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Price War Kicks Off in China's Budget Smartphone Market

Xiami's founder Lei Jun announced the price cut of its Hongmi mobile.

Xiami's founder Lei Jun announced the price cut of its Hongmi mobile with this online promotion poster.

China’s startup smartphone maker Xiaomi reduced the price of its cheapest model Hongmi, meaning “red rice” in Chinese, by 100 yuan (16.5 US dollars) to 699 yuan (115.5 US dollars), on January 7, 2014 to compete with its rivals. The company's CEO Lei Jun spread the news online through his microblog.

Hongmi, aimed at cash-strapped students, with specs of a 4.7-inch 720-pixel IPS screen, a quad-core processer, and an 8-megapixel camera, was launched in July and triggered a buying frenzy.

China’s smartphone giant Huawei, feeling threatened by Xiaomi, followed suit by launching its budget phone as a counterattack. In December, Huawei began to sell its budget model Honor 3C with a 5-inch 720-pixel LTPS panel, a quad-core processer, and an 8-megapixel f/2.0 camera, priced at 798 yuan (about 130 US dollars) for the 1GB RAM model. With better specs than Hongmi, the model has been wildly successful with customers. On December 25, the phone sold out online, selling 120,000 units in about one minute, according to the company.

Faced with the further price cut of Xiaomi’s Hongmi models, the executive of Huawei smartphone division, Yu Chengdong, claimed on his Sina Weibo account, a popular Twitter-like service in China, that Huawei would not continue the cut-throat competition:

上帝让谁死亡,必先让其疯狂。我们坚持产品质量、品质感、消费者体验与口碑,坚持精品路线不动摇!绝不为搞吸引消费者眼球的超低价需降低成本,而去做牺牲产品质量与品质的事情。

For those who must die, God will make them crazy. We will stick to quality and consumer experience, stick to fine product strategy. We will not take part in extreme low-price operations to draw consumers in by cutting costs and damaging quality.

Indeed Xiaomi's star is on the rise. In the three years since Lei Jun founded the company, Xiaomi has captured 5 percent of China's smartphone market as of the second quarter of 2013, overtaking Apple's share in the country, according to research group Canalys. The company’s market valuation is already estimated to surpass 10 billion US dollars.

Its major rival, Huawei, shipped more than 52 million smartphones in 2013 and plans to ship 80 million this year.

Lei published Xiaomi's remarkable annual sales report on Weibo:

小米2013年业绩:1. 销售手机1870万台,增长160%,超额完成了年初供货 1500万台的承诺。2. 含税销售额 316亿元,增长 150%。3. 12月当月,销售手机 322.5万台。我们再次承诺,2014年全年至少供货 4000万台!

Xiaomi's 2013 annual report: 1. sold 18.7 million smartphones in 2013, a 160-percent increase from 2012, more than the 15 million units estimated at the start of the year. 2. sales revenues, including taxes, rose 150 percent to 31.6 billion yuan (5.22 billion US dollars). 3. In December, 3,225,000 units were sold. We promise in 2014 there will be at least 40 million handsets [more than double the number it sold in 2013].

Despite the popularity of Xiaomi, some netizens don't like its online marketing strategy, as all its stock is often sold out within minutes. Complaints like this one made by Xin Xu are very common on Weibo:

为儿子抢了五次米3没见影,当米3无需预约销售时,已感觉厌倦恶心反胃了,决定放弃米3选择华为荣耀3X,我的放弃也许对小米算不上啥,但希望小米能记住:玩粉的结局是掉粉。别了,小米!

I’ve not bought Mi3 [another Xiaomi mobile phone model] for my son five times. I feet disgusted when consumers do not need booking and decide to buy Huawei's Honor 3X rather than Mi3. My giving up [of Mi3] does not cause much harm to Xiaomi, but it is a warning: If you fool your fans, you will lose your fans. Bye, Xiaomi!

Weibo user “Flowers flying everywhere in the river city” described Xiaomi's online sales as futures because tens of thousands customers have signed up for the new mobile phones but eventually they failed to get the actual product because they don't have enough stock. The manufacturing of the Xiaomi smart phone cannot fulfill the actual market need. The microblogger warned Huawei against similar practice:

华为荣耀3C,不要总学小米做期货,弄多了很反感

Huawei Honor 3C don’t learn from Xiaomi to make futures. It makes consumers disgusted.

“My skull has a bun” rejected Xiaomi CEO's explanation of the always-out-of-stock phenomenon for its low-price phones and believed Xiaomi deliberately limited the sales:

关于红米的期货质疑,雷军屡屡用产能爬坡来解释。没错,热门新机上市,一两个月内难买到很正常。但红米上市半年之久仍每月5万台进行放量,不是期货难道是现货?要说产能爬坡,恐怕放在对手荣耀3C的身上更合适,从第二周的12万到第三周的22万,都已经达到红米月供量了吧?到底是谁不尊重事实和历史规律?

Xiaomi CEO Lei Jun has always used climbing production capacity to explain the doubt that Hongmi are like futures. Sure, it’s common that new models would be difficult to get in the first month or two. But how does Xiaomi explain that it still only sells 50,000 Hongmi per month, six months after its launch? In comparison, its rival Honor 3C's sale rose from 120,000 in the second week to 220,000 in the third.

IT manager Ren Yonghong cast doubt on Xiaomi’s future:

智能机说到底还是要用户体验、产品质量、工艺,用户的选择会越来越理性!预测小米的营销方式在2014年将受到极大的挑战!别说20%的市场份额,恐怕会遇到危机!

After all, smartphones should depend on consumer experience and quality. Consumers will be more and more rational with their purchases. I suspect Xiaomi’s sale model [without adequate manufacturing support] will be seriously challenged in 2014. It could suffer a crisis, the 20 percent market share is far too optimistic.

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