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Why are Xiaomi phones so cheap?

Xiaomi's unique business model is propeling the company outside its home base in China

By Michael Kan
May 16, 2014 10:52 AM ET

IDG News Service - Chinese smartphone vendor Xiaomi has made a name for itself by selling iPhone-like gear for almost a third of the price of Apple products. It may sound too good to be true, but the company is managing to sell millions of phones and is already kicking off a global expansion. So how does it pull it off?

For one thing, Xiaomi claims to price its phones just above their costs. But company officials also point to its iconoclastic business model, which eschews the financial burden of using traditional marketing and distribution practices, and relies on the Internet to fuel sales. It's made Xiaomi into a company that doesn't operate like a typical smartphone vendor, but still successful enough to become one of China's hottest tech firms.

Disrupting the market

When Xiaomi unveiled its first flagship Mi 1 phone in August 2011, attention was fixated on the device's price. Consumers could buy what was then a cutting-edge smartphone for 1,999 yuan (US$324). This was a major bargain compared to other high-end phones including the iPhone 4, which started at 4,999 yuan.

Xiaomi Mi 3
The Xiaomi Mi 3 phone.

Xiaomi maintained the initial 1,999 yuan price for the flagship phone. But the company also released its Hongmi line of products, which are lower-spec phones, at even lower prices, starting at 699 yuan. The Hongmi phones are doing so well, they've helped Xiaomi become China's third largest smartphone vendor in this year's first quarter, according to research firm Canalys.

What do they cost to make?

 

Xiaomi's latest flagship handset, the Mi 3, has the features you would expect from a high-end phone. It has an Nvidia quad-core 1.8GHz processor, a 5-inch 1,920 by 1,080 pixel screen, and a 13-megapixel rear camera, all fitted together in a metal casing.

 

But even though Xiaomi maintains low prices for its phones, it's still able to extract some profit from their sale, according to analysts. In the case of the Mi 3, the device itself cost $157 to make, according to research firm Fomalhaut Techno Solutions.

"I think they are making at least 100 dollars of profit with the Mi 3," estimated Minatake Kashio, Fomalhaut's director, accounting for Xiaomi's distribution costs.

That profit margin, however, is much lower for the Hongmi phone, which Fomalhaut estimates cost $86 to build, but is priced at about $113.

Cost cutting

 

Unlike other rivals, Xiaomi doesn't spend money on traditional advertisements. It does not have a major network of its own physical stores it needs to staff and maintain. Instead, it has done away with those costs, and largely sells its phones directly to consumers through e-commerce.

Reprinted with permission from IDG.net. Story copyright 2014 International Data Group. All rights reserved.
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