‘s performance in the German consumers‘ top 3 purchasing criteria is similar

but weaker than the market leader‘s samsung Galaxy Note 4.

Xiaomi‘s technology is not superior

Xiaomi Mi4

Internet

connectivity3

Benchmarking relative to Samsung, top 3 purchasing criteria of German consumers1

8h 32 min

Hygiene factor - all models are realtively equal

13 MPix

» Replaceable

Battery

» Pen

» Water-

proof

» IOS

» App-Store

» Cheapest

in its class

» To be

defined

13 MPix20.7 MPix8 MPix


In the German smartphone category, Xiaomi will most likely

be perceived as a direct competitor of Huawei

Company: Technology benchmarking

8

1 based on the assumption that the German smartphone market is efficient

Samsung and Apple have build the competitive advantage of a superior brand which

gives them the strength to sell at a higher price than weaker smartphone brands in

Germany.

Samsung Galaxy Note

iPhone 6 Plus

Perceived Performance

Re

lati

ve

P

rice

Sony Xperia

Value Map, relative position of Xiaomi and major competitors compared to Samsung1

HuaweiAscend

100%

160%

82%

65%

IOS-based phones are able to sell at a high

price premium because customers value the

Apple brand, the customer experience and the

product ecosystem (creating a Customer Lock-in)

Among the Android-based phones, the

Samsung Galaxy Note is able to sell at the

highest price due to its superior brand, although it

has weaker technical specifications than the

Sony Xperia.

The Chinese competitor Huawei positioned itself

as a low-cost brand, capturing a 5% market share

within three years after entering Germany.

Xiaomi’s mostprobable position


Xiaomi’s implementation of its ecosystem in Germany, and

its localization, will be success-critical

Company

9

1 Source [12]

Xiaomi‘s success in China and other international markets is based on its signature ecosystem,

generating competitive advantages like superior processes, superior offering, superior

access, superior customers, superior data, superior agility, and superior branding

E-Commerce Site

selling devices

MIUI App-Store

localized content

for every market

MIUI

customizable Android

user interface

High Quality

premium

performance, look & feel

Fan communities

influencing marketing and

R&D efforts

Xiaomi‘s ecosystem for success1


Xiaomi’s Vision MANTRA1:

Always believe that something wonderful is about to happen

Company Strategy

10

1 Source [11];

Goals:

1. Product and service. Focus on product innovation, further improve consumer relationship, continue

producing high-quality, high-performance devices with great user experience.

2. Ecosystem. Continue to work with more partners to create a strong and open ecosystem moving

forward.

3. Go global. This year, Xiaomi will enter more overseas markets. We believe everyone in the world would

appreciate the opportunity to enjoy technology innovation. Thus we remain fully committed to our global

business.

Marketing Strategy:

Xiaomi is pursuing the competitive advantages of superior offering to superior customer based on superior data and superior access.

Xiaomi is utilizing online marketing channels to supply its products to its community of brand-loyal fans

The necessary resources are allocated aggressively to outpace competition.

Xiaomi’s target segment are young adults from 18– 34 years old who desire affordable high-tech products.


Entering the German market and the medium-term

perspective of targeting all of the EU outweighs the risks

Company

11

Opportunities

for Xiaomi in GER

Threats

» Both Samsung and Apple, the

dominant players in the German

smartphone category, have lost

their former advantage of superior

technology, giving other players the

chance to catch up on their market

share

» If Xiaomi manages to sell in

Germany it can expand to the rest

of EU, too (+500MM consumers)

» Diluting management attention

to Europe could lead to lack of

strategic agility in the Asian

core markets

Delegate EU market to

independent management unit


Applying Xiaomi’s Chinese online-distribution strategy will

limit the potential market reach to 30% in Germany

Customers

12

1 Source 1; 2 based on CAGR of 2010-2013

23% 29%27%26%24%20%20%

60%

40%

80%

0%

100%

2014E22013 2015E22010 20122011

Internet Based Retailing

Store-Based Retailing

Sales Channels for Mobile Phones in Germany1,

% of total retail volume

With only 29% of smartphones

purchased online, Germany is an

offline-market.

