Xiaomi Inc Case Analysis

Description

Xiaomi case (First file attach) and related readings,

your reactions and thoughts

, including rise of Caogen culture after Deng’s reforms and the related phenomenon of shanzhai ji and the related, and the role of social media in Xiaomi’s innovation process.

As you read focus on Xiaomi and its culture (“value network”) and business model, and the related readings, including rise of Caogen culture after Deng’s reforms and the related phenomenon of shanzhai ji and the related, and the role of social media in Xiaomi’s innovation process. Also try to find out who else is now competing with Xiaomi and how is their business model different.


Xiaomi, Caogen, Social Media, And The Future Of Innovation


Can Innovation Be Crowd-Sourced?


Is The “Shifting Basis Of Competition” Shifting Again In The Smartphone Field?

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Discuss Xiaomi and its Innovation Culture

–Formal case Xiaomi :The Rise of a Chinese Indigenous Competitor (2015)

–“Xiaomi, Not Apple, Is Changing the Smartphone Industry” (HBR, October 2014).

–Kean and Zhao, “Renegades on the frontier of innovation: the shanzhai ji “grassroots” culture of Shenzhen, China”.

long article, so you may skim

. But you will learn recent Chinese economic history.

–“When Customer Become Fans” (MIT Sloan Management Review, 2016).

–Xiaomi’s “Social MediaBusiness Model” (

skim this research article

).

