Xiaomi Wants Its Fans to Sell Its Phones. Will That Fix Anything?

Probably not.

If Xiaomi's plan goes smoothly, in a few months an old classmate you haven't heard from in years may start pitching you a Xiaomi 6 or a Xiaomi Note 3 in your WeChat class group.

In early February, a site called "Xiaomi Direct Supply" quietly went live. The site works only on mobile, and to apply as a Xiaomi Direct Supply distributor all you have to submit is your name, phone number, address and other personal details, plus a 100-character bio and a photo of your ID card. No proof of assets or employment is required. The whole thing takes a few minutes, after which the application goes to review.

Xiaomi says its direct-supply model works differently from the traditional agency-and-distribution model for phones: the company supplies the goods itself, no advance payment is needed, SF Express guarantees timely delivery, and there will be regular training, promotional materials and bonus incentives. The bar to join is low as well — anyone with a Mi.com account can log in and apply for the beta as an individual or as a business.

On the face of it, Xiaomi Direct Supply looks a lot like the WeChat sellers hawking face masks, tea and handbags in Moments. Once a fan closes a sale, Xiaomi ships the product and pays out a commission.

According to several Xiaomi employees we spoke with, the direct-supply project is being run inside Mi.com, Xiaomi's e-commerce operation. Liu Qi, marketing director of the Mi Store, said a separate team is currently in charge of the direct-supply business.

In recent years, as the cost of buying traffic has kept climbing, e-commerce has become a harder business. JD.com now spends 85% of its outlays on cost of sales alone, and the Mi Store, with far less traffic than JD.com, is under even more pressure to figure out how to sell more Xiaomi phones and ecosystem products.

But direct supply may not solve Xiaomi's problem.

This isn't an efficient way to sell anything, least of all phones and appliances

Direct selling has produced its successes — Amway, and the assorted brands of tea and face masks sold in WeChat Moments.

Those goods are mostly everyday consumables, far cheaper than a phone and bought again and again.

The replacement cycle for Android phones, by contrast, has stayed at roughly 12 to 14 months in recent years, while phone makers put out new models about every six months.

In the traditional direct-selling model, recruiting downline sellers and tiering commissions by monthly sales performance is permitted. Amway in the US and Taiyangshen in China both worked this way.

But turning individuals into distributors has one big problem: the average person's working circle of friends and family tops out at a hundred-odd people, and the number they can actually talk into buying is smaller still. A phone isn't Amway detergent, either — you don't use it up and go back for more.

Even at its peak, Amway's annual sales were less than a fifth of Procter & Gamble's.

The most efficient way to sell a phone in China is still the offline phone shops scattered across every city, their signs usually carrying the logo of whichever brand they stock.

In China's phone market, the channel that reaches the most people is still the offline store — above all, the regional distributor

According to the market research firm IDC, China sold 467 million smartphones in 2016. OPPO ranked first and vivo third, with shipments up 122.2% and 96.9% respectively over 2015. Xiaomi shipped only 41.5 million phones in 2016, down 36% year on year.

What doubled OPPO's and vivo's sales were the regional distributors spread across every province and city in China.

By OPPO's own account, the company has 36 first-tier agents, with second-tier agents beneath them in some of the larger regional markets.

Each distributor's reach is limited to one or two provinces, but within them it covers every busy commercial district. Take Longxiang Communications, a provincial-level agent: it mainly covers Chongqing and Sichuan, starting with chain stores in big cities like Chengdu and Chongqing and then spreading into suburbs and townships — it has outlets in Mianyang, Deyang, Nanchong, Guangyuan, Neijiang, Zigong, Yibin and other prefectures, cities and counties.

By holding on to these provincial agents, OPPO and vivo have laid a fine-meshed sales net over the whole country, keeping their phones close enough to reach buyers.

According to figures released by OPPO vice president Wu Qiang, OPPO had more than 200,000 offline stores as far back as 2015. vivo, whose stores always seem to open next door to OPPO's, had 250,000 last year.

Both companies keep their distance from the carriers and are less active online than Xiaomi or Huawei. Yet together they hold 31.6% of China's Android market today.

Besides adequate products and stores blanketing the country, the two also advertise everywhere.

Almost every entertainment and variety show with top ratings in China is now title-sponsored by OPPO or vivo. The faces they pick to endorse their phones are the hottest stars on television — Li Yifeng, Lu Han, TFBoys, Yang Yang — and each deal costs more than 10 million yuan.

Analysts estimate that OPPO and vivo together may spend as much as 2 billion yuan a year on celebrity endorsements and show sponsorships.

Opening a lot of stores fast isn't enough. One thing that decides whether the phones actually move is the sales staff.

A full-time in-store salesperson spends more than 300 days a year behind the counter selling phones, on a very low base salary, making money mainly from commissions.

