The Chinese answer to Apple is falling apart
Etienne Oliveau/Getty ImagesLei Jun, Chairman and CEO of Xiaomi Technology and Chairman of Kingsoft Corp talks to journalists before the 2nd plenary session of the National People's Congress on March 9, 2016 in Beijing, China.
The "Apple of China" is in serious trouble.
Sales of smartphones from Xiaomi, a once-red-hot Chinese hardware startup touted as the country's answer to Apple, dropped in China a whopping 38% in the second quarter of 2016 year-on-year, according to new data from research firm IDC.
Xiaomi did not immediately respond to a request for comment.
Xiaomi's phones are not yet available in Western markets — but it has developed a buzzy reputation in the tech press.
The company launched in 2010, and enjoyed meteoric growth: By the end of 2014, it was the officially the world's most valuable technology startup, with a private valuation of more than $46 billion. (It has since been dethroned of that title by Uber.)
Specialising in cheap, high-quality smartphones, it had grown off the back of an unusually passionate fan base, which it was careful to cultivate. It liberally borrowed from Apple's playbook, including charismatic CEO keynote speeches. There is also a booming market in China for smartphones.
The company set an ambitious target for 2015: Sell 100 million smartphones. But by July, as sales began to slow, it started to become clear that it just wouldn't happen.
It ultimately sold "over 70 million," according to a company representative.
Earlier this year, Fortune reported that all-in-all, Xiaomi's revenue's barely grew in 2015. It pulled in 78 billion yuan ($11.9 billion) for the year, up 5% on 74.3 billion yuan ($11.3 billion) in 2014, but well short of a 100 billion yuan target for the year.
Now, the latest figures from IDC suggest that Xiaomi isn't just standing still — it's actually in freefall.
It's worth noting that Xiaomi sells other products — from water-purifiers to hoverboards. But smartphones still make up the lion's share of the company's bottom line, with just 5%of its revenues in 2015 coming from over products, according to Fortune.
In Q2 of 2016, Xiaomi sold an estimated 10.5 million smartphones in China, down from 17.1 million a year prior. That's a drop of 38.4%.
Meanwhile, rivals Oppo and Vivo have skyrocketed, enjoying year-on-year growth rates of 124.1% and 74.7%.
What's behind Xiaomi's implosion? A slowing in growth, at least, was inevitable: In previous years, the company was perfectly positioned to take advantage of the rapid growth in China's smartphone market.
This has now dropped off — but the Chinese market is still growing, 4.6% in Q2 year-on-year.
IDC points to a failure of marketing as the cause.
Xiaomi previously spent very little on marketing, and was proud of it — relying on word-of-mouth and user hype to spread word of its products. But this tactic is no longer viable: Competitors Vivo and Oppo are spending heavily, including using "brand ambassadors" to promote their smartphones, and without any concrete ways to differentiate its products, Xiaomi has been forced to follow suit.
"In the past, Xiaomi started the trend of selling its phones online and other vendors soon followed suit and created their own online brand. After vendors witnessed OPPO's success with its R9, they also started riding on the trend of hiring celebrity endorsers to represent their brand and appeal more to the young crowd,"IDC analyst Xiaohan Tay said.
"Hiring celebrity endorsers may help increase numbers in the short-term, but this alone may not be sufficient to drive numbers in the long run. As there is very little differentiation across products to warrant significant brand loyalty, vendors must constantly think out of the box to get people hyped up about their products."
Xiaomi was once the head of the pack. Now it's playing catch-up — and losing.
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