IF YOU can sell smartphones, you can sell anything. That seems to be the motto of Xiaomi, a Chinese firm best known for making feature-laden but affordable handsets. On August 31st, at a splashy event in Beijing, it unveiled a robotic vacuum cleaner—the latest in its “ecosystem” of devices, which also includes smartwatches, air purifiers, hoverboards, rice cookers and even an electric screwdriver (most are built by startups in which Xiaomi has a stake).
The snazzy vacuum—it features a futuristic distance sensor that is able to scan its surroundings up to 1,800 times a second—is a symbol of the hubris that has led Xiaomi to chase its ecosystem dreams even as it has neglected its core business. Considered the world’s most valuable startup only a couple of years ago, when it attracted more than $1 billion in funding at a valuation of $46 billion, some now reckon it to be worth only a tenth of that.


The firm vigorously rejects such estimates—and calls another figure deeply flawed. According to IDC, a market-research firm, sales of Xiaomi handsets on the Chinese mainland fell by nearly 40% in the second quarter of this year, compared with a year ago. Other research, Xiaomi points out, shows that sales have declined only a bit. The firm insists that demand remains strong, claiming it sold nearly 7m phones in June alone (it shifted more than 70m last year).
Whoever is right, the days of heady growth are clearly over (see chart). The firm soared by offering legions of first-time buyers smartphones with high-end features for just 699 yuan ($105). Partly as a result, smartphone penetration in urban China has risen from 51% two years ago to 75% today, according to Kantar Worldpanel, another research firm.
Xiaomi also prospered by staying “asset-light”. Its initial business model involved holding few phones in stock, selling online only and offering only a limited number of models. In addition, rather than splash out on costly advertising, it relied on word-of-mouth recommendations and short-lived online sales campaigns that deliberately kept supply scarce (“hunger marketing”, in the jargon).
Yet the smartphone market in China has quickly matured. Consumers are now buying their second or third devices. They are ready to pay for more expensive devices—and are less susceptible to marketing gimmicks. These worked when most people in big cities had never bought a smartphone, but now many find them annoying, observes Duncan Clark of BDA, a consultancy. Xiaomi’s slow product-release cycles may also have led the firm to appear “stale and uninnovative”, adds Edward Tse of Gao Feng, another consultancy. Consumers now favour mid-priced phones from local rivals such as Huawei and BBK.
Other problems are home-made. C.K. Lu of Gartner, another research firm, argues that Xiaomi has failed in its push into services, which was meant to offset the thin margins on handsets. Xiaomi claimed it would reach $1 billion in revenues from services last year, but achieved barely half that amount. The firm’s noisy forays abroad, to South-East Asia and elsewhere, have proved a costly distraction. But the biggest headaches have been supply-chain snags, which hurt product quality and are another reason why it missed its sales targets. These troubles have led Lei Jun, the firm’s founder, to take personal charge of smartphone development and supply-chain management.
Executives insist that the firm remains on track. Shou Zi Chew, its chief financial officer, says the bet on services is paying off. He claims his company is already profitable and predicts that revenues from services will reach the billion-dollar mark by the end of this year. Hugo Barra, who runs Xiaomi’s international business, points to sales growth of more than 70% year on year in India. Xiaomi recently won a licence for internet banking and will launch an online-payment service soon. It also plans to open 50 of its own retail stores across China by year-end. Some Xiaomi investors are looking to dump their holdings, but many seem patient. One of the biggest says: “The company is in no danger of collapse…and Lei is focused on the right things.” If he is wrong, others warn, Xiaomi could become the “Blackberry of the East” or the “HTC of the mainland”, referring to two once-proud handset makers that are shadows of their former selves.