This is caused by the strong positions

of two groups of customers:

» Stores operated by network carriers:

50% of total retail volume

» Grocery retailers and electronics

retailers:

20% of total retail volume

Given the slow growth rate of Germany‘s mobile phone category‘s internet based retail

volume, it is unlikely that a brand that is only sold online can capture significant market

share in the near future.


Xiaomi’s marketing strategy will cater to the technology-

driven purchasing decisions of Germany’s generation Y

Consumers

13

1 Source [14]; 2 Source [15] –shown data are results of additional, own analysis; 3 Source [16]; 4 Source [2]

Although German consumers are known to be „late adopters“ because they evaluate new

technology carefully before purchasing it, the top 5 purchasing criteria in Germany are

based on technological performance of the smartphones. Therefore brand loyalty is low.

Generation Y Generation XPilot Users

» 24MM people1

» 75% smartphone

penetration2

» 30MM people1

» 53% smartphone

penetration2

“Germany is no early

adopter market”3

Consumers are

carefully evaluating new

options

1. Battery Life

2. Internet Accessibility

3. E-Mail Functionality

4. W-LAN Accessibility

5. High camera performance

…

10. Choice of brandTo

p p

urc

ha

sin

g c

rite

ria

4


A company selling smartphones in Germany must be aware

of the seven major centers of influence in Germany

Centers of Influence

14

1 Source [5]

Most important influencers in German smartphone category

Newspapers

TV ShowsSocial

Networks

Tech

Bloggers

Web-Store

Reviews

Test

Institutes

Tech

Magazines

As 30% of smartphones are purchased online and 80% of consumers state that their

purchasing decision is influenced by online product reviews1, smartphone manufacturers

depend significantly on the judgment of the German centers of influence.

online On- / offline offline


Selecting the right mix of collaborators to invest our

marketing efforts will need to be careful considered

Collaborators

15

1 y2013, number of contracts, Sources:

Entering exclusivity agreements with selected offline retail partners is an opportunity for

Xiaomi to gain consumer access. Especially Telefonica‘s low-price brands are attractive

targets because they currently don‘t sell Huawei phones.

Potential Retail Partner Associated

Brands

Market

Share1

Selling

Samsung?

Selling

Huawei?

Telekom Deutschland T-Mobile

Deutschland

33.5% YES YES

Vodafone Group Vodafone 28% YES YES

Telefonica Deutschland

Holding

O2, Base, Fonic 35,6% YES YES (only

O2)

Medionmobile Aldi Talk N.A. NO NO


Economical

» The German consumer confidence in Germany is at its highest

since late 2001, despite the ongoing crisis in the European

Union1

Political

» Germany‘s official relations with China are friendly; China is the

third largest trade partner with mutual imports and exports of

EUR 140bn in 20132

Environmental / Ethical

» 52% of Germans see China as one of the worst performing

countries regarding the environment and climate protection

policies in international comparison3

Technological

» According to plans of the German network providers, Germany

will reach complete LTE coverage in 20164

The overall context is positive except of China‘s negative

ethical perception that might harm Chinese manufacturers

Context in Germany

16

1 Source [9[, 2 Source [6] ; 3 Source [7], 4 Source [8]

2015 is a good moment to enter the

German market

Since there are no German

manufacturers in the market, political

intervention is improbable

China‘s negative perception poses a

medium-term risk, as German

consumers shift to ethical consumption

Increasing demand for LTE-ready

handsets like Xiaomi‘s

Implications for the German Smartphone

Category


Strategic Opportunity

17

» The strategic opportunity for Xiaomi in the German smartphone category is to gain 5%

market share by Q1 2016 and to become market leader with 30MM units sold by Q4 2017

» The German smartphone category has matured with demand expected to peak at 26MM

units in 2016. The market is fragmented with Samsung being the market leader, Apple

trailing in second place and other manufacturers competing for single digits market shares.

