The once high-flying Xiaomi Ecosystem has rarely produced nothing of note for three years. What went wrong and can it be fixed?
Masked residents wait outside a Xiaomi store in Hong Kong, China, on May 25, 2021. Photo from CFP
By WU Yangyu
At a suppliers’ meeting late last year, QU Heng, VP of Xiaomi in charge of the company's “Ecosystem,” brought up a touchy subject: We’re not making it big anymore. It was an awkward moment. Once high-flying, the Ecosystem is barely fluttering along now and no one really knows why, or what to do about it.
The Xiaomi Ecosystem was conceived in 2013. The smartphone business was moving onwards and upwards, and the company wanted similar success through other smart devices. The solution? Incubate an ecosystem for smart device makers with each company remaining an independent Xiaomi supplier, essentially outsourcing R&D.
From 2014 to 2018, almost every gadget Xiaomi launched was an instant hit: the fitness tracker, the robot vacuum and the air purifier. Everyone, consumers and investors alike, enthusiastically looked forward to the next funky invention.
Things have changed a lot since 2018 when Xiaomi went public in Hong Kong. Although no one can pinpoint when it happened, or why, the consensus of the ecosystem – executives, suppliers and customers – is that the new products are just not exciting anymore. There has been no lack of soul-searching, but a solution seems as far away as ever.
WANG Chenran’s company is one of nearly 200 Ecosystem suppliers. Not long ago, one of his proposals lost out to a bigger company that could make the same thing much cheaper. The launch was a bust and the big company gave up on the project. Wang’s company won the contract back but was discouraged. “Big companies always offer cheaper deals even if their plans seemed unmindful,” he said. “Small but devoted companies willing to exert their utmost effort in R&D like us have no motivation anymore.”
But these big companies have their own complaints. YANG Ping, whose company was among the ecosystem veterans, has been underbid multiple times by smaller or less established companies.
“They are willing to do it no matter how much money they lose,” he said. “No one makes money, and the quality of the products compromised. It’s terrible for the entire Xiaomi brand.”
Xiaomi is not oblivious to such murmuring. Qu Heng has attributed the unpopularity of recent new products to, among other things, competition. Behind it is the obsession with cost intrinsic to the Ecosystem’s business model.
“Fans love Xiaomi for the low price. You have to lose money first if you want to get them hooked,” XU Fan, a long-time employee, reasoned.
It hasn’t always been like this. Ecosystem suppliers used to enjoy some level of exclusivity. Suppliers were told to focus on research and development, and that competition in their specialized category would be introduced “slowly and gradually” after two years.
Only it was neither slow nor gradual. In the robot vacuums category alone, for example, five suppliers rival one another. Big suppliers round up contracts once a bid is opened. Some openly admit that their role is contract manufacturer rather than innovation partner.
A priority shift has been felt among suppliers since Xiaomi went public. Quality has been compromised in the pursuit of expansion.
There are no hard and fast performance targets, but the expectation is that Ecosystem sales need to double every year.
"Sales expectations are communicated to each group, down to every individual product, and the numbers are adjusted monthly or sometimes weekly," a Xiaomi employee told Jiemian News. "The goal is to double sales every year and stay profitable. There are no specific requirements on profit, just that we make one."
Even amid mass factory closures in the depths of the pandemic last year, large orders were placed based on aggressive forecasts, forecasts did not age well.
Ecosystem sales are lumped together with other smart devices under "IoT and lifestyle products" in the financial report. The growth of the segment has collapsed from 87 percent a year to 8 percent. The best guess is that the Ecosystem’s growth fell from around 70 percent to 18 percent, lower than the company’s overall growth.
Suppliers have noticed changes in the way decisions are made. In the early days, issues were solved through phone calls or text messages to the department head, "the big brother.” Nowadays most requests snake through layers of vendor relationship associates, project managers, and analysts.
But suppliers and employees are worried that the rigid process has impeded Xiaomi's proverbial ability to “move fast and break things.” One Ecosystem supplier observed that the new professional managers are less imaginative than "the founding squad."
The ecosystem’s problems may be more to do with the market than any internal strife. CEO LEI Jun once wrote that the Ecosystem should be a disruptor and trendsetter in every market it competes in. In the early days, it was easy. The markets —robot vacuums, smart lighting, power banks — were young, small, and often fragmented. Faceless brands made largely similar products, each hanging onto a small piece of the market.
Seven years in, however, and such low-hanging fruit have become fewer and harder to come by. Xiaomi's competitors, including traditional home appliance manufacturers and startups focusing on e-commerce, are faster on their feet these days. When Xiaomi released an extension board that was supposed to be "the first of its kind", another manufacturer came up with another almost immediately.
The ecosystem now finds itself spread over an ever-increasing number of specialized markets. The norm is to develop as many different models as possible within each product category and cover all viable price ranges. Under the robot vacuum category, for example, five models with all different combinations of vacuuming and mopping functions are available, at prices ranging from 799 yuan (US$125.44) to 2699 yuan.
Inside Xiaomi, many compare the market transformation to that of the venture capital world. There are fewer new markets to be discovered, so investors have to milk more out of existing ones.
There’s been no lack of soul-searching on the absence of blockbusters, but there's hardly any agreement on how to make one, or even what counts as one. Qu Heng believes it is nothing more than solid technology, affordable prices and a cool user experience. Wang Chenran believes suppliers should be selected based on their design rather than any budget: "Only then would I feel motivated again." CHEN Bo, a hardware engineer turned e-commerce executive, was recently appointed to a key position in Ecosystem, perhaps signaling a refocus on design and technology.
In another optimistic development, Lei Jun has elevated the Ecosystem to the same strategic importance as the smartphone business. The two segments of business will not only coexist but synergize with each other, Lei wrote in an internal letter last August.
Consumers will decide with their wallets whether and when these efforts will pay off. The rise and fall and potentially revival of the Ecosystem might be the natural, inevitable stages of its lifecycle. As some employees have pointed out, the Ecosystem itself is an innovation.