For the exclusive use of d. feng, 2019.
TB0417
Mary B. Teagarden
Carolyn Fifi
Xiaomi, Inc.: The Rise of a
Chinese Indigenous Competitor
Always believe that something wonderful is about to happen.
Xiaomi Mantra
Xiaomi’s rapid rise is changing the smartphone landscape in China, and potentially the world. China rapidly
surpassed the United States of America to become the world’s largest smartphone market in 2011. While industry
giant Apple’s attention was focused on overtaking industry leader Samsung for the fast-growing China market,
Xiaomi burst onto the mobile phone scene catching both giants off guard. In the five years since their founding
in 2010, Xiaomi rose to be the world’s third largest smartphone company based on units shipped. South Koreaheadquartered Samsung Electronics Co. Ltd. and U.S.-headquartered Apple Inc. are the holders of the first and
second spots, respectively.
When founded, Xiaomi’s vision was to develop and sell software for mobile devices using the Android
operating system. As the company evolved, Xiaomi grew into a mobile Internet and e-commerce company that
contract-manufactures smartphones and compatible devices designed to offer a complete customer experience.
Xiaomi, one of China’s relatively few indigenous innovators, has been a major disruptor in China’s lucrative mobile telecommunications industry, due in large part to their emphasis on continuous, incremental improvement.
The reputation of Xiaomi’s driven founder, chairman and CEO Lei Jun, a Chinese serial entrepreneur and
investor, is that he rarely rests. His reach in China’s high-tech sector is extensive, and his vision for Xiaomi aggressive. Lei stands out from many other Chinese IT leaders like Alibaba’s Jack Ma or Lenovo’s Yuanqing Yang;
when he founded the company, he had no Western experience and did not speak English. To realize his vision, Lei
surrounded himself with a world-class team of Chinese executives—and one prominent Western executive—with
collective experience at top foreign IT firms like Google, Microsoft, Motorola, and Yahoo. This executive team
complemented Lei and brought attributes that Lei lacked, in addition to considerable world-class IT experience.
Xiaomi was the 2014 leading smartphone vendor by shipments in China and the third largest smartphone
manufacturer globally. Lei has come a long way from his youth in Xiantao, Hebei, to the helm of the most
highly valued start-up in the world; yet, challenges remain for Lei and for Xiaomi. With more than 18 million
handsets sold in China by 2013, and products launched regionally in Taiwan, Hong Kong, Singapore, Malaysia,
Philippines, India, and Indonesia, the company contemplated global expansion. Xiaomi had been very successful
in China, but how would they fare in the global market? Would Xiaomi need to develop additional capabilities
to compete head-to-head with industry giants Apple and Samsung? Given Lei’s extraordinary range of interests
and activities, would he have the focus and bandwidth to lead Xiaomi to its future?
Lei Jun, Founder, CEO, and Chairman
Lei was born during the height of China’s Cultural Revolution, in December 1969, in Xiantao, a small city in
China’s central Hubei province where his father was a schoolteacher. He attended local primary and secondary
schools. Lei earned a Bachelor of Science degree in Computer Engineering in 1991 from Wuhan University, one
of the first schools in China to offer Computer Engineering.
Copyright © 2015 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge Enterprise. This
case was written by Professor Mary B. Teagarden and Carolyn Fifi for the sole purpose of providing material for class discussion.
It is not intended to illustrate either effective or ineffective handling of a managerial situation. Any reproduction, in any form, of
the material in this case is prohibited unless permission is obtained from the copyright holder.
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Today, billionaire Lei is one of the richest men in China. Often referred to as the Steve Jobs of China, he
dresses in simple black shirts and blue jeans emulating Jobs, whom he has admired since his college days. Like
Jobs, he has been called a shameless self-promoter and supreme marketer—characteristics that are thought to
partially explain his company’s success by Xiaomi’s competition and the media. Described as wonkish by the
media and his colleagues, Lei’s technical focus remains intense and consistent. In the spirit of continuous professional improvement, Lei seeks criticism as well as praise. His reputation as a very hard worker propelled him on
a dynamic career path from the beginning.
Shortly after graduation, Lei began his career with Kingsoft Corporation Limited, a Chinese office software developer that creates software similar to Microsoft Office. His talent was recognized early and his career
progressed steadily. Although he is often identified as its co-founder, Lei worked for Kingsoft for several years
before being appointed CEO in 1998. He remained at their helm and, after repeated attempts, oversaw a successful initial public offering launch and listing on the Hong Kong Stock Exchange in 2007. Lei resigned from
Kingsoft in 2007, reportedly for health reasons associated with the preparation of the company’s Hong Kong
Stock Exchange listing. The IPO process had been exhausting. In July 2011, Lei rejoined Kingsoft and has been
its chairman since then.
During his time away from Kingsoft, Lei realized that his real dream was to build his own high-tech company. He concluded that timing was critical when starting a new venture, especially in the high-tech industry
sector. The mobile Internet industry was taking off. Lei saw an opportunity to pursue his dream by catching the
mobile Internet wave. Years later, in a post on Sina Weibo—a social media forum similar to a combination of
Twitter and Facebook—in September 2011, he reflected on Xiaomi’s success and commented, “Things get much
easier if one jumps on the bandwagon of existing trends…A pig could fly if it finds itself in the eye of a storm.”
Lei’s entrepreneurialism has been a consistent theme since his graduation from college. While at Kingsoft,
Lei founded Joyo.com in 2000, an online bookstore company that was subsequently acquired by Amazon in
2007. From 2007 to 2010, Lei invested in various tech start-ups, including UCWeb—purchased by Alibaba in
2014—where he served as chairman and president of what became China’s largest mobile browser company.
In addition to his entrepreneurial activity, Lei is an investor who pursues three key areas for investment—
the mobile Internet, e-commence, and social networks. He is a co-founder, founding partner, and chairman of
the Shunwei Fund, a venture capital firm that specializes in incubation, early to mid-stage, and growth capital
investments in a variety of information technology-related high-tech industries. Lei also co-founded VANCL
Limited, an online apparel and accessories company; and YY Inc., a communications and social media platform
where he serves as chairman.
Lei is sought after as a consultant in the mobile Internet industry for his vision expertise. He served as a
director and chairman of Cheetah Mobile Inc., a Chinese firm specializing in Internet security, beginning in
October 2010. Lei is an investment advisor for Taiwanese Hotung Investment Holdings Limited, a venture capital
fund that invests primarily within Greater China. He also served as a director of 2020 ChinaCap Acquirco, Inc.,
a hedge fund, and is an advisory board member at the Great Wall Club, an organization that provides professional services to leaders in China’s mobile Internet industry.
Xiaomi, Inc.
Xiaomi disrupted the smartphone industry in China through a combination of innovative marketing and distribution practices; dynamic and pragmatic supply chain management; flexible manufacturing; and ambitious
staffing practices focused on attracting and retaining world-class executive talent. From Lei’s founding vision
to develop and sell software for mobile devices using the Android operating system, the Beijing-based Xiaomi
quickly evolved into a smartphone juggernaut.
In 2011, unit sales of all Xiaomi smartphone models stood at 3.52 million. In 2012, Xiaomi sold 7 million
units. Xiaomi far exceeded its unit sales target of 15 million units for all its models by selling 18.7 million units in
2013. Xiaomi’s unit sales of all its models more than tripled in 2014 as unit sales reached 61.1 million. Xiaomi’s
evolution has been rapid, savvy, and calculated. (See Tables 1 and 2 for details on China’s smartphone shipments.)
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Table 1. China’s Smartphone Shipments by Vendor, 2014Q4 vs. 2014Q3 and 2013Q3
2014Q4
Market Share
2014Q3
Market Share
Rank
Vendor
1
Xiaomi
13.7%
14.8%
2
Apple
12.3%
3
Huawei
11.0%
4
Lenovo
5
Samsung
Others
Total
2013Q4
Market Share
Year-on-Year Unit
Growth 2014Q4
6.5%
150.0%
5.0%
7.4%
99.7%
9.1%
10.2%
28.3%
9.5%
12.8%
13.2%
-14.3%
7.9%
11.0%
18.8%
-49.9%
45.6%
47.2%
43.9%
23.5%
100.0%
100.0%
100.0%
19.1%
Source: IDC Asia/Pacific Quarterly Mobile Phone Tracker, February 2015.
Table 2. China’s Smartphone Shipment by Vendor, 2014 vs. 2013
Rank
Vendor
2014 Market Share
2013 Market Share
Year-on-Year
Growth in 2014
1
Xiaomi
12.5%
5.3%
186.5%
2
Samsung
12.1%
18.7%
-22.4%
3
Lenovo
11.2%
11.9%
13.7%
4
Huawei
9.8%
9.3%
27.4%
5
Coolpad
9.4%
10.7%
4.6%
44.2%
44.9%
22.0%
100.0%
100.0%
20.0%
Others
Total
Source: IDC Asia/Pacific Quarterly Mobile Phone Tracker, February 2015.
The Xiaomi Executive Team
Lei did not achieve this success alone. He surrounded himself with a world-class team of Chinese former executives,
who previously worked at multinational high-tech firms, like Lin Bin from Google, and others from Microsoft
and Motorola, and a deep bench of technical experts eager to grow with the company. Lei recruited Hugo Barra,
formerly vice-president of Android Product Management at Google, to oversee global operations. Lei is quick to
give credit to the team who, for the most part, have been with him since the beginning. (See Table 3.)
Xiaomi Early Days
Xiaomi began with firmware—software that provides control, monitoring, and data manipulation in devices
such as digital cameras and mobile phones. Their MIUI firmware was developed and launched in August 2010.
MIUI is a customized ROM—read only memory. (See Exhibit 1 for a picture of the MIUI skin.) During the
rise of Android smartphones, firmware developers across the world debated what features were important and
what needed to be added to a smartphone. The varied preferences among the community gave rise to different
versions of Android. One such Android firmware was MIUI (pronounced as Me-You-I) developed by Xiaomi.
MIUI, a custom Android ROM, was developed for the specific needs of Chinese users. However, the ROM
found fans all around the world for two reasons. One, MIUI simplified the Android interface in terms of the
application drawer, notification bar, and camera functionality. Two, the interface of MIUI was similar to that of
an Apple iPhone without the iOS and a high price tag. This meant that Android users could have the flexibility
of Android while enjoying the simplistic aesthetics of iOS. These two points enabled MIUI to gain traction and
attention among those in the international Android community. On the other hand, MIUI was criticized for
imitating features from Apple’s iOS and Samsung’s TouchWiz UI (user interface).
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Table 3. Xiaomi Executive Team
• Mr. Bin Lin graduated from Sun Yat-sen University in 1990, where he obtained an Electronic Engineering degree.
He received his Master’s Degree in Computer Science at Drexel University in 1992. Soon after, he joined Microsoft,
where he worked as Lead Project Engineer, Senior Development Manager of MSRA, and Engineering Director of
MSRA. Mr. Lin also contributed to the R&D of Microsoft products, including Windows Vista and IE 8. In 2006,
he joined Google as the Vice President of the Google China Institute of Engineering and the Engineering Director
of Google Global. He was in charge of building and managing Google China’s Mobile Search and the Android App
Localization teams.
• Mr. Wanqiang Li is currently head of the Mi.com e-commerce team. In 2010, Mr. Li co-founded Xiaomi where he
led both the MIUI and Mi.com teams. Mr. Li has made a significant contribution to software and hardware design,
development, marketing, and other departments at Xiaomi. Since 2012, Mr. Li has been in charge of the e-commerce
Management, Operations, and Marketing teams. Mr. Li is also the creator of popular Internet keywords such as “mobile
phone geek,” “F code,” and “Mi Fan Festival.” In 2000, Mr. Li joined Kingsoft and co-founded their UIUX Design
Center. He served at Kingsoft in various positions as the General Manager of Kingsoft Dictionary, Chief Designer
of UI department, Director of Design Center, and Director of Internet Content. Mr. Li has also played a key role in
developing many well-known software projects, including Kingsoft Antivirus, Kingsoft Dictionary, and WPS Office.
He is also considered one of the earliest UI and HCI experts in China.
• Dr. Guangping Zhou is the director of Xiaomi’s Mi-Phone Team, and obtained his PhD from Georgia Tech University
in 1991. He was the Chief of Hardware R&D of Motorola’s best-selling model “Ming” series. In 1995, he joined
Motorola as a core expert engineer and returned to China to establish the R&D Center for Motorola China in 1999.
During his career at Motorola, Dr. Zhou served as Senior Director of the Motorola Beijing R&D Center, Chief