In China, Xiaomi has beaten these same competitors by leveraging its success-critical

ecosystem of competitive advantages

» German consumers value technological performance over the brand of a smartphone

Indicates relatively low customer loyalty

Critical Insights

Strategic Opportunity


Strategic Alternatives

18

Should Xiaomi enter

the German

smartphone market?

Alternative 1:

No market entry

Alternative 2:

Market entry


Xiaomi enters the German market for two reasons:

1. Leadership announced the goal of ‘going global’ in the beginning of 2015

2. Germany is the biggest and most prestigious smartphone market in Europe

Xiaomi enters the market in H2 2015 with a low-priced smartphone as a direct

competitor to Huawei, selling through our own online stores, and using Telefonica

Germany’s retail stores, while utilizing all relevant centers of influence.

The German market is mature, fragmented with Samsung as the market

leader. German consumers are looking for innovative technology,

conducting about 1/3 of their purchases online.

Xiaomi’s offerings are state of the art technology for competitive prices.

W

B

M

H

Entering the German smartphone category is a manageable

strategic move that is aligned with Xiaomi‘s 2015 goals

Alternative 2: Market Entry

19


The strategic recommendation is to enter the German

smartphone category

Strategic Recommendation

20

1 See Exhibit 0 for detailed calculation; 2 non-compounded

400

0

200

1,000

600

800

73

733

66

664

12122

App Store SalesSmartphone Sales

Estimated sales revenues and cumulative net profit for year 1 (in MM RMB)1

-200

1,000

400

200

0

600

800

152

-35

16-5

Cumulative Net Profit

Beginning in Q2 2015, Xiaomi‘s German market entry requires upfront investments of

RMB 59 MM that will result in breakeven during the Christmas sales and a 5% market

share by Q1 2016 (ROI=250% after 1 year2)

Q2 2015 Q3 2015 Q4 2015 Q1 2016


Xiaomi‘s tactical marketing plan focusses on 5 key issues to

launch and grow in the German smartphone category

Key Issues

21

Gro

w

Launch » Invest to grow market share from 0% in 2015 to 5% in 2016 with the

perspective of gaining 20% market share in 2018

Market

Share

» Invest to localize the success-critical Xiaomi ecosystem in Germany and be

market-ready in September 2015

Create

Value

» Build awareness, consideration and intention in German consumers through

focused communication efforts and incentivizing campaigns

Communicate

Value

» Invest to position Xiaomi as a low-price high quality brand in the German

smartphone category generating high sales volume of devices and capturing

high margins in the MIUI App Store in the long run

Capture

Value

» Follow critical environmental developments that could impact Xiaomi’s ability to

execute its strategy in Germany

Strategic

Attention


Building brand awareness and incentivizing the purchasing

decision require the highest marketing investments

Tactical Marketing Goals

22

Served Market

Intention to

buy

Offer

attractiveness

Awareness

Purchasing

decision

75%

Objective

(by Q1 2016)How to reach this goal?

» Xiaomi Online Store (30% reach)

» Sell through Telefonica Germany‘s retail stores (60% reach)

50%» Run RMB 49 MM worth of launch campaigns & holiday campaigns

» Utilize centers of influence

75%» Spend RMB 14 MM on localization of the MIUI system and app store

» Spend RMB 2.4 MM for certifications and a local service and fulfillment center

50%» Position Xiaomi as the lowest-priced product with technical performance

comparable to Samsung

50%» Run RMB 40 MM discount campaign on app store purchases to lower switching cost

for previous users of Android or IOS-based systems

Potential

Market Share7% = RMB 1,022 MM sales per quarter in the German mobile phone category