According to China Securities Journal, a salesperson takes home roughly 100 yuan for every OPPO phone sold. More than 20% of an OPPO phone's price is generally thought to be split among the shop, the salesperson, the provincial agent and the other links in the chain.

OPPO and vivo each have more than a million salespeople, who between them may meet more potential buyers in a day than Xiaomi's fans meet in a year.

All of them have been trained, and their pitch has been sharpened by doing the job day after day. Recruited fans can hardly match that.

Xiaomi hasn't been able to get into these channels

This is what Xiaomi is up against as it tries to move offline.

Xiaomi started building an offline business around the second half of 2015.

Its main push has been the official Mi Home store plan, turning the "service points" it already called Mi Home in various provinces and cities into places that sell phones and electronics.

More than a year in, Xiaomi has 47 Mi Home stores nationwide, and its official site lists just 9 authorized Xiaomi specialty stores.

There are other channels, of course. Xiaomi has mostly gone to institutions that already have nationwide retail networks, like Suning and Gome. Last March, 1,200 Suning stores began carrying Xiaomi phones. In the second half of last year Suning was also a launch channel for the budget Redmi Note 4, selling it at the same time as Xiaomi's own site.

But according to QDaily's observations on the ground, the best spots inside Suning stores still belong to the OPPO and vivo counters.

That leaves some distance to Lei Jun's target. Only last week he announced that Xiaomi would open 1,000 stores by 2020. Even if it hits that number without a hitch, 1,000 stores would still reach far fewer people than OPPO or vivo.

More important, measured by selling efficiency, these channels are nowhere near as nimble or as effective as the distributors dug into each province.

A good share of today's provincial phone-distribution networks were built up by Nokia in the mid-2000s. Working with them, Nokia broke the channel monopoly of the so-called national agents of the day and made sure more of the commission went to front-line salespeople, which made them keener to sell Nokia phones.

As late as 2010 — the iPhone's fourth year on the market — those channels were still keeping Nokia's sales and profits growing.

In 2011, Nokia's failed turnaround sent it into fast collapse. Samsung was later beaten by cheaper Chinese phone makers, and Apple has never given its channels much commission. So the channels switched to selling Android phones.

Between 2011 and 2012, Xiaomi briefly became the hottest Android brand in China. That is when it settled on the product logic it has followed ever since: high value for money, low prices, no middlemen, sold through e-commerce.

An operating system cleaner and better-looking than ordinary Android and easier to use, plus noticeably higher specs than other phones at the same price — these user-friendly qualities were the reason for Xiaomi's early success, and they are now what holds it back. Higher specs at the same price mean thinner margins, and less money to hand to a sales channel.

Channels want more than a commission — they want the right product

According to IDC data, China's four best-selling Android phone makers last year were OPPO, Huawei (including Honor), vivo and Xiaomi.

Of these, Huawei — which chases carriers, e-commerce and offline channels at once — has the most models. Not counting configuration variants, its official site sells 18 of them.

At list price or at street price, OPPO, vivo and Huawei all sit a notch above Xiaomi.

The Xiaomi Note 2 and Xiaomi MIX, both launched in 2016, were priced at 2,799 and 3,499 yuan — far above Xiaomi's usual 499-to-2,000-yuan range.

To sell more of these pricier phones, Xiaomi stopped leaning on its free spokesman, Lei Jun, and started hiring celebrities to front its ads. The Redmi line has used Wu Xiubo, Liu Shishi and Liu Haoran, each aimed at a different audience, and it recently brought in the virtual idol Hatsune Miku as well.

To promote the Xiaomi Note 2 last year, Xiaomi went further and signed Tony Leung. Print ads of Leung holding a Xiaomi Note 2 are now in subway stations, at bus stops and on outdoor walls.

The concept phone Xiaomi MIX even ran a 30-second spot in prime time on the Spring Festival Gala, reportedly for 44.57 million yuan.

The marketing money is huge, but Xiaomi's high-end phones are nothing like the equally expensive ones from OPPO and vivo. While OPPO's and vivo's main models sold well enough to double their companies' annual sales, the Xiaomi Note 2 and Xiaomi MIX were badly short of production capacity.

The reason lies mostly in the components Xiaomi chose.

The Xiaomi 5 used a glass fingerprint sensor fused into the front of the phone. The Xiaomi 5s launched with Qualcomm's then newly released top-end Snapdragon 821 — a line Qualcomm could not supply in quantity.

The Note 2 used an OLED screen curved on both edges, similar to the Samsung Galaxy Note 7's and made by LG. Capacity for that screen was quite limited, which directly delayed the Xiaomi Note 2's launch. In 2016 Lei Jun took personal charge of negotiations with component suppliers.

The Xiaomi MIX, the model scalpers marked up the most, used an all-ceramic frame and buttons that took a long time to machine.

After all these years, what Xiaomi still values most is "value for money": charge more, and spend more on components. The price of that is that it takes a while after each launch event before Xiaomi can guarantee supply.