Engineer and Director of the R&D Center of Motorola Personal Communication Department, Vice Chairman of
the Mobile Patent Committee in Motorola China Research Academy, and the Vice Chairman of Cellphone Quality
Control in Motorola Asia-Pacific.
• Mr. Jiangji Wong leads the Mi Wi-Fi and Mi Could teams. He graduated from Purdue University and worked for
Microsoft from 1997 to 2010. While serving as the Director of Development at the Microsoft China Academy of
Engineering, he oversaw the development of products such as the high-performance analysis system of Microsoft’s
business server, B2B systems, Biztalk auto-logistics distribution system, Windows Mobile (China), Windows Phone
7 Multimedia, Internet Explorer, and Instant Messenger.
• Mr. Feng Hong leads the MIUI division at Xiaomi. He graduated from Shanghai Jiao Tong University, where he
obtained a computer science and engineering degree. He continued his academic career at Purdue University, where
he received a Master’s Degree in Computer Science. From 2001 to 2005, Mr. Hong worked at Siebel and then joined
Google as Senior Software Engineer in 2006. While at Google Headquarters, Mr. Hong oversaw Google Calendar,
Google Maps, and Google 3D Street View. From 2006 to 2010, he worked as Senior Product Manager of Google
China and led the Google China team to develop a series of localized products like Google Music and Google Pinyin
Input.
• Mr. De Liu leads Xiaomi’s Industrial Design and Ecosystem development programs. He graduated with a Master’s
Degree in Industrial Design from Art Center College of Design located in California, USA, where he is one of only 20
Chinese students to receive a diploma during the institution’s 80-year history. Mr. Liu returned to China to establish
the Industrial Design Department at Beijing University of Technology, where he served as the department’s dean.
• Mr. Tong Chen leads Xiaomi’s Content Investment and Operations. He holds multiple degrees: an MBA from China
Europe International Business School; a Master’s degree in Journalism from Renmin University of China; a Master’s
degree in Communications from Beijing Institute of Technology; and a Bachelor’s degree in Electrical Engineering
from Beijing University of Technology. Mr. Chen participated in the founding of a Sina subsidiary company in 1997
before joining Sina in 1998 as Executive Vice-President of Sina Corp and Chief Editor of sina.com.
• Mr. Hugo Barra is responsible for Xiaomi’s Global Division and is in charge of the company’s products and operations
in all markets outside of Mainland China. Before joining Xiaomi in 2013, Hugo Barra was Vice President of Android
Product Management at Google. Prior to joining the Android team, he worked for Google in London as Director of
Product Management for Mobile, a role he had since joining the company in 2008. Hugo is a graduate of Massachusetts
Institute of Technology, with Bachelor and Master’s degrees in Computer Science, Electrical Engineering, and
Management Science.
Source: Xiaomi Corporate Website http://www.mi.com/en/founder/. Retrieved July 5, 2015.
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MIUI was made for China. It quickly gained popularity among the Chinese users who primarily had inexpensive
Android phones until then. Chinese users preferred the
integration with local apps such as Sina Weibo and Chinese
language options. Early on, emphasis was placed on MIUI to
be able to run on multiple devices. MIUI continues to push
firmware updates to phones that are no longer supported by
their parent companies. For example, Samsung Galaxy S2 has
received the latest Android firmware through MIUI rather than
from Samsung. This has enabled Xiaomi to pursue longer life
cycles for their own devices later on.
Exhibit 1. MIUI ROM Created by Xiaomi
Beginning in 2013, Xiaomi decided to discontinue
Google services on their devices in China and promoted the
usage of their proprietary cloud services (MiCloud), paid
themes (MiThemes), and paid games—one of the fastest
growing IT sectors in Asia. To facilitate adaptation of these
services, Xiaomi developed a virtual currency called MiCredits
that can be redeemed in their online stores to access their value
added services.
Inspired by the Walmart and Apple business models,
Xiaomi provides the market with high-quality, customerresponsive, low-cost smartphones and extraordinary customer
service. They offer high-end Android devices using many of
the same components from the same vendors as industry leaders Samsung and Apple. They do this at very attractive price
points. Xiaomi has earned the reputation as the smartphone
manufacturer that enables almost everyone to own a smartphone with high-end specifications due to its affordable prices
and willingness to earn thin margins.
Xiaomi Smartphone Journey
In 2011, Xiaomi expanded its offering with the launch of its first smartphone, MiOne.1 Chinese consumers liked
the MiOne so much that Xiaomi received 500,000 pre-orders in the first 36 hours they were available online.
The company’s product portfolio currently includes two product families, the smartphone family and smarthome
family, which offer a range of related mobile phones and consumer electronics that connect to the Internet in
addition to mobile applications.
Xiaomi’s smartphones are sold unlocked and all run on the Android-based ROM with a custom MIUI skin.
Xiaomi smartphones are competitively priced at roughly half the price of an unlocked Samsung smartphone or
iPhone. Since 2011, Xiaomi has released a new flagship smartphone annually. The 64GB Mi Note Pro is the
most expensive smartphone in Xiaomi’s portfolio with a price of $489. Apple’s comparable phone, 64GB iPhone
6, is priced at roughly $980 when sold unlocked.
Xiaomi’s smartphones range from those with high-end specifications, such as its Mi 4—somewhat comparable to Apple’s iPhone 6 and Samsung Galaxy S6—to smartphones with basic features like its low-cost Redmi
brand, which are comparable to the features of phones like the Lenovo A7000 and the LG G3.
Although Xiaomi smartphones are sold at different price points based on their specifications, the pricing
of all their phones is very competitive. An unlocked Mi 4 sells for $299.99, while an unlocked iPhone 6 starts
at $649 and an unlocked Samsung Galaxy S6 sells from $629.99. (See Appendix 1 for detailed descriptions of
Xiaomi products.)
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Xiaomi is China’s most popular smartphone brand in a crowded and hypercompetitive local market. (See
Table 4 for a description of Xiaomi’s local Chinese competitors.) They rely extensively on social marketing to attract and serve customers and to drive their product improvement and enhancement process. Xiaomi uses social
media hubs and fan communities—populated with Mi Fans—where they create a cool culture using a just for
fans motto to both fuel marketing and guide product development.
Table 4. Top-Selling Chinese Smartphone Brands 2015
• Xiaomi: The top smartphone brand in China.
• Huawei: Huawei is a well-respected global telecommunications equipment manufacturer that competes with Cisco
for a share of the telecommunications equipment market. This company is the biggest smartphone manufacturer.
Although smartphones are not its flagship product, Huawei was regarded as the second best Chinese smartphone
brand in 2014.
• Meizu: The third best Chinese smartphone brand, Meizu launched the Meizu MX4 and the Meizu MX4 Pro in 2014.
Meizu smartphones are well known for their quality construction and high-end specifications at mid-range prices.
Meizu has a well-respected music app and a Meizu fan base that helps propel this brand to higher heights.
• Oppo: Oppo is considered the fourth best Chinese smartphone brand. In 2014, it developed the first motorized
rotating camera and the world’s slimmest smartphone, which measured 4.85mm in thickness. Its flagship brand for
2014, Find 7, runs on an Android 4.3 operating system, has a 1440p display, and a Snapdragon processor.
• OnePlus: OnePlusOne is the flagship smartphone for fifth place OnePlus. This smartphone possesses high-end
specifications, a stylish design, durability, and is sold unlocked at less than half the price of other high-end smartphones.
The approximate selling price is $299. The smartphone’s operating system is either Android 5.0.2 OxygenOS or
Cynogenmod. OnePlus built a strong following through an exclusive marketing strategy: consumers could only
purchase the smartphone if they received an invitation to do so.
• Zopo: Zopo, in sixth place, is a high-quality smartphone manufacturer but does not have the consumer following of
better-known Chinese brands. As a result of this, the outlook for this company in such a highly competitive market
is not very promising.
• Elephone: In seventh place, Elephone targets the low end Exhibit 2. Elephone’s Flagship
of the smartphone market by the production of inexpensive
Smartphone for 2015, P7000
phones. However, they manufacture low-cost phones with good
specifications. So, the future prospects for this brand look quite
bright. (See Exhibit 2.)
• Lenovo: Lenovo, in eighth place, is known for producing
reasonably good products, including smartphones, but the
company does not create marketing hype for its smartphones,
nor does it develop cutting-edge phones. It is a worldwide player
in the smartphone market.
• ZTE: ZTE is in ninth place. Founded in 1985, the Shenzhenbased manufacturer is China’s largest publicly traded
telecommunications equipment company, listed on the Hong
Kong and Shenzhen stock exchanges. ZTE is committed to
research and development, having been recognized by the
International Data Group as one of China’s top 10 competitive
brands and the most innovatively competitive brand among the top 10 holders. ZTE has been recognized by the World
Intellectual Property Office as one of the world’s largest originators of technology patents. They spend 10 percent
of their annual revenue on research and development, with research centers in China, France, and India. ZTE has a
reputation for making quality, affordable, and customized phones.
• UMI: UMI, in tenth place, is known for delivering quality metal smartphones. They have positioned themselves at
the high end of the market, and analysts expect them to become much more popular in 2015.
Source: Adapted from: http://chinese-smartphones.com/top-10-best-chinese-smartphone-brands/. Retrieved July 4, 2015.
Xiaomi sells online directly to customers from their own website, avoiding potentially brand-diluting
partnerships with distributors, retailers, and network operators whenever possible. They have a flagship brickand-mortar store in Shanghai that is similar to Apple’s flagship store in the same city, and they have 18 physical
retail locations in their distribution chain. Given Xiaomi’s tight control over distribution in China from their
website, they can more tightly control market entry and exit timing for their products. In addition, they have
developed a more intimate understanding of customer and Mi Fan tastes and preferences in an industry that is
increasingly like the fashion industry. With regional expansion, Xiaomi has found it necessary to partner with
retailers in other countries; for example, they have done so in India where they have retail partnerships.
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As noted above, Lei places significant importance on timing. Since its inception, Xiaomi has released the latest model
of its flagship device, the Mi phone, in the months of August, July, and October, whereas Apple is known for launching
its latest model of the iPhone in the winter in China, except for the release of the iPhone 6 and iPhone 6 Plus in October
2014. Furthermore, Mi phone releases have not occurred in the same quarter as the iPhone releases in China (see Table 5).
This practice raises two interesting questions: is Xiaomi’s success in China the result of its smartphone launch timing? And,
can Xiaomi compete head-to-head with Apple in China by releasing its latest model smartphone at, or about, the same time
as Apple launches its new version of the iPhone in China?
Table 5. Xiaomi and Apple Smartphone Release Dates in China
Apple Smartphone Model
Release Date
Xiaomi Smartphone Model
Release Date
MiOne
August 2011
iPhone 4S
January 2012
Mi2
August 2012
iPhone 5
December 2012
Mi3
October 2013
iPhone 5S
January 2014
Mi4
July 2014
iPhone 6 and iPhone 6 Plus
October 2014
Source: http://www.androidauthority.com/xiaomi-mi2-1s-launch-108316/, Retrieved September 14, 2015;
http://www.androidauthority.com/xiaomi-mi-3-official-launch-price-263864/, Retrieved September 14,
2015; http://gadgets.ndtv.com/xiaomi-mi-4-1786, Retrieved September 14, 2015; http://www.apple.com/pr/
library/, Retrieved September 14, 2015.
Xiaomi Smartphone Product Family Expansion
Xiaomi diversified its offerings by having two product families: smartphone
products and smarthome products. Xiaomi’s smartphone products (see Appendix 1) comprise smartphones, tablets, and wearables. After resounding
success in China with its smartphone portfolio, Xiaomi launched a tablet,
the Mi Pad, on May 15, 2014. The introductory prices of the Mi Pad
16GB and the Mi Pad 64GB were competitively set at $243 and $276,
respectively. The design is somewhat similar to that of the iPad mini in
terms of the cover that wraps around the side and is visible from the front
(see Exhibit 3). However, the Mi Pad’s cover is made of plastic, unlike
the iPad’s metal finish, which makes the Mi Pad difficult to hold. The Mi
Pad outperforms the comparably priced Samsung Galaxy Tab 4 as it has
a 2048×1536 screen resolution, while the Samsung Galaxy Tab 4 screen