Before launching in September 2015, Xiaomi needs to invest

around ¥30MM to build up its success-critical ecosystem

PRODUCT

23

MA

RC

H –

AU

GU

ST

‘1

5

Pre-Launch: Develop Xiaomi EcosystemCost

(1,000 RMB)

350

2,100

2,100

10,000

700

700

7,000

1,000

» Build online shop Xiaomi.de

» Localize and translate MIUI

» Localize MIUI-App Store

• Inhouse developers

• Incentivize popular app developers (RMB 100,000 bonus for the 100 most

popular apps in the German MIUI App Store by EOY):

» High Quality: Establish German service and fulfillment center

• Build up

• Aquire CE Certification and other licenses

» Build fan communities: Pre-launch social media ramp-up campaign

» Develop distribution network (air & land)

Results:

» Market Readiness by August 2015

» 50% brand awareness in Generation Y consumer segment by August 2015

Costs

(1,000 RMB)

28,850


The official launch in September will require a ¥35MM

campaign followed by a ¥40MM holiday offensive

PRODUCT

24

* Or a comparable smartphone of a younger generation ; 1 valid till January 31, 2016; 2 expected payout rate: 75%

SE

PT

EM

BE

R ’1

5 –

JA

NU

AR

Y ‘

16

Product Launch & Holiday Sales Operating CostsCost

(1,000 RMB)

35,000

39,375

14,000

152,000

76,000

» September 2015: Launch Xiaomi Germany on the „IFA Consumer Electronics

Unlimited“ in Berlin

• Booth, Show & national campaign

» Introduce Xiaomi’s Mi4* at a price point of EUR 349 (lowest-price tag in the

category - for sales estimate go to Exhibit 0)

» Offering EUR 25 discount codes for the first 300,000 customers on purchases

in the MIUI-App Store1 to lower switching costs for consumers2

» Holiday advertisement campaign (on- & offline)

» Operating costs of the German service and fulfillment center (10% of

revenues)

» Commission on smartphone sales for collaborating retail stores

Results:

» 90% brand awareness in Generation Y consumer segment by January 2016

» 5% market share in the German smartphone category in Q4 2015

Costs

(1,000 RMB)

316,375


A €349 price tag for a Mi4 smartphone allows Xiaomi to

annihilate its perceived disadvantage to German consumers

PRICE

25

1 author’s estimates; 2 Source [17]

349399

Perceived

Value

Disadvantage

XIAOMIHUAWEI

Disadvantages1:

» Switching cost to MIUI App Store: EUR 50

» Unknown brand, quality risk: EUR 50

Advantages:

» Innovation & curiosity bonus EUR 50

NET DISADVANTAGE: -EUR 50

Xiaomi Mi4 vs. Huawei Ascend Mate 7: Performance based price as perceived by German consumers

For the pricing decision it is important for Xiaomi to consider that consumers in

Germany’s mature market have high perceived switching costs to MIUI because they are

locked-in their respective OS (80% Android, 19% IOS)2


Xiaomi.de contributes profits while the partnership with

Telefonica serves merely the strategic purpose of growth

PLACE

26

Xiaomi.de will be the main source of contributed profits due to its lack of intermediary

distribution parties.

Telefonica’s brand retail stores are necessary to increase the served market % to 75%.

Xiaomi.de Telefonica Retailer

Target Customers Online Shoppers Offline Shoppers

Percent of Sales 75% 25%

Revenue per purchase 349.00 € 349.00 €

Retailer Discount 20%

Net Price 349.00 € 279.20 €

Cost of Goods Sold 233.83 € 233.83 €

Percent Margin 33% 16%

Marketing & Sales Expense 15% 10%

Mareting & Sales Expense (EUR) 52.35 € 27.92 €

Net Marketing Contribution 62.82 € 17.45 €

Marketing ROS 18% 6%

Marketing ROI 120% 63%

Online vs. Offline - estimated sales channel effectiveness


Investing ¥58MM during year 1 in communication enables

Xiaomi to reach 5% market share by Q1 2016

PROMOTION

27

Phase Communication Channels Goal Focus Budget

(1,000 RMB)