OPPO and vivo do the opposite. Their flagships, the R9s and the X9, use Qualcomm's mid-range Snapdragon 625 — high, steady volumes and a lower price. For screens they use ordinary flat panels, which are easy to get.

That doesn't just make OPPO's and vivo's phones cheaper to build, leaving more money for the salespeople. It also means each brand's 200,000-plus offline stores can get the hottest, priciest models quickly.

Xiaomi's MIX and Note 2, with all that promotion behind them, can pull in users too, but they still can't even supply Xiaomi's own website and Mi Home stores. What distributors can get is mostly the few-hundred-yuan Redmi, with its thin margins.

Starting with the product itself, Xiaomi has nothing to attract offline distributors.

The component shortage will only get worse in 2017

Xiaomi's steep drop in shipments last year also happened to coincide with a supply squeeze upstream in the phone industry.

The tight supply of memory, screens, cameras and other parts that began in the second half of 2016 may last more than a year. The immediate result is higher procurement costs.

After the Galaxy Note 7 battery incident, Samsung Group's fourth-quarter profits actually hit a record high, largely because its NAND flash and DRAM memory businesses were doing so well.

Here a phone maker like Apple, shipping 200 million units a year, carries real weight with its upstream suppliers. Apple recently added an order for 60 million OLED screens from Samsung on top of the 100 million it had already ordered; most will go into the new iPhone. Apple's other screen supplier, Japan's JDI, is losing money and still spending $1 billion to build a plant for OLED displays.

All of which means phone makers other than Apple and Samsung will have trouble getting enough curved screens.

The camera shortage is just as plain. On its earnings call in early February, Apple said it still can't get enough dual cameras to meet demand for the 5.5-inch iPhone 7 Plus.

The dual-camera setup Chinese makers commonly use is color-plus-monochrome, which is not the same as the iPhone 7 Plus's, which supports 2x optical zoom. If Chinese makers want a similar camera setup in 2017, they will hit serious supply problems too.

As upstream parts suppliers keep merging, more of the bargaining power sits with them — not with the handful of Android phone makers whose products aren't fundamentally different from one another and who fight over the same ground.

Apple and Samsung, whose main models sell for 5,000 to 6,000 yuan, are both developing more of their own underlying technology and paying more to lock up scarce parts in advance.

Chinese phone makers, whose average selling price is under 2,000 yuan, will find it hard to compete with Samsung and Apple for a supplier's support.

Samsung, for one, has already bought up the first production run of Qualcomm's next flagship processor, the Snapdragon 835. Xiaomi, which for several years was the first to get Qualcomm's new chips, can't use the processor as a selling point this time.

But Xiaomi may not have many choices left

Seen from the supply chain and the technology, Huawei and Xiaomi have things in common, including building higher-spec products to draw users — the curved screen on the Mate 9, for example.

Unlike Xiaomi, though, Huawei has also started playing OPPO's and vivo's game.

The Huawei Nova, launched last October, uses the same flat screen and Snapdragon 625 processor as the OPPO R9s and the vivo X9. Huawei hired the young idol Zhang Yixing as its face, title-sponsored the Zhejiang TV variety show Sound of My Dream, and priced the Nova 400 yuan below the R9s and X9.

The Huawei Nova, in other words, is a product made to please China's regional sales channels.

Huawei also has profits from its telecom-equipment business and its European market to fall back on, so it can lose money for a while to win channels over. Xiaomi probably can't.

Unable to hand agents a commission they find satisfying, Xiaomi is left building its own channel through direct supply, relying on its brand, its products and internet traffic.

A company that has advertised "value for money" from the first day naturally attracts consumers who care about value for money and watch prices and specs closely.

If Xiaomi now copies OPPO and vivo and builds the products distributors like, margin will have to come out of the specs, and profit will have to go to the channel — which means angering the loyal users it already has, with no guarantee of winning new ones.

The problem isn't confined to phones. Mijia has it too. Xiaomi said Mijia's sales reached 15 billion yuan in 2016. But selling rice cookers, power strips and the rest through offline channels runs into the same thing, as long as Xiaomi holds on to its "value for money" logic: distributors are likely to prefer goods that leave them room to make money, like Philips's or Midea's.

In December 2014, Lei Jun announced that Xiaomi had raised $1.1 billion at a valuation of $45 billion.

That astonishing number rested on Xiaomi's original story: use internet channels to become the biggest phone company in China, then make more of its profit from software and internet services.

Two and a half years later, that route hasn't worked. Paid software and services have fallen short of expectations, Xiaomi's share of the Chinese market has been left far behind by OPPO, vivo and Huawei, and its phone sales are falling.

Whether talking up "black tech" and a "MUJI" aesthetic can make Xiaomi worth $45 billion again is hard to say, but it doesn't look like it has a better option.

With its existing channels in decline, and the provincial distributors out of reach, no wonder Xiaomi wants its fans to move the goods.

Cover image source: Xiaomi's official website