has only a 1280×800 resolution. Google’s Nexus 7 is a comparable tablet
with the Mi Pad in terms of screen and price.
Mi Pad negative reviews include: the lack of a themes store and a
global positioning system; no 3G or 4G capability; difficulty holding it
due to the plastic finish; and its rapid heating up during use. Mi Pad sales
were sluggish as only 550,000 units had shipped by the end of September
2014. By way of comparison, at the end of September 2014, Samsung
had shipped 9.9 million units, Asus Teck had shipped 3.5 million units,
and Lenovo had shipped 3 million units.2
Exhibit 3. Mi Pad
Source: http://thenextweb.com/
gadgets/2014/05/15/hands-xiaomis-mipad-wants-challenge-apples-ipad-largerversion-iphone-5c/. Retrieved September
16, 2015.
Two months after the May 2014 release of the Mi Pad, Xiaomi launched the Mi Band, a low-cost activity
and sleep tracker, and began selling them in China in August 2014. There are mixed perceptions about the Mi
Band. Positive perceptions include its highly competitive price at $15; reasonably accurate tracking of activity
and sleep; and a long-lasting battery. On the other hand, the Mi Band is criticized for lacking a screen; unoriginality, given the ability of smartphone apps to track activity and sleep; early signs of wear and tear; and difficulty
signing up for the Mi Fit app. Xiaomi shipped one million Mi Band units in China between August 18, 2014,
and November 28, 2014.3 In a single day during this period, the Chinese tech giant sold 103,000 units of the
Mi Band.4 By comparison, 3.3 million fitness bands and activity trackers were sold between April 2013 and
March 2014 in the United States.
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Can Xiaomi resolve the kinks in its Mi Pad and Mi Band so that they are held in the same high regard as
its smartphones? Does Xiaomi need to be successful across all three platforms in order to remain a formidable
competitor of Samsung, Apple, Huawei, and Lenovo in the long haul?
Mi Fans and Xiaomi’s Innovation Pipeline
Mi Fans contribute both to Xiaomi’s research and development and to its marketing efforts through regular faceto-face events held for Mi Fans to meet and promote Xiaomi products. The loyalty of some Mi Fans goes as far
as enthusiasts shaving their hair into the shape of Xiaomi’s company logo, and composing and performing songs
about the company. This user following has grown organically. It is not pervasive outside of China.
Xiaomi’s innovation is based on intense customer engagement and market probing. While their hardware has
a relatively long life cycle, they update software weekly based on contributions from their loyal Mi Fan base. Mi
Fans participate on Xiaomi’s user forum by posting ideas and suggestions for additions and improvements to the
design and features of the MIUI ROM and its hardware. Xiaomi’s practice is to contain inventory levels, promote
online sales and flash sales, and rely on Mi Fans to spread the word about the benefits of its product portfolio.
Xiaomi’s product managers are known for closely monitoring their user forum for comments, and for
presenting their Mi Fans’ ideas to Xiaomi’s engineers. If the idea is considered a good one, then it is quickly incorporated. It is then released as part of the weekly update, regularly scheduled for Tuesday at noon, Beijing time.
For a start-up, Xiaomi employs a large number of people—about 4,300 in all. They have 1,500 people working in their call center, and another 1,500 engaged in e-commerce and after-sales service. The remaining 1,300
are involved in R&D, focused on smartphone hardware design, user interface (UI) and software development,
television and set-top boxes, and router design. Xiaomi does not rely on ODMs (original design manufacturers);
they rely on their own engineering team with deep technical knowledge sufficient to enable them to handpick
appropriate components for its smartphones from those publicly available.5 Internal chip design is done in tight
partnership with Qualcomm. Xiaomi’s engineers work side-by-side with Qualcomm engineers inside Qualcomm’s
offices in San Diego, California.
Despite their R&D efforts, Xiaomi has been criticized for lacking a platform like Apple’s iOS. A platform is
the operating system and hardware that conforms to a set of standards. Open standards are publicly available—
often with limitations on their usage through licensing and other restrictions—that enable software developers
to develop software applications for the platform. Platforms do not provide direct benefit to the customer; rather,
they enable the development of software applications that do provide benefit to the customer. New standards-based
interfaces and open interfaces allow software applications to run on multiple platforms. Some criticize Xiaomi
because its lack of an open platform impedes the development of software applications that could increase the
value of their smartphones for customers.
Xiaomi’s Supply Chain Dynamics
Xiaomi’s manufacturing model is similar to Dell’s; it is based on customer demand. Xiaomi’s customers place their
orders online and, once there are sufficient orders, Xiaomi purchases components from its global suppliers. Since
they order components after users have placed their order, Xiaomi does not have to manage excess inventory.
In the early days, original equipment manufacturing (OEM) firms were not willing to collaborate with
Xiaomi to help them meet optimal production levels. Demand for Xiaomi’s smartphones often outstripped
supply, and Xiaomi was not able to manufacture smartphones fast enough. This led competitors to claim that
Xiaomi created artificial scarcity to boost their popularity. The company claims otherwise.
More recently, Xiaomi has forged strong partnerships with OEM firms Inventec Appliances and Foxconn
(in India and Brazil)—Taiwanese OEM firms used throughout the industry by giants like Apple, as well as by
smaller, less well-known companies.6
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Xiaomi shortens its procurement process and lowers its costs by sourcing most of their phone’s electronic
components from countries within the Asia-Pacific region, including batteries from Thailand, the screen from
Sharp, and the camera from Sony. These components are then shipped to a central location, Shenzhen, China,
where they are assembled in a local foundry.
Assembled phones are then shipped to warehouses located in several locations throughout China and delivered to customers shortly after they arrive in the warehouse. To reduce the cost of shipping, Xiaomi located
their warehouses near other big e-commerce companies and collaborates with these on warehouse management
and shipping. This practice lowers their cost and speeds customer delivery.
Upon arrival in the warehouse, one team receives and inspects the smartphones. A second team packs the
smartphone and accessories for delivery to the customer. Industry experts estimate that this rapid inventory
turnover rate leads to 80 percent less inventory in the warehouse than competitors with more traditional inventory management. The warehouses stock replacement batteries and accessories.
While their phone models change, they are essentially the same device, mostly using the same components. This has enabled Xiaomi to negotiate component cost decreases over time. Their strategic partnerships
with suppliers, coupled with managing longer product life cycles than are typical in the industry, give Xiaomi
tighter control of their supply chain and margins that are big enough to allow them to keep customer prices
low. To make longer life cycles work, Xiaomi maintains software updates, spare parts, and other services longer
than their competitors.7
Xiaomi’s Global Expansion
Xiaomi supplies about 5 percent of the world’s smartphones. Xiaomi’s initial expansion outside of China was into
neighboring locations—Taiwan and Hong Kong. This was followed by expansion into Southeast Asia—Singapore,
Malaysia, and India. Their largest market outside of China is India where they sold over 3 million smartphones
between July 2014 and September 2015. Xiaomi claims to have made significant contribution to the growth of
online sales in this industry. Online phone sales are between 20 and 25 percent of all Indian sales. To support
their integration into the Indian market, they began manufacturing through their supply chain partner, OEM
Foxconn, in late 2015.8 This move enabled them to replicate the business model they use in China.
In Singapore and Malaysia, Xiaomi partnered with Uber to piggyback sales on the Uber website. Customers
pre-order Xiaomi phones on Uber’s site and have their order delivered by Uber—a distribution approach that
works well in Singapore and Malaysia. Expansion into Indonesia—another big emerging market—Thailand, and
Vietnam are on the horizon. Once they have mastered these Asian markets, expansion into the more developed
East Asian markets could be next.
Xiaomi’s first expansion outside of Asia was into Brazil where they manufacture and sell products. Brazil’s
smartphone market is about half the size of India’s, but it is the fourth fastest growing market in the world.
Once again, they partnered with OEM Foxconn to manufacture their phones in Brazil. Xiaomi introduced the
use of online sales, an uncommon practice in Brazil. They are confident that they will propel the industry to
achieve online sales penetration rates similar to India’s. Xiaomi is selling smartphones at half the price of their
competitors’ offerings, and Brazil is a price-sensitive market. Xiaomi has not announced intentions for additional
expansion in Latin America, but they anticipate entering Africa in early 2016. They have not announced plans
for similar expansion into the USA and Europe, where the sales and marketing fundamentals are very different.
Unlike emerging markets, telecommunications service providers subsidize most smartphone sales in the saturated
developed markets.
Xiaomi’s Structure and Financing
Xiaomi Corporation, the parent company of the Xiaomi group of companies, was incorporated in the Cayman
Islands. This is the company in which investors obtain shares, and is similar to the structure of Alibaba Group
Holding Limited, which is also incorporated in the Cayman Islands and is listed on the New York Stock Exchange. Xiaomi H.K. Limited is a subsidiary of Xiaomi Inc. and is the shareholder in Xiaomi Inc., the company
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that sells and distributes handsets. (See Exhibit 4 for a diagram
of their corporate structure.) Xiaomi’s co-founders are Lei Bin,
Li Wangqiang, Zhou Guangping, Wong Jiangji, Hong Feng,
Wang Chuan, and Liu De.
Exhibit 4. Xiaomi’s Corporate Structure
Xiaomi’s first round of funding, Series A, was concluded
on December 1, 2010, and amounted to $41 million with investments made by QiMing Venture Partners and Morningside
Group. A year later, on December 27, 2011, the series B funding attracted $90 million from Qualcomm Ventures, an affiliate
of Qualcomm, a major mobile phone processor developer. Six
months later on June 26, 2012, Xiaomi’s series C funding resulted
in an investment of $216 million by undisclosed investors. In
August 2013, Xiaomi’s series D funding amount was undisclosed.
Series E funding garnered $1.1 billion from investments made by
DST Global (founded by Yuri Milner, a Russian entrepreneur and
venture capitalist), HOPU Investment Management Company,
and GIC. Ratan N. Tata made the most recent investment in
Xiaomi at an undisclosed amount. This funding was completed on April 27, 2015.9
In May 2015, Xiaomi’s mantra rang true when Xiaomi Corp., its parent company, was valued at $46.0
billion. This round of funding will support Xiaomi’s global expansion aspirations. The company has quashed
rampant IPO rumors given this recent round of funding and their strong cash position. Within just five years,
Xiaomi Corp. moved up to the top spot as the highest valued private company worldwide. The others in the top
five are Uber, Snapchat, Palantir, and Flipkart, respectively.10
Xiaomi’s Competitive Landscape in China
Competition in China’s smartphone industry is intense. From 2009 to 2013, revenue for the smartphone manufacturing industry in China grew at an average annual rate of 53.9 percent, and revenue was forecasted to grow
21.2 percent to total $68.9 billion in 2014. Increased consumer demand for third and fourth generation smartphones and greater exports were identified as the main drivers for the upsurge. Other significant drivers included
the continued sophistication of the market’s 3G and 4G technology. To this end, China Mobile, China Telecom,
and China Unicom—China’s dominant telecommunications service providers—obtained 4G licenses towards
the end of 2013. Further, Chinese smartphone manufacturers were attuned to consumers’ price sensitivity, and
responded with highly competitive pricing to the extent that their offerings are often less than half the price of
products from established foreign players. Lastly, the extensive range of smartphones available in the Chinese
market is another contributor to industry growth.
The escalating growth in this industry is reflected by the increase in the manufacture of smartphones from
1.3 million units in 2003 to approximately 488.6 million units in 2014. Current industry distribution channels
are telecommunication operators, e-commerce, electronic retailers, mobile phone stores, and domestic agents.
Apple and Samsung entered into strategic alliances with telecommunication operators to sell their phones. Apple
has a distribution partnership with China Telecom and China Unicom. Samsung distributes its phones through
