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Low-Cost Chinese Smartphone Brand Xiaomi Goes After The Wealthy

Chinese smartphone maker Xiaomi is changing its Internet sales model to boost growth in China and fend off competition from fast-rising rivals such as Huawei.

Chief Executive Lei Jun said last week that the company would open as many as 300 retail outlets throughout China, as it explores retail channels. Although Lei didn’t reveal more details, the figure itself surprised many industry watchers because Xiaomi used to rely entirely on the online flash sales of bargain Android smartphones. The strategy, which helped the six-year-old startup became a sensation in China, no longer works well as competitors followed with similar business models and consumers opt for high-end products.

It shipped more than 70 million smartphones last year, missing its own target of 80-100 million. Its China market share grew 14% to 14.9%, while Huawei’s share grew 52% to 14.3%. Apple AAPL +0.13% Inc. also had 14.3% of the market, according to consultancy Counterpoint Research.

Analysts say the change is aimed at attracting wealthy consumers, who have become the driving force of China’s smartphone market. Last year shipment of high-end handsets priced above $500 grew 45%, when the country’s smartphone market only grew 2% to 427 million units, according to analyst company Canalys. Xiaomi, however, last year generated 74% of its revenue from smartphones priced below $200, a segment that saw its growth declining 16.6% from a year earlier, Canalys data shows.

A large retail presence will help Xiaomi build a closer relationship with high-end consumers, analysts say. Unlike bargain hunters, wealthy consumers tend to try products at brick-and-mortar stores before making purchases. Xiaomi also has service centers called Xiaomi Home where consumers can pick up online orders and get damaged devices repaired.

“It is time for Xiaomi to adjust its strategy for the China market,” said Nicole Peng, a Canalys research director.

Xiaomi is also making more expensive phones. The Mi Note Pro, unveiled last year and priced at 2,999 yuan ($483), is the company’s most expensive handset yet. This year it launched the Mi 5. The model, priced from 1,999 yuan($305), is one of the first devices to use Qualcomm QCOM -0.04%’s Snapdragon 820 processor.

Huawei, one of Xiaomi’s competitors, has more success with wealthy consumers. Its smartphone shipment jumped 44% to more than 100 million units last year. One third of its total shipments is aimed at mid- to high-end handsets, including the 5.5-inch Mate S priced from $673, the most expensive handset the company ever made.

But opening retail stores alone will not be enough. Xiaomi has to come up with more product lines other than smartphones to attract users, says Teng Bingsheng, associate professor of Strategic Management at the Cheung Kong Graduate School of Business. Xiaomi this year entered virtual reality and robotics businesses, after launching a slew of smart hardware that can be remotely controlled by its phones.

The company is also supporting its business with its own payment channel. Xiaomi in January acquired a 65% stake in Huhehaote, Inner Mongolia-based payment company Sheng Yin He Rui, according to a February 23 change to a filing with the State Administration for Industry and Commerce.

The purchase will give Xiaomi access to Sheng Yin He Rui’s license that allows it to operate mobile payment apps. China’s central bank, the People’s Bank of China, last year stopped granting licenses as it started to regulate the online payment market.

Xiaomi follows Apple Inc. and Samsung Electronics Co. in entering the market. The two companies signed separate agreements with state-run China UnionPay, the country’s largest payment and clearing network, to introduce their e-payment systems to Chinese consumers. Apple made its China debut on February 18, as the country’s state-run banks seek to take back lost ground from Alibaba and Tencent. Samsung’s payment app is expected to launch in China in March, according to Chinese media reports.

“Xiaomi is likely to be inspired by the latest success of Apple Pay,” Forrester senior analyst Wang Xiaofeng wrote in an e-mailed note. “However, Apple Pay has a powerful partner — Union Pay and the dominant local banks behind that. If Xiaomi can’t find a strong partner, it will be hard to succeed, because it is a highly competitive market and very hard to penetrate.”


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