Pre-

Launch

• Facebook (50%)

• Twitter (15%)

• Specialized online and print

magazines (35%)

Awareness of

Xiaomi

Hype

Potential consumers

Potential app developers

2,000

Launch

+/- 1

month

• Social Media (15%)

• Specialized media (10%)

• Youtube Blogger

Sponsoring (1%)

• Youtube Commercial (5%)

• IFA booth & coverage (69%)

Awareness of

Xiaomi

Intention to buy

Potential consumers 42,000

Grow • Social Media (50%)

• Youtube Commercial (25%)

• Product Tests (25%)

Awareness of

Xiaomi

Intention to buy

Potential consumers 14,000

Xiaomi will invest RMB 58MM during year 1 to create brand awareness and intention to

buy with the potential German consumers, focusing mainly on online communication

channels and the all-media launch campaign during the IFA in September.


Exhibit 0:

Sales Forecast & Net Income, year 1 Xiaomi Germany

28

Assumptions: Margin on Phones 25%; Margin on Apps 50%; App Revenue per Smartphone Revenue 10%; Cost of Service Center 10%; Retail commission 20%

Budget 2016

∑ Q2 Q3 Q4 Q1

COST

Build Website -350.00¥ -233.33¥ -116.67¥

Localize MIUI -2,100.00¥ -1,400.00¥ -700.00¥

Localize App Store -2,100.00¥ -1,400.00¥ -700.00¥

Incentivize developers -10,000.00¥ -10,000.00¥

Build Service Center -700.00¥ -700.00¥

CE Certification -700.00¥ -466.67¥ -233.33¥

Pre-Launch Social Media Marketing -7,000.00¥ -1,400.00¥ -5,600.00¥

Ramp up Distribution network -1,000.00¥ -200.00¥ -800.00¥

IFA Booth, Show, campaign -35,000.00¥ -21,000.00¥ -14,000.00¥

Holiday Campaign -14,000.00¥ -11,200.00¥ -2,800.00¥

25EUR discount campaign -39,375.00¥ -7,875.00¥ -23,625.00¥ -7,875.00¥

Operating Cost Service Center -12,215.00¥ -66,449.60¥ -73,290.00¥

Retail commission (Telefonica) -¥ -6,107.50¥ -33,224.80¥ -36,645.00¥

Total Cost per Quarter -5100 -66047.5 -148499.4 -83965

REVENUES

units sold 0 50 272 300

Smartphone revenues 0 122,150.00¥ 664,496.00¥ 732,900.00¥

Smartphone Contribution margin 0 30,537.50¥ 166,124.00¥ 183,225.00¥

App Revenue 0 12,215.00¥ 66,449.60¥ 73,290.00¥

App Contribution Margin 0 6,107.50¥ 33,224.80¥ 36,645.00¥

Total Contributed Profits 0 36,645.00¥ 199,348.80¥ 219,870.00¥

Net Income per Quarter -5,100.00¥ -29,402.50¥ 50,849.40¥ 135,905.00¥

Cumulative Net Income -5,100.00¥ -34,502.50¥ 16,346.90¥ 152,251.90¥

2015


Exhibit 1

29

Source [1]

25,677

2015 20162014

26,226 26,126

Smartphones

22,433

2011 2012 2013

25,121 26,013

Forecast Sales of Smartphones: Volume 2013-2018 , Germany, 1,000 units

PEAK DEMAND


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30


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31

http://www.mi.com/en/about/

http://www.teaglegroup.com/en/articles-to-share/-/blogs/xiaomi-a-case-study

https://plus.google.com/112108000562542116245/posts/bAeDgfgCk94

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http://www.emarketer.com/Article/Smartphones-All-Rage-Germany/1010942/1