China Mobile and China Telecom. Apple also sells via brick-and-mortar stores and through large agents. On
the other hand, Samsung uses domestic agents in addition to phone carriers. Xiaomi has mastered the use of an
e-commerce platform as the primary vehicle to build its brand and record very high sales. Apple’s parity with
Samsung was the result of their distribution deal with China Mobile that enabled them to make inroads in
China that were once believed to be impossible. Historically, Apple’s brand simply did not hold the same cache
as Chinese smartphone makers.
The industry is quite fragmented, as seen above in the exhibit showing the top ten Chinese smartphone
makers. The outlook is that as e-commerce reduces barriers to entry, the entry of new Chinese players will continue, thereby intensifying competition and potentially lowering already cutthroat pricing. Notably, in 2013
industry profitability stood at approximately 3.4 percent of turnover.
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Telecommunications operators are in a controlling position in the Chinese market because they provide
subsidies to low-end smartphone producers. This helps lower prices further as smartphones become a common
feature in third- and fourth-tier Chinese cities.11 Thus, the opportunity for greater profit margins seems to lie
in high-end smartphones to meet the needs of the nation’s growing middle class. Analysts anticipate that local
players will position themselves in the high-end product portfolio.
According to estimates, China’s smartphone users total 520 million, which dwarfs the total United States
population. As a result of the market size and Chinese consumers’ affinity for technology and social media, numerous Chinese smartphone brands have entered the market over the last five years. These Chinese smartphone
manufacturers are showing their technological prowess among global players to the extent that some of the top
smartphone manufacturers worldwide are Chinese brands, such as Huawei, Lenovo, and Xiaomi.
Five-Year Industry Outlook
According to the International Data Corporation, growth has slowed in China’s smartphone market as shipments
fell to 98.8 million units in the first quarter of 2015, an 8 percent decrease in shipments from 2014 levels. This
is the first time since 2010 that there was a reduction in Chinese smartphone shipments year over year. This
drop is an indicator of the Chinese market’s maturity, comparable to those of the markets in Australia, Japan,
and the United States.
Nevertheless, the first quarter of 2015 saw Apple Inc. rise to the top as the number one smartphone manufacturer in China—a rise attributed to Chinese consumers’ affinity for the large screens of the iPhone 6 and
iPhone 6 Plus. Xiaomi came in second place due, in large part, to intense competition from other smartphone
makers of low-end to mid-range handsets. Huawei maintained its number three position due to strong demand
for its mid-range phones.
Generally, there is volatility in terms of different vendors leading the market as Samsung, Lenovo, and
Xiaomi each held the top spot at least once in 2014. In this regard, Chinese consumers have not shown a strong
brand preference for smartphones as consumers do in the more developed markets, such as the United Kingdom,
Japan, and the United States.
Looking to Xiaomi’s Future
The rise of this indigenous competitor threatens Apple and Samsung’s market share in a very important growth
market, China. However, when talking about the future, Lei comments, “We’re just a young company and in
a fragile position.” What will it take for Xiaomi to mature and achieve Lei’s ambitious growth goals? Is Xiaomi
really fragile? There are many points to ponder. What does the rapid ascent of Xiaomi mean for Apple and
Samsung in China and globally? What does it mean for the industry? Will Apple and Samsung block Xiaomi’s
global expansion? Should Xiaomi be more concerned about local rivals than foreign competitors? What obstacles
will Xiaomi face as it continues to pursue international expansion? Winning in the future will depend on the
answers to these questions.
Endnotes
The MiOne was outfitted with a 1.5GHz dual-core Qualcomm SoC processor, 1GB RAM, 4GB ROM, 8MP camera,
4-inch LCD, WiFi, Bluetooth, GPS (aGPS and GLONASS), and 1,900mAh battery.
2
http://www.wantchinatimes.com/news-subclass cnt.aspx?id=20141109000007&cid=1102. Retrieved September 16,
2015.
3
http://gadgets.ndtv.com/wearables/news/xiaomi-mi-band-fitness-tracker-hits-1-million-shipments-says-company
-628895. Retrieved September 16 2015.
4
https://www.techinasia.com/xiaomi-ships-1-million-mi-band-fitness-trackers-3-months/
5
http://www.eetimes.com/document.asp?doc_id=1321490&print=yes. Retrieved July 29, 2015.
6
Paul Nunes & Larry Downes (4/03/2014), Big Bang Disruption: How China’s Xiaomi Manages Catastrophic Success.
Forbes.
7
http://techcrunch.com/2015/01/19/xiaomi-secret-sauce/. Retrieved July 20, 2015.
8
http://techcrunch.com/2015/08/10/xiaomi-is-now-making-smartphones-in-india/. Retrieved October 12, 2015.
1
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http://yourstory.com/2014/12/xiaomi-funding-45-billion-valuation/ and https://www.crunchbase.com/organization/
xiaomi. Retrieved June 22, 2015.
10
http://graphics.wsj.com/billion-dollar-club/. Retrieved June 22, 2015.
11
The tier system used in China classifies cities by level of economic development, provincial GDP, level of infrastructure,
and historical and cultural significance. First-tier cities refer to Beijing, Shanghai, Guangzhou, and Shenzhen. Second-tier
cities are capital cities of each province. Third-tier cities are medium-sized cities in each province or coastal towns like Tianjin,
Chongqing, Chengdu, Wuhan, Xiamen. Even third-tier cities have large addressable markets.
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Appendix 1. Xiaomi Product Range
Smartphone Family
Products
Smartphone
Smartphone
Smartphone
Smartphone
13
Brand and Specifications
Mi 4i
Display: 5” Sharp/JDI 1080p display, NTSC 95% color gamut
(compared with NTSC 72% on iPhone6), 441 pixels per inch (PPI),
Sunlight Display (provides better readability in sunlight), Corning
OGS glass;
Processor: 64-bit CPU, 28nm process, 2GB LPDDR3 RAM, 16GB
Camera: 13MP Sony/Samsung Camera, f/2.0 intelligent two-tone flash
Memory: 16GB, 2GB RAM
SIM: 4G Dual SIM, Dual Standby
WIFI: 802.11ac Wi-Fi wave 2 MU-MIMO
Bluetooth: Bluetooth 4.1 low energy
Battery: All-day 3120 mAh battery (charges up to 40% in an hour)
Smart PA amplifies sound
Design: Anti-grease coating/5 color options, seamless back cover meets
the screen
OS: MIUI based on Android L.
Mi4
Display: 5” Sharp/JDI 1080p display, NTSC 95% color gamut
(compared with NTSC 72% on iPhone6), 441
PPI, 2.63mm bezel with Corning Core glass
Processor: Qualcomm Snapdragon 801 2.5GHz processor
Adreno 330GPU and 3GB RAM for ultimate gaming
Camera: 13MP Sony/Samsung Camera, f/1.8 intelligent 6-element
lens, chroma flash
Memory: 16/64GB, 3GB RAM
SIM: Micro-SIM
4G Support
Battery: 3080mAh battery
Design: 2 color options, back cover 0.8mm thick
OS: MIUI 6.
Unlock with Mi Band
Redmi Note 4G
Display: 5.5” HD IPS display
Processor: Qualcomm Snapdragon 610 Quad-Core 1.6 GHz processor
16GB
Camera: 13MP rear camera, 5MP front camera
2GB RAM+ 8GB Flash Memory
Battery: 3100mAh Lithium-ion polymer battery
Mi Note Pro
Display: 5.7” HD IPS display
64GB
8-core Snapdragon 810 processor, and 4GB RAM LTE-CAT gives
lightning fast 450Mbps download speeds
6.95mm thick and weighs 161g
3,000mAh LG battery
Curved glass edges for sleek design
Price
~ $205.00
From $299.99
16GB version retails
for around $370
64GB model retails
for around $450
U.S.$535
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Smartphone
Tablet
Redmi 2
Display: 4.7” Sharp/AUO HD IPS display resolution at 312 PPI
Processor: Qualcomm Snapdragon 410, Quad-Core 1.2 GHz, 64-bit
Adreno 306 GPU
Camera: 8MP camera, f/2.2
4G Dual SIM
Battery: 2200mAh Sony/LG Lithium-ion polymer battery
133g phone weight and 9.4mm phone thickness
Rounded corners and textured back for easy grip
Back cover fingerprint and grease-resistant
OS: MIUI 6
MEMS microphone improved noise cancellation
Mi Pad
Sharp/AUO 7.9” IPS display with 2048×1536 resolution, 4:3 aspect
ratio with Corning Gorilla Glass 3
NVIDIA Tegra K1 quad-core 2.2GHz ARM Cortex-A15 processor
192 supercomputer-class GPU cores
2GB LPDDR3 RAM
16GB eMMC flash storage
8MP camera f/200 aperture
16 hours HD video playback
802.11 ac dual-band Wi-Fi
OS: MIUI (OS is co-develop with users based on improvements
suggested by 100 million active MIUI users globally
Up to 128GB expandable Micro SD (TF) Memory simple file transfer
by dragging and dropping files after connecting MiPad to your
computer
Improved rapid heat cycle Moldino techniques fingerprint-resistant
high gloss
Smarthome Family
Products
Fitness Tracker Smart MiBand
TV
Monitors activity levels, tracks walking distance and calories burned
Sleep tracker and alarm
Bluetooth app sync
Unlock phone with Mi Band
Incoming call alerts
Aluminum alloy core and hypoallergenic silicone band
30-day battery life
IP67 water-resistant
High-temperature and cold-temperature functionality
Drop tested 1.2 m
Corrosion tested
Smart TV
MiTV
47” 3D TV Samsung/LG panel 1920×1080, full HDTV with a super
slim profile and an 8.4mm frame
Built in MiBox
2×2 dual aerial 2.4GHz dual Wi-Fi channel
Stream free 1080p HD movies and TV shows
Monthly updates
Unique dual-system technology keeps data safe
Mi HD cable box
14
U.S.$159.00
From U.S.$259.99
U.S.$323.00
U.S.$323.00
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Fitness Tracker
Power Bank
Headphones
Air Purifier
Mi Band
Monitors activity levels, tracks walking distance and calories burned
Sleep tracker and alarm
Bluetooth app sync
Unlock phone with Mi Band
Incoming call alerts
Aluminum alloy core and hypoallergenic silicone band
30-day battery life
IP67 water-resistant
High-temperature and cold-temperature functionality
Drop tested 1.2 m
Corrosion tested
Mi Power banks
16000mAh
10400mAh
5000mAh
Mi Headphones
Acoustic membrane: 50mm diaphragm, 25% larger than average
headphones
3D audio (realistic surround sound)
Built-in Knowles MEMS microphone/Kevlar fiber cables song
controller
32-ohm low impedance
Stunning gold aluminum grilles 220g weight; PU ear cushions
Safety certified by ROHS, REACH and FCC
Accessories: 3.5mm-6.3mm gold-plated adapter, microfiber drawstring
bag, hard zip-around case
Mi In-Ear Headphones
Aerospace-grade metal diaphragm with patented sandwich design to
provide optimal sound in mid and bass ranges
Third-generation balanced damping
Spiral airflow channels
Outperform Sennheiser CX985 and Urbeats on distortion curve
Built-in Knowles microphone durable, break-resistant Kevlar fiber
cable, ergonomic design, brushed, anodized aluminum
Accessories: cable winder and 3-earbud size. Safety certified by ROHS,
REACH and FCC
Mi In-Ear Headphones Rose Gold (fully gold-plated)
Metal composite diaphragm made for high-quality audio systems,
better audio restoration, faster transmission speed lowers audio loss,
lightweight diaphragms result in more sound distortion
Dual damping system
Cable organizer
Interchangeable ear buds in S/M/L sizes
3.5mm gold-plated jack
Mi Air Purifier
Internet-connected
Dual fan, four air ducts for large indoor circulation
Produces nearly 10,000 liters of clean air per minute (406 m³/h)
3-layered filter removes 99.99% of PM2.5 particles
Real-time air quality monitor and auto speed control
Smartphone remote control and alerts
Occupies area equivalent to an A4 sheet of paper
U.S.$14.99
U.S.$29.99
U.S.$13.99
U.S.$9.99
U.S.$79.99
U.S.$25.99
U.S.$23.99
U.S.$149.99
Source: The authors compiled this product list from numerous public information sources.
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Xiaomi, Not Apple, Is Changing the Smartphone Industry
by Juan Pablo Vazquez Sampere
OCTOBER 14, 2014
https://hbr.org/2014/10/xiaomi-not-apple-is-changing-the-smartphone-industry
Determining which customer to target first is one of the most critical decisions in the entrepreneurial
process. Customers that are relatively less risky and more predictable can make it easier for new to firms
gain a market foothold. One such set of customers is the nascent middle class in emerging economies.
Why? First, as their financial situation improves they are anxious to buy new things. Not quite able to afford
the top brands, they’re nevertheless willing to pay a little more for something they perceive might be close.
Second, because they can’t yet afford the high-margin top brands, they’re not all that attractive to
incumbents worried about generating enough cash to cover their high fixed and variable costs. So they
exist in a sweet spot from an entrepreneur’s point of view: rich and numerous enough to fuel a start-up’s
growth and also poor enough not to spur incumbents to respond. Xiaomi, the four-year-old Chinese
smartphone manufacturer, has found just such a sweet spot, and as a result is taking the smartphone
industry by a storm. Pundits claim that Xiaomi is just a Chinese copycat of Apple, and not without some
reason. Some point to Xiaomi’s product introductions, which are eerily just like Apple’s. Others point out
the strong similarities between Xiaomi’s operating system (named MIUI) and Apple’s iOS. What’s more,
Xiaomi’s products rank among the best in the industry in terms of performance. All these cues might lead
us to believe that it is competing head to head with the leading smartphone manufacturers.
However, looking at the full extent of Xiaomi’s business model reveals just how different – and how
disruptive — it is. For starters, unlike Apple, Xiaomi is not targeting premium customers; it’s mostly teens
