Article / 20 February 2015 at 5:58 GMT

Chinese phone giant Xiaomi plans 'baby steps' US entry

China Watcher / Shanghai
  • Smartphone maker Xiaomi plans to enter the US, but not to sell phones yet
  • Xiaomi's site will initially sell accessories in the US
  • It needs to overcome copyright and security hurdles for the US phone market

By Neil Flynn

At the end of 2014, I pointed out that Chinese smartphone maker Xiaomi would be the most closely followed startup firm in the world during 2015, and this has so far proved to be correct. The firm has become the world’s most valuable startup.

Earlier this month, Xiaomi announced that the number of activated accounts on its custom MIUI Android operating system had reached 100 million. MIUI isn’t solely used on Xiaomi phones, as about 13 million users of other smartphones use the operating system. Xiaomi has actively been developing it for international expansion, as the operating system now supports 31 languages across 112 countries.

Xiaomi's MIUI User Growth

Source: Xiaomi  

The company views MIUI as an important revenue source, as its proprietary app store now distributes about 35 million apps each day. It has also partnered with third party firms in order to improve the service for its users, such as Wi-Fi hotspots, parcel delivery firms and other services within its lifestyle service channels.

MIUI has been generating meaningful revenue since 2012, and in 2014, monthly revenues from third party mobile games reached 197 million yuan, earning third party developers 600 million yuan throughout the year. This revenue sharing business model has been key to MIUI’s success, and allows the firm to keep its own costs relatively low, whilst expanding the services it offers users.

Xiaomi MIUI

Source: Xiaomi  

In the previously mentioned article I wrote in December, I discussed how Xiaomi is entering the smart home market, with the release of its Android based smart TV and its smart wristband. Both of these products use the MIUI operating system, so that all Xiaomi products can be used together to form the smart home ecosystem.

Smart TVs are a growing market in China, and should see strong growth throughout 2015. Xiaomi is currently facing competition from video platform site LeTV, which is also developing its own electric car. China’s other tech firms have yet to pursue this strategy, with most only releasing a smart TV set top box, which can be connected to standard TVs to let users enjoy video libraries and shopping services.

Entering hotly contested US

Earlier this month, Xiaomi announced that it will make tentative moves into the US market. However, instead of selling its smartphones, it will open its ecommerce site in the US, to sell accessories such as earphones, power banks and fitness bands. This tentative entry is likely due to concerns about copyright infringement and the location of its servers.

An important issue to consider is that Apple has sued every other major Android smartphone manufacturer that has entered the US market, on the basis of copyright infringement. Likewise Samsung has done the same, and the biggest risk to Xiaomi’s entry into the US is that it would likely face a barrage of lawsuits. Discussion of Xiaomi’s possible copyright infringement issues has been common over the past few years, but it should be no surprise that no foreign firm has taken Xiaomi to court in China, as it would be unlikely to stand up in court, and also possibly damage the firm’s reputation in China, which has become such an important market for foreign smartphone manufacturers.

Whilst I expect Xiaomi will continue to produce new phones for the Chinese market, it will likely develop a smartphone specifically for the US market, in order to avoid these legal issues. Yet this would still allow Xiaomi to transfer its reputation of producing low cost quality smartphones from China to the US.

Smartphone security concerns

Another issue for Xiaomi is national security concerns about its servers. The Indian Air Force warned its personnel not to use Xiaomi phones, after security solution firm F-Secure released a report stating that the Xiaomi Redmi 1S budget smartphone was forwarding the carrier name, phone number, IMEI, as well as numbers from the address book and text messages back to servers in Beijing. This would also be an issue for Xiaomi if it released its smartphones in the US, which is why I expect that it will build servers outside of China before pursuing their international expansion.

With the success that Xiaomi has enjoyed in China, entry into the huge US smartphone market is inevitable, but significant challenges lie ahead before it can actively challenge Samsung and Apple. Nevertheless, these should be little more than formalities to be worked out, whilst it makes its tentative first steps into the US. Nevertheless, Xiaomi continues to have strong growth in China, and I expect that by the end of 2015 its smart home products will be a significant revenue driver.

– Edited by Robert Ryan

Neil Flynn is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform


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