Deal with Microsoft notwithstanding, China’s Xiaomi won't be stateside anytime soon

Marketing and branding must be Xiaomi’s priorities, analysts say

China’s Xiaomi won't be stateside anytime soon
Martyn Williams

Xiaomi's cross-licensing and patent-transfer deal with Microsoft announced earlier this week prompted a flurry of renewed interest in how soon the Chinese smartphone maker will sell its devices directly in the U.S.

Several analysts interviewed this week said they believe a U.S. arrival won't happen for more than a year, perhaps even two years, and will certainly pose big marketing challenges for Xiaomi.

One of the biggest issues will be how to effectively build Xiaomi's brand with its latest premium smartphones like the Mi 5 to attract average Americans who barely know the company, much less how to pronounce the company's name.

Xiaomi means "little rice" in Mandarin Chinese and is pronounced "SHAO-mee," but there are several variations. Former Googler Hugo Barra, now global vice president at Xiaomi, offered a pronunciation lesson on stage last year, explaining that it sounds like the two words starting the phrase "show me the money, but it sounds more like 'shower.'"

160223 barra 1 Martyn Williams

Hugo Barra, vice president of international at Xiaomi, shows off the Mi 5 smartphone at a Barcelona news conference on Feb. 24, 2016.

So far, Xiaomi has operated primarily in its home base of China, as well as in India and parts of South America, relying heavily on Internet sales. Coming to the U.S. will likely require Xioami to negotiate deals with U.S. carriers for in-store sales in order to be successful, analysts said. Some Xiaomi wearables are already sold on Amazon in the U.S., including the Mi Band, a fitness monitor that sells for $21.

The deal with Xiaomi that Microsoft announced on Tuesday has two parts. Microsoft transferred patents, reported by The Wall Street Journal to be 1,500 out of Microsoft's total of more than 60,000 patents, to Xiaomi for an undisclosed sum. Also, a cross-licensing agreement will allow Xiaomi to ship Microsoft Office and Skype on Xiaomi's Android smartphones and tablets.

Beginning in September, Xiaomi's Mi 5, Mi Max, Mi 4, Redmi Note 3 and Redmi 3 will come pre-installed with Microsoft Word, Excel, PowerPoint, Outlook and Skype apps. But the specific apps may vary depending on the device, market location and mobile operator.

The cross-licensing agreement between Microsoft and Xiaomi is similar to those that Microsoft struck last year with Samsung and Dell. But because the Microsoft apps can run on Android devices from other manufacturers, analysts said the Microsoft capability won't be a key differentiator for Xiaomi sales.

Barra has recently said in interviews that the U.S. market is "on the radar" for Xiaomi, but not in 2016. Analysts have been parsing his comments carefully, but most aren't optimistic about the company's prospects in the U.S., partly because of the stiff competition offered by Apple and Samsung, as well as by Chinese companies already in the U.S., like ZTE and TCL.

"Xiaomi's had an eye on coming to the U.S. and Western Europe where there's a seemingly untapped potential for smartphone growth," said Jack Narcotta, an analyst at TBR, in an interview. "It's a big hill they have in front of them with the U.S. in particular. The marketing question is a really big challenge for them."

Patrick Moorhead, an analyst at Moor Insights & Strategy, agreed. "American consumers need unique marketing directly tailored to them that knocks them off their pattern of buying Apple, Samsung and LG," he said. "Most Americans have never heard of Xiaomi and the company would need to invest in some serious brand-building to move the needle. It's not impossible to do this, just difficult and expensive."

In the U.S. market, Xiaomi faces Apple and Samsung for premium smartphones with prices above $600 (without carrier subsidy). But Xiaomi has offered its smartphones in other countries for $200 to $300 (without subsidy), putting it more in direct competition with phones from ZTE and Huawei, analysts said.

Generally, Xiaomi phones have premium features and styling, but have sold at lower prices partly because the company has circumvented the more expensive wireless carrier sales channel, analysts said.

In China and other markets, Xiaomi has relied heavily on online sales, but has also successfully paired its products with the ability to purchase apps and services for features like chat or multimedia that are harder to obtain than in the U.S., partly because Google services, among others, are blocked by the government in China, TBR's Narcotta noted.

"The Xiaomi business model works only in China where Google is blocked by the Chinese, but as soon as that advantage goes away in other countries, what do you have with a Xiaomi phone that isn't that different from a Samsung phone, but a little cheaper?" Narcotta said.

"The U.S. carriers, I'm sure, want an alternative to Samsung and Apple devices, but it doesn't serve Xiaomi's needs to get de-prioritized on the brand side like a ZTE or a Kyocera," Moorhead added.

"In the U.S., people are much more comfortable going into a shop to buy a phone," added Tuong Nguyen, a Gartner analyst. Also, other Chinese companies are pushing to break into the U.S. market due to the recent slowdown of smartphone sales in China.

Two years ago, Xiaomi was the top smartphone seller in China, with 20 percent year-over-year growth, but now its revenues there are flat, Narcotta noted. The company was founded in 2010, but by 2014 had shipped 17 million smartphones, representing 211 percent year-over-year growth, according to IDC.

Xiaomi was the fifth-largest smartphone seller in 2015 globally and was third largest in the third quarter of 2014, according to IDC.

In the first quarter of 2016, Xiaomi fell to sixth globally -- behind Samsung in first place, followed in order by Apple, Huawei, Oppo and Vivo, according to IDC.

In the U.S. alone, Gartner said Apple remained the top seller of smartphones in the first quarter of 2016, with a 36.4 percent market share, followed by Samsung (26.7 percent), LG (13.9 percent) and then ZTE (6.6 percent) and TCL (4.6 percent) -- both based in China.

The patent and cross-licensing deal with Microsoft helps Xiaomi in the sense that it helps prevent intellectual property-related lawsuits, said both Moorhead and Jack Gold, an analyst at J. Gold Associates.

Gold sees better prospects for Xiaomi in the U.S. than do some other analysts.

"Xiaomi has lots of cash and wants to be a disrupter in the market and we should expect them to do things like they did in China where they were very successful, although the smartphone market is becoming saturated," Gold said.

"If Xiaomi follows a similar path in the U.S. by selling pretty capable phones at low prices, it could capture a significant share of the market, especially in the lower tiers of smartphones. Competitors like Samsung, HTC, LG, and even Apple could be affected."

This story, "Deal with Microsoft notwithstanding, China’s Xiaomi won't be stateside anytime soon" was originally published by Computerworld.

Copyright © 2016 IDG Communications, Inc.

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