buying those high-quality phones, and hardly at a premium, since Xiaomi’s prices are at least
60% lower. A neat trick. How does Xiaomi pull that off?
To sell high-quality cell phones at so low a price, Xiaomi keeps each model on the market far longer than
Apple does. On average, a new version of a phone is launched every 265 days in the industry – down from
345 days in 2009. But Xiaomi doesn’t renew its product for two years. Then, rather than charge high prices
to cover the high cost of state-of-the-art components, Xiaomi prices the phone just a little higher than the
total cost of all its components. As component costs drop over the two year period by more than 90%,
Xiaomi maintains its original price, and pockets the difference.
Apple, on the other hand, collects its highest profits with the introduction of each model and needs to come
up with new model after new model to keep those margins up. When you consider how much easier it
might be to profit from plummeting component prices than from continual new feature development
(which sooner or later will likely overshoot the needs of most cell phone customers in any event), the
disruptive potential of the model becomes clear. One might worry that other low-end competitors could
easily copy this clever model, and to forestall that, Xiaomi has devised a creative way to create some of the
mystique Apple is so justly noted for.
Essentially it markets its phones to its price-constrained but status-conscious teen base in much the same
way that rock band promoters sell concert tickets. Through an online retailer called Flipkart, potential
buyers preregister for a short sales window. They’re required to stay online for at least two hours before
the sale starts, and then only the first 20,000 lucky buyers get the opportunity purchase. Human nature
being what it is, after this awful experience, buyers end up wanting the phone even more. Xiaomi is close
to meeting its target of selling 60 million phones in 2014 with a business model well suited to expansion
into other developing economies. In a classical reaction to disruptive innovation, the largest smartphone
manufacturers were at first not motivated to seriously challenge Xiaomi, since they could not be profitable
at the price these customers are able to pay. Now that Xiaomi is becoming a significant competitor, the
incumbents are still barely reacting, launching simplified versions of their mature flagship products, as
Apple did with the iPhone 5c. But these are perceived as outdated, as newer models, like the iPhone 6, are
introduced amid great fanfare in wealthier markets, and often end up being discontinued.
So far from being a copycat, Xiaomi presents a knotty disruptive challenge to the largest smartphone
manufacturers. As it continues to expand in developing economies by marketing to the emerging middle
class, it remains sheltered from the competition by its margins and the way it makes products profitable.
Sooner rather than later, as it continues to propagate its new business model, this disruptive competitor is
going to change how this industry works.
ABOUT THE AUTHOR:
Juan Pablo Vazquez Sampere is a professor of business administration at IE Business School in Madrid.
Renegades on the frontier of innovation:
the shanzhai grassroots communities of Shenzhen, China.
Michael Keane, Queensland University of Technology m.keane@qut.edu.au
[corresponding author]
Elaine Jing Zhao, Queensland University of Technology
Published online as part of the Asian Creative Transformations’ Work-in-progress paper
series. (Find out more at: http://www.creativetransformations.asia/wip)
1
Renegades on the frontier of innovation:
the shanzhai grassroots communities of Shenzhen, China.
ABSTRACT
This article examines recent developments in southern China commonly described as
shanzhai. The term translates as “hideaway of mountain bandits”. While shanzhai is often
condemned as the embodiment of China’s “knock-off” industries we argue that it might be
more appropriately viewed as an instance of China’s emerging creative economy and an
example of rapid prototyping. The paper traces the evolution of shanzhai mobile phones and
the materialization of the shanzhai ethos in popular culture.
In arguing that shanzhai
provides inputs into creative industries the paper describes the fuzzy boundary between
formal and informal culture and notes the interaction between three spheres of activity:
official culture, the market and grassroots culture.
Keywords: shanzhai, creative economy, grassroots culture, regional innovation, second
generation innovation, intellectual property
Renegades on the frontier of innovation:
the shanzhai grassroots communities of Shenzhen, China.
Introduction
…the word “copycat” has given the word “imitation” a new meaning, and at the
same time the limits to the original sense of “imitation” have been eroded, allowing
room for it to acquire additional shades of meaning: counterfeit, infringement,
2
deviations from the standard, mischief, and caricature. With visas such as these one
can gain entry to the Land of Imitation and take up residence in Mountain Hamlet
(Yu Hua 2010: 181)
In 2010, Yu Hua, the author of the renowned novel To Live, selected ten words which
characterize Chinese society today. Among these keywords were “Grassroots” (caogen),
“Copycat” (shanzhai) and “Bamboozle” (huyou). They were entries eight, nine and ten
respectively. “People” (renmin) and “Leader” (lingxiu) listed first and second. The entries in
China in Ten Words (Yu 2011) are spiced with irony as one might expect from a writer
whose work has drawn heavily on the political vicissitudes of the Cultural Revolution (1966 1976). Yu begins his account with official terms before moving to the unofficial. In this
sequence of “keywords” it is evident that “grassroots”, “copycat” and “bamboozle”
symbolize something intrinsic to China’s fast moving commodity economy.
In this paper we are concerned specifically with how “grassroots” is represented. There are
many connotations—for instance grassroots democracy (Wang and Yao 2007; Guo 2009:
O’Brien and Zhao 2010), grassroots literature and grassroots entrepreneurs (Sato 2004); there
are celebrities and anti-celebrities such as Zhao Benshan, Zhou Libo and Sister Lotus that
epitomize China’s grassroots culture.1 But arguably the most telling expression of grassroots
culture is shanzhai.
The term shanzhai translates literally as “hideaway of mountain bandits.” Some anecdotal
reports claim that shanzhai it is a homophone for Shenzhen in the southern Cantonese dialect.
Situated on the border of Hong Kong SAR and the mainland, Shenzhen is a bustling city
noted for its entrepreneurial ethos and in the context of this paper, for “knock offs” of famous
electronic brands. As we discuss below, the origin of shanzhai is in the re-design of mobile
phones. As shanzhai entered into the vernacular it came to represent a blurring of commodity
and simulacra: cheap copycats, fakes, pirated goods, local versions of globally branded goods,
celebrity impersonators, as well as parodies of mainstream and official culture. Drawing on
an association with the popular Ming dynasty novel Outlaws of the Marsh (Shuihu zhuan)
1
See http://www.seeraa.com/seeraa‐special‐topics/china‐grassroots‐culture.html
3
about a brotherhood of renegade bandits, shanzhai conjures up associations of escape from
authority, rising up against social injustice, and developing a set of rules parallel to those of
the government (Xi 2009: Wu 2000).
In this paper we demonstrate how shanzhai’s bleeding edge technology and “renegade” ethos
offers a variation of the slogan “from Made in China to Created in China”, which is now
widely associated with China’s cultural and creative industries in academic, policy and media
reports. We will argue that the slogan might be reinterpreted as “From Made in China to
recreated in China”. “Recreated” can be read two ways; first as imitation, adaptation and
variation, which finds an outlet as economic activity; and second as counter-mainstream
cultural activities that embody a sense of play: this latter sense of recreation often displays
contention, whereby activists “respond creativity to state controls” (Yang 2009: 13) Certainly,
many of the cultural representations that are now gathered under the label of shanzhai are
playful parodies of formal institutions and cultural meanings.
The word shanzhai symbolises a range of contending perspectives on China’s creative
economy. We use the term “creative economy” here in the light of a recent publication by Li
Wuwei entitled How Creativity is Changing China. Li is a senior policy advisor and vicedirector of the Revolutionary Guomindang Party, China’s leading “opposition party”.2 The
overriding theme of Li’s book is that China must escape from being the “factory of the world”:
it must look to innovate its future and to construct a “creative society.” The issue of
copycatting and shanzhai is therefore a delicate one. Li writes:
Rather than generalizing the shanzhai phenomenon in a negative sense we should
differentiate good and bad shanzhai products, shanzhai cultures and shanzhai
economies on a case by case basis (Li 2011: 33)
The paper has 4 sections. In the first section we show how this emergent phenomenon has
emerged “parallel” to the national innovation policy ambitions of China’s leaders. In linking
the technological environment of shanzhai to the creative economy discourse we note recent
2
The Revolutionary Kuomintang (Guomindang) was formed in 1946. It is one of eight “opposition parties”. Its
function however is more to support the main Chinese Communist Party with policy suggestions than to
constitute a Western‐style alternative to government.
4
discussion about how creative industry sectors and occupations provide inputs into the
broader economy. A more specific claim is that the creative industries are an element of the
(national) innovation system (Potts and Cunningham 2008; Müller et al 2009: Bakhshi et al
2008). The first section briefly introduces this argument and its relationship to the concept of
the innovative milieu (Camagni 1991).
The second section turns to the issue of grassroots innovation in China and positions this in
the context of three interrelated spheres of activity: the official, market and unofficial. We
argue that whereas the official sphere is representative of government power, the market is a
domain of behaviour bounded by weak intellectual property enforcement and a high degree
of opportunistic behaviour. We believe that the third level, the grassroots sphere, acts as an
unofficial incubator for the market. This section introduces the concepts of adaptive creativity
(Tatsuno 1990) and second generation innovation (Breznitz and Murphree 2011).
The third section turns to Shenzhen, the origin of shanzhai communities. This section
describes the origin of shanzhai mobile phones and characteristics of shanzhai culture. In
describing an innovative milieu of shanzhai producers, distributors and retailers we offer an
alternative version of the argument that creative industries are an element of the national
innovation system. Our key point is that a characterisation of the Chinese “world factory”
model as derivative and excessively imitative does not account for the inputs of the shanzhai
“open source manufacturing” model into an emergent regional innovation system. The
section also looks at how shanzhai culture is disseminated in cultural forms.
In the final section we look at the challenges facing shanzhai producers and communities as
both the formal spheres of the state and the market respond to the success of the shanzhai
model of innovation. Drawing on the metaphor of “panarchy” (Simmie and Martin 2010) we
show how the shanzhai economy has given rise to more formal innovative practices. We
conclude the paper by making some observations of the inputs this model is making into the
cultural and creative industries and proposing some tentative policy recommendations that
are relevant to the creative economy.
5
National and regional innovation systems
Like many nations facing economic restructuring in the transition to a knowledge-based
service economy China has seized upon the idea of innovation. In January 2006, at the
National Conference on Science and Technology President Hu Jintao pledged to build China
into “an innovation-oriented country” by 2020 (chuangxin xing guojia). The benchmark
indicator for this transformation is an increase in science and technology-based innovation
from 39 percent to 60 percent and a corresponding increase in investment in R&D to 2.5
percent of GDP (Li 2011). The vision entails promoting “indigenous innovation” (zizhu
chuangxin), particularly the capacity to generate core network technologies and standards
rather than relying on developed countries. In addition the focus on indigenous innovation
looks at breaking the domination of foreign investment in producer driven industries such as
computer and IT products.
Behind the desire to promote indigenous innovation and the triumphalism of China’s
booming economy lies a sober realisation. According to Gu and Lundvall (2006: 10): “after
twenty years as the origin of manufactured goods “made in China”, China’s economy has not
been able to embark upon the track of competence upgrading”. Gu and Lundvall contrast
China’s “catch-up” performance with the US and Japan where “made in the US” and “made
in Japan” led to both two countries reaching the world frontier in terms of innovativeness and
competitiveness, “within the time span of one generation”. China remains specialised in lowvalue added products with profit margins trapped at a meagre 2- 5 percent, or in some areas
even lower (Gu and Lundvall 2006: 10). They maintain that one of the problems of the
innovation system inherited from the socialist planned economy was a separation of R&D
centres and enterprises. Moreover, statistics reveal that in the current era of technology parks
and clusters only 0.81 percent of revenue of large and medium enterprises are spent on R&D
(Cao et al 2009: 255). The perception remains that China’s industrial economy is locked into
low value OEM.3
3
An original equipment manufacturer, or OEM, manufactures products or components that are purchased by
a company and retailed under the company’s brand name.
6
In an indictment of China’s dependence on the factory model, Li Wuwei writes:
China’s manufacturing enterprises can be described as a coolie: he sweats over what
he is making and sells it to the rich at a very low price. He uses the little money he
makes to buy bonds from the rich. But the rich person is still not happy, criticizing
him for working too hard, making so much pollution that his home is no longer a safe
place to live and taking jobs away from other people. Meanwhile the rich person pays
the poor guy principal and interest with a continuously devaluing currency. (Li 2011,
9)
The dependence on foreign ownership and capital has however precipitated a response, which
we might categorize as a mode of indigenous innovation, if not the novel product generating
mode envisioned by Hu Jintao in 2006. In short, China is excelling at “second generation
innovation”, the “mixing of established technologies and products in order to come up with
new solutions” together with the science of organizational, incremental and process
innovation (Bresnitz and Murphree 2011: 4). Elsewhere this has been described as a
combination of modular production practices and informal networks (Brown and Hagel 2005).
The method by which China moves from OEM to OBM re-evaluates the notion of how a
regional innovation system functions. It has ramifications for understanding Chinese-style
innovation and the resilience of regions in the face of economic recession and competition
(Simmie and Martin 2010). “Recreated in China” helps us to understand the limitations of
China’s current cultural and creative industries policies, which are focused on the state
supervised clusters. The locus of this “grassroots innovation” movement in China is the Pearl
River Delta.
The shanzhai activities in the region around Shenzhen can be described as both industrial
clusters and innovative milieu. Prior to Michael Porter’s revival of the industrial cluster
(Porter 1990) a number of economic geographers and urban theorists had made use of the
“innovative milieu” concept (Camagni 1991). The key idea here is the role of innovative
SMEs and their networks, both formal and informal and the notion of “collective learning”.
The innovative milieu is found in work on regional innovation systems and generates what
Lundvall et al (2007) call “interactive learning”. The common factor in both the cluster and
the innovative milieu is localised external economies; in other words the benefits to co7
location of businesses competing in similar markets but cooperating in the development of
similar knowledge.
Arguably China’s most culturally diverse city in terms of population, the story of Shenzhen
began in 1979, following its inception as the first of China’s Special Economic Zones (SEZ).
The SEZs, which were created to bring foreign investment into China, initially included
Zhuhai, Xiamen, and Shantou. Hainan Island became an SEZ in 1988. By 1984 there were
also fourteen “open coastal cities”, which like the SEZs had considerable autonomy in fiscal
and managerial matters (McGee et al 2007). The rural areas around these cities ultimately
witnessed complex forces of migration. Industrial zones (kaifaqu) were set up to attract
foreign investment; these ultimately attracted workers from many parts of China. Hong Kong
provides a good coordination point for many Shenzhen exports. In 1978, the population of
Shenzhen was 30,000. By 1994, following Deng Xiaoping’s “southern tour” of SEZs, it had
jumped to 3.3 million (Liang 1999: 116).
The important point to note about Shenzhen, and the Pearl River Delta more generally, is that
this region was designated as an experimental zone by the Chinese government as early as
1978: its distance from Beijing meant that it was a “remote area”; being a site of reform local
cadres developed a desire for increased autonomy from Beijing’s official culture while at the
same time allying with businessmen and investors from Hong Kong. In effect, the rise of the
region is more due to grassroots developments than planned actions by the central state
(Bresnitz and Murphree 2011). As a result of its hard earned autonomy from central control
the region began to encourage migration, much of which was low skilled workers. A notable
example of this is the Dafen Art Village in Shenzhen which has transitioned thousands of
rural labourers into the flourishing art world, albeit a world that makes its gains from
supplying imitation art works to the global market (Keane 2011).
Shenzhen developed a reputation as a frontier city, a place where experiments could happen,
where quick money could be made. It attracted young Chinese from other provinces as well
as many speculators. Opportunities quickly arose for entrepreneurs in Shenzhen due to its
openness and its proximity to Hong Kong. A 40 minute bus trip can bring tourists from Hong
Kong or take local business entrepreneurs to Kowloon or Hong Kong Island. Shenzhen
8
quickly became a Mainland stopover for tourists to Hong Kong, a chance to pick up bargains,
often counterfeit goods.
China’s grassroots creative economy
In a book entitled Informal Rules: The Real Games of Chinese History, initially published in
China in 2000 and subsequently banned, the author Wu Si wrote: “Outside the formal
regulations of every kind of system in Chinese society, and behind every clear statement,
there are unwritten rules that are widely recognized” (Wu 2000: Preface) Wu goes on to say
that these kind of unwritten rules determine the rhythms of everyday life. In effect, the formal
institutions of society are underpinned by informal institutions, which are in the main
inherited from culture. In turn, officialdom has its own informal rules and processes.
China’s “creative economy” (chuangyi jingji) is not immune from informal rules and
processes. Echoing the sense implied by Yu Hua the creative economy is a bamboozling
concept: it is “a lexical master key” that opens all kinds of doors (Yu 2011: 205). Indeed, a
veneer of academic respectability is attached to a range of activities that absorb a high level
of state investment without much visible indication of creativity. In Li Wuwei’s How
Creativity is Changing China the creative economy is conjoined with the “creative
industries” (chuangyi chanye), a concept imported into China in 2004 (Keane 2007). In this
account, as in most government reports, the creative (and cultural) industries extend from
high end services to agriculture and tourism. This definitional largesse also extends to “the
creative industries” concept globally which according to Bharucha is “at best a catch-word, if
not a logo, clubbing together distinct categories like “skill”, talent” and “innovation” which
masquerade as an affinity to the world of artists but with no real evidence of the labour and
imagination that goes into art-making (Bharucha 2010: 22).
In spite of the scepticism about the applicability of the adjective “creative” or indeed the
noun “industry”, the term “creative industries” has captured the policy heartland in many
economic development bureaus globally. In making the argument for allocation of resources
some authors have argued persuasively that due to the centrality of intellectual property,
9
particularly in intangible products and services such as design, the creative industries “offer
a diverse bundle of services that can be integrated into the innovation processes of other
businesses” (Müller at al 2009: 150). Studies conducted in Australia (Higgs et al 2005) have
shown that design workers are over-represented in non-creative sectors such as IT, banking
and education. In a much-cited study Potts and Cunningham (2008) argue that the creative
industries do not drive economic growth directly, as might a boom in the primary resource
sector or the housing market for example, but rather facilitate the conditions of change in the
economic order.
Do the creative industries function this way in China? Research is still at an early stage but
there is evidence emerging to suggest that the importance of tangible outputs in official data
collections constrains the capacity of the creative industries to engender change, for instance
by bringing about the reform of ineffective market mechanisms (Keane 2011). Moreover,
despite arguments by Li Wuwei that creativity impacts across the whole economy, regional
policy is invariably directed at constructing physical infrastructure projects. The symbol of
the Chinese cultural economy is therefore the cluster. This is not altogether surprising
considering how industrial clustering stimulated the Chinese economy to new heights during
the 1990s, particularly in Zhejiang and Guangdong provinces. These regions have managed
to break away to a large extent from dependence on the state and are celebrated for their
entrepreneurial ethos.
However the success of clusters in these regions indicates a failure of policy. Over the past
decade Chinese policy advisors have identified clustering as a means of turning the intangible
and the mysterious attributes of creativity into material forms (paintings, artefacts, sculptures)
— in other words, “things” with which they are familiar. Cluster master plans have circulated
as factories are turned over to developers and investors seeking to take advantage of the
government’s advocacy of the cultural economy. State-opened enterprises, private business
entrepreneurs and university research centres have joined in cultural and creative industries
projects thanks to generous incentives from local governments. Setting up a factory, calling it
a cluster and producing contracted products is an obvious business model. International
animation companies, design firms, movie production companies and international fashion
houses have played a part by outsourcing work to low-cost China. Yet the economic benefits
of many ambitious cluster projects are yet to be realised.
10
The concept of clustering can be understood in different ways. The planned physical
environment embellished with an official plaque of approval is arguably the benchmark for
government officials and developers alike in China. Many of these have names that resonate
with their industrial heritage such as 798 Art Zone, M50, 1933, and Loft 49. While these spaces
accommodate a variety of businesses and generate positive media reports about how China is
becoming more creative, more innovative, the downside is that they are inevitable supervised or
monitored by government officials. The sustainability of many cluster projects is conditional on
good relationships with officials (Keane 2011).
The verb “cluster” connotes a sense of following, of attaching one’s identity, skills or resources
to something already successful, often an existing physical community. Two terms commonly
used in China illustrate the role of attraction: zhao shang (to attract business) and zhao chuang
(to attract creativity or innovation). The first sense is pragmatic: businesses are attracted to
geographical locations hoping to take advantage of technologies, labour forces and institutional
structures (including incentives such as low cost rent and tax waivers). The second term is more
contentious: how does a cluster or a region attract creative and innovative people? Moreover,
how is a creative ethos engendered? How do you promote a culture of creativity?
In order to understand this regional perspective and the challenges facing China’s cultural
economy as it seeks to become a creative economy, it is useful to adopt a wide angle view. In
China there are three levels of inter-related activity: the first level of activity operates in the
realm of policy and state planning; the second concerns the market adjustment to policy and
to uncertainty; the third level represents widespread grassroots experimentation.
The first level is official culture and the Chinese Communist Party’s raison-d’être: reform. In
effect reform is a process of constantly designing policy to development objectives, although
in practice the nature of reform has been contingent on the Marxist-Leninist canon as
interpreted by successive Chinese leaders. Policy making in relation to cultural activities has
generally followed a conservative path. However, the international diffusion of the creative
economy (Kong et al 2006) has led many to speculate how China can tap into the benefits
associated with this “millennium idea.” Proponents, often economic bureaus of regional
governments, regularly recite the mantra that this is the fastest segment of the global
11
economy. Likewise in China the economy illustrates the aspirations of municipal and local
governments to generate capital from the cultural market. Cultural policy is therefore closely
aligned with economic growth theory, urban regeneration and local entrepreneurship. In this
triangular relationship there is a sense that government must shoulder much of the
responsibility for planning. As a result, there is recognition of the need for “informed” topdown planning.
The first level represents what some political scientists and economists call formal
institutions: “the rules, regulations, policies, and procedures that are promulgated and meant
to be enforced by entities and agents generally recognized as being official” (Tsai 2005: 125).
From a cultural policy perspective the first level symbolizes official culture (guanfang wenhua).
The state maintains an interventionist role.
The effect of political supervision is acutely felt on the second level. Broadly speaking, this is
the realm of commercial popular culture—the tangible manifestation of creative industries.
The practice of forming clusters, and of opting to be located in a cluster, is frequently a
strategy for obviating the risk and uncertainty of the creative industries. While agglomeration
ought to engender “spillovers” and “increasing returns”, in effect we see a widespread
tendency to avoid sharing of ideas, a lack of intellectual property generating product and
lock-in effects as businesses opt for safe business models. While rigid regulation of media
industry sectors constrains much innovation, the market level has become adept at looking for
its “ideas”, not from above, but from below.
The third level—grassroots culture—is therefore the most important. It is typified by adaptive
activity in non-commercial spheres. Much of the activity currently occurring in online
communities is not aimed directly at profiteering, but rather functions as informal and
amateur incubation. In other words it is both re-creation and recreation. The productiveness
of this layer is not measured by economic success but by impact. China has more than 420
million net users and over 600 million registered mobile phone users.4
4
http://www.cnnic.cn/en/index/0O/index.htm
12
Whereas levels one (official) and two (popular culture) require navigation of censors, the third level
is conspicuous by its risk culture. It is this willingness to take risks that makes it an incubator for the
market. Networked social communities are sites of rapid experimentation, drawing on the ingenuity
of users and the interpretations of communities. This “grassroots soft power” has a potential
“commons” effect, albeit constrained by governmental technologies of power. In effect the third
level illustrates a kind of creativity perhaps best described as “adaptive creativity”, a term
used by Sheridan Tatsuno in his book Created in Japan: from Imitators to World Class
Innovators. Tatsuno wrote in relation to Japanese ingenuity: “In the West, creativity is
viewed as an epiphany and only one phase in the creative process— the generation of new
ideas that triggers dramatic breakthroughs—is emphasized” (Tatsuno 1999, 49).
He goes on:
In the broadest sense, creativity reflects a fresh, novel and unorthodox way of
thinking and viewing the world. We need to expand our Western notion of creativity
to include all forms of creativity, including Japanese creativity (Tatsuno 1999, 49 50).
Tatsuno, writing at a time when Japan was breaking new ground in miniature consumer
electronics formats, makes some interesting points in comparing East and West. In China, the
term “putting new wine in old bottles” was used to describe how the Maoist revolutionaries
rewrote Chinese cultural policy. Rather than trying to rewrite the source code, they used old
cultural forms and updated these with Marxist content.
Recycling ideas and imitation is a business model that is shedding its negative image. Oded
Shenkar, author of Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge,
suggests that the age of novel-product innovation is passing. Shenkar’s interest in the role
played by imitation in business strategy was aroused during thirty years of study on China.
While imitation has always been widespread, it has gained a bad name due to the emphasis
placed on innovation (and novelty). Due to the forces of globalization and the codification of
knowledge, which facilitate reverse engineering, imitation “is becoming more feasible for a
wide array of products and services, process, and business models, as well as more attractive
in costs, benefits and potential return” (Shenkar 2005, 43).
13
In their study of China’s IT industry Breznitz and Murphree (2011) draw attention to what
they call “two myths”: first the “Western techno-fetishism of novelty, which equates
innovation only with the creation of new technologies and products” (2011: 2); the second
myth is that China’s capacity to be innovate must necessarily be measured against an
idealised Silicon Valley benchmark. In fact, according to the authors what China does so
effectively is second-level innovation—the mixing of new techniques and technologies in
order to come up with new solutions, including solutions in organisation of production,
packaging, marketing. This ingenuity allows Chinese businesses to move into new niches that
have been made profitable by an innovator elsewhere. This is the essence of the shanzhai
phenomenon, as we demonstrate below.
Renegades and innovators: the shanzhai phenomenon
The shanzhai phenomenon enjoins a macro-cluster, a highly networked “learning region” (Gu
and Lundvall 2006) in which a particular modality of incremental innovation has gained
ascendency. Shanzhai innovation is indicative of the region around Shenzhen although it is
arguably symptomatic of a wider “national” style. It has much to do with small-scale flexible
operations, grassroots communities, and “complex adaptive systems with emergent patterns of
behaviour and organisation.” (Simmie and Martin 2010: 32). In this context the shanzhai
innovation model is inimical to the state’s preferred vision of strong industrial groups and
national brands. Yet the value of shanzhai activity to the provincial economy is considerable,
especially as much of the value that accrues doesn’t appear in official statistics.
Echoing the ethos of contemporary hacker culture and the renegade “take from the rich” spirit
of The Water Margin, shanzhai culture offers the following rules (Jeffrey 2011):
1) Design nothing from scratch; rather, build on the best of what others have already done.
2) Innovate the production process for speed and small-scale cost savings.
3) Share as much information as you can to make it easy for others to add value to your
process.
14
4) Don’t make it until you’ve already got a buyer.
5) Act responsibly within the supply chain.
The most well-known shanzhai product is unquestionably the shanzhai mobile phone
(shanzhaiji). Initially shanzhai phones were “non-brand” copycat products that featured
multiple functions at incredibly low costs (CCID 2009). Many OEM manufacturers clustered
in the Pearl River Delta region sought to compete with the world-leading brands. Some
products carry copycat names such as “Hi-Phone”, “Nokla” or Motololah. With shanzhai
products lying in the informal economy, the absence of 17% value-add tax, network license
fees and sales tax, as well as the absence of marketing and after-sales service, save costs. The
cheap but functional shanzhai phones appeal to price-sensitive consumers. While early
shanzhai products were knock-offs and counterfeits criticised for intellectual property
infringement, shanzhai producers have moved beyond merely copying.
The nature of shanzhai innovation evolved due to the technology of the integrated chip
developed by Taiwan’s mobile phone chip solution company MediaTek. The widespread
availability of the chip mitigated R&D costs for device producers and accelerated the
production cycle. Mobile phone manufacturers took advantage of MediaTek’s simple,
integrated motherboard and easily changeable user interface, and focused their efforts on
developing and adding popular features.
Consumer insights were important in developing products to satisfy consumer needs. Another
small but important innovation was dual-SIM-card mobile phones which support two
operator networks on one mobile. This novelty not only enables users to bypass roaming
charges but also helps them with work/life balance. Such a disruptive innovation has
impacted on other players in the industry. It has undermined operators” business models and
has led many mainstream mobile manufacturers to start offering such devices. Nokia
launched two dual-SIM mobile phones, the C1 and C2 in 2010, in an effort to improve its
products and respond to local needs. The diverse range of shanzhai mobile phones
contributes to the “long tail” effect (Anderson, 2006), constantly stimulating niche market
consumption. This is evident in how China’s generation X, born in the 1980s and 1990s, have
adopted shanzhai products as lifestyle statements.
15
Shanzhai mobile phone manufacturers are known for their speed to market; moreover the
added features of their products compete with global and national brand products. With the
clustering effect of IT companies in Shenzhen, an effect of government policy (Bresnitz and
Murphree 2011), a well-developed supply chain has benefited the shanzhai mobile phone
industry. The existence of a comprehensive electronics industry chain in the Pearl River Delta
provides advantages for shanzhai producers as they move up the value chain. This has also
brought added market pressure to bear on brand product producers.
The shanzhai mobile phone industry rapidly developed a presence in the domestic market,
especially in the underserved 3rd to 5th tier cities and rural areas where people want trendy
mobile phones but have less purchasing power. Shanzhai handsets have to some extent
promoted the adoption of mobile data services, as price-sensitive users can get smart phones
at affordable prices. In 2008, it was estimated that more than 80 million shanzhai phones
were produced in China, constituting around 20 per cent of the domestic market (Chase,
2009). Furthermore, shanzhai mobile phones have captured large market shares in overseas
emerging markets such as India, Brazil, and Russia. Half of the shanzhai phones produced
were exported to these markets (Chase, 2009). It is also claimed that mobile devices
employed in the 2011 Arab Spring uprisings were predominantly imported from Shenzhen.5
Despite significant export figures to developing economies, the “informality” of the shanzhai
mobile industry has caused problems for producers vying for the global market. As most
shanzhai devices do not undergo an expensive testing and approval process they do not have
an International Mobile Equipment Identity (IMEI).6 Mobile phones without IMEI imported
from China were blocked in India and Pakistan. According to a report from the Pakistani
newspaper Dawn, a user in Pakistan requested the operator to block the IMEI of his mobile,
which resulted in many other users sharing that IMEI not being able to use their shanzhai
mobile phones (Shahid 2008). In July 2008, the Pakistan government banned sales of IMEI5
http://www.fastcoexist.com/1678136/chinas‐cell‐phone‐pirates‐are‐bringing‐down‐middle‐eastern‐
governments
6
The International Mobile Equipment Identity or IMEI is a unique 15 digit code to identify mobile phones. It is used by
the GSM network to identify valid devices and therefore can be used for stopping a stolen phone from accessing the network in
that country.
16
less phones. In addition there are challenges to content provision and mobile marketing as it
is hard to optimize content for mobiles which may have a Nokia look and an iPhone screen
size. Further, the hidden costs and sometimes deceptive charges in mobile applications preinstalled on shanzhai mobile phones have been a constant complaint among users.
Despite these lingering issues, the success of shanzhai mobile device manufacturers is
indicative of a Chinese model of indigenous innovation; within China such devices have
become a symbol of the shanzhai spirit. Originally synonymous with knock-offs or bad
quality, shanzhai mobile device manufacturers have very quickly transformed “into emerging
indigenous adaptors and innovators, from not only industrial design and local demand capture
perspectives but also core technological breakthroughs such integrated circuit (IC) chip
design, whole phone system’s total solution and whole supply chain’s regional integrations”
(Zhu & Shi 2010, p. 31). More importantly, they have successfully challenged the incumbent
industry players and disrupted the market with their innovations. Owing to the increased
efforts in R&D and brand building, some companies have become more and more distant
from their shanzhai beginnings (Tse, Ma, & Huang 2009). K-Touch, for example, has
become a well-embraced domestic mobile phone brand and received the license for
developing GSM and CDMA mobiles in 2006. In 2007, the removal of the licensing policy in
mobile phone manufacturing which had been in place for 9 years further pushed the shanzhai
manufacturers to find their way to the formal economy and accelerated market disruption.
Tse et al. (2009) argue that the shanzhai phenomenon emerged as a result of both “soft”
factors (Chinese culture, history, and the policymaking/ regulatory context) and “hard”
factors (market supply and demand). These include a “fearless experiment” mindset, the
relatively weak, inconsistent/non-transparent industry policy-making, the evolving nature of
the Chinese market, especially the underserved rural market and the lower middle class,
industry incumbents” inadequate understanding of local markets, as well as a strong
manufacturing capacity within the ecosystem.
The shanzhai ethos has gone beyond the manufacturing industry and has diffused to other
spheres including popular culture. As mentioned above, the generation born in the 1980s and
the 1990s most identifies with shanzhai culture. Known for being “anti-authorit…
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