Ren Zhengfei makes mobile phones for the poor, proving Xiaomi's success in terms of cost-effectiveness?

　　In the latest Q3 industry report, SA and IDC have the same view that Huawei's mobile phone shipments of 39.1 million units are approaching Apple's second place, OPPO's shipments of 30.7 million units, and Xiaomi 's return to the mainstream camp with a doubling of 27.6 million units. The familiar Three Kingdoms seems to be making a comeback. Let's follow the mobile phone portable editor to learn about the relevant content.

　　Ren Zhengfei's recent summary at Huawei's IRB product improvement meeting has been widely circulated. He made seven points in total, the last of which is intriguing:

　　Pay attention to low-end mobile phones! More than 90% of the world's population is poor. Low-end mobile phones from other companies have a market for the poor. Don't underestimate them. Huawei also wants to make low-end phones. Our old products may be used to make low-end phones.

　　This competitor did not mention it explicitly, but the only mobile phone brand that caught Huawei's eye, apart from OV, which Lei Jun said took advantage of the "information asymmetry in third-, fourth- and fifth-tier cities", is probably Xiaomi , whose sales have recovered . What's more, the "melon-eating crowd" in the news comment section have already automatically taken sides.

　　Considering that Huawei launched the entry-level new phone Maimang 5 immediately after Mate 10, many people think that the poor-level phone is a recognition of Xiaomi's cost-effective concept, but this understanding of the competition for mobile phone shipments is not thorough. In the context of Lei Jun and Xiaomi, cost-effectiveness probably has three connotations:

　　1. Eliminated the huge profits in the mobile phone industry?

　　When Xiaomi was first founded, it promoted "value for money" and "born for enthusiasts" for two purposes: one was to differentiate itself from the copycat mobile phones that were still very strong at that time, and the other was to find a sense of belonging in an era when Apple held the pricing power.

　　From the early Mi Fans’ discourse system, it can be seen that quite a number of people agree with Xiaomi’s claim to eliminate excessive profits, although this has never been realized. For example, the first iPhone was priced at $499 when it was launched, the iPhone 4s in 2011 was $649, and the latest iPhoneX is $999. The first generation of Samsung Galaxy S released in March 2010 was priced at 3,400 yuan in China, while the starting price of S8 released in May this year is 5,688 yuan.

　　There is no indication that domestic mobile phones represented by Xiaomi have suppressed the price increases or profitability of Apple and Samsung. Microsoft's Ballmer had a similar judgment to Mi fans. He believed that "the iPhone has no chance of gaining a large market share, no chance. It's a $500 thing and they make a lot of money. ... In the next five months they will only have the most expensive mobile phone in the world to sell. Let's see what happens? ... I think Apple can only get 2% to 3% of the market share." This judgment made him repeatedly slapped in the face in the years that followed.

　　The truth is that a product priced significantly higher than its cost will not bring huge profits for the consumer scenarios and people it is suitable for. This is true even for industries with particularly transparent costs. Ignoring this logic is just like what Li Shufu said when he said that a car is nothing more than four wheels and a few sofas. Zotye would have already eliminated Porsche, Land Rover, Audi and Mercedes-Benz.

　　2. From business strategy to values?

　　Over the years, Lei Jun's expression of cost-effectiveness has changed, but the connotation has not changed. Initially, Xiaomi followed Apple's example and focused on the ultimate single product. It only made 5 mobile phones in 3 years. In Lei Jun's words, it is to promote "geek spirit and eliminate the middle links." Later, high cost-effectiveness was proposed. At the Pinecone chip launch conference at the beginning of the year, Lei Jun further emphasized "sticking to cost-effectiveness to the end." Co-founder Li Wanqiang simply stated that "cost-effectiveness is Xiaomi's value."

　　But this means that Xiaomi's shipments are more dependent on low-end mobile phones. The Redmi 4, which is the main selling product in India, is priced at around RMB 740. In domestic online channels, the average unit price of Xiaomi's mobile phones in the first half of this year was only RMB 1,168.

　　Xiaomi's strategy can be summarized as using low-end products such as Redmi to trick its competitors in terms of value, while relying on offline Xiaomi stores to inject services to drive high per capita purchases. Lei Jun previously stated at the China Green Company Alliance Roundtable: "Many people believe that consumption upgrades are becoming more and more expensive, but I think this is a road of no return. Can we improve efficiency and provide better services under the current circumstances? Only in this way can you survive in future competition."

　　According to the data previously released by Lin Bin, the monthly revenue of a single Xiaomi Home store is 5.19 million yuan. On average, 45,000 customers visit the store each month after the midweek and weekend, with a conversion rate of around 20%, equivalent to 9,000 people making purchases and 2.7 items per person. Based on this calculation, although the unit price of Xiaomi Home's products is not high, the per capita consumption has exceeded 1,500 yuan.

　　3. Strengthen your advantage over your followers

　　Before 2014, China had a large number of Internet mobile phone brands, such as Honor, Meizu, OnePlus, Nubia, Hammer, ZUK, Dakele, IUNI, LeTV, Qihoo, Qingcong, Alibaba Cloud Phone, etc. Now they are dying out. Except for the rapidly growing Honor, which has the strength to challenge Xiaomi, other brands, under the pressure of Xiaomi's cost-effectiveness, have either moved overseas, retreated to the niche market, or withdrawed sadly. At least in preventing the next black swan, Xiaomi has succeeded.

　　But from the current industry structure, the concept of maintaining cost-effectiveness no longer depends on Lei Jun's subjective wishes, but is related to Xiaomi's position in the entire industrial chain.

　　1. Does Xiaomi still have a cost advantage?

　　In 2012, when Zhou Hongyi said on Weibo that Xiaomi's profit per phone reached 700-800 yuan, and that the valuation was 10 times the PE of a hardware company at 4 billion US dollars, and predicted that the price would drop by 1,000 yuan within two months, Lei Jun then countered that the taxes and patent fees that Xiaomi could disclose for its phones totaled about 400 yuan.

　　In Lei Jun's view, Xiaomi's cost-effectiveness is "systematically reducing the overall cost, rather than reducing manufacturing costs." He believes that some brands have wrong ideas, "users want to buy products, not promoters or advertisements."

　　But today, it is actually very difficult for Xiaomi to reduce channel and marketing costs outside of the ODM link.

　　The era of Li Wanqiang's zero-cost word-of-mouth marketing is long gone. Xiaomi started running TV commercials in 2015. Not only do it have popular artists endorsing it, but its enthusiasm for online variety shows has also increased, including the sky-high sponsorship of "U Can U Bibi".

　　What the cost-effectiveness concept can really compress is R&D investment.

　　Like Apple, Xiaomi pursues product innovation rather than technological innovation, and focuses on shaping the user ecosystem. Apple invested $8.1 billion in R&D last year, which is less than Huawei's $9.48 billion or Samsung's $12.7 billion. In HTC's heyday, R&D costs accounted for only 0.8% of its revenue.

　　Xiaomi's R&D investment has not been reported, but we can get a glimpse of it from one detail. According to the relevant provisions of the state's corporate income tax incentives, high-tech enterprises must meet three indicators to enjoy a 15% discount: first, the proportion of R&D expenses to revenue, which must not be less than 3% for enterprises with annual revenue of more than 200 million yuan; second, high-tech products or services must account for more than 60% of total revenue; third, the proportion of scientific and technological personnel and R&D personnel among employees must reach 30% and 10% respectively.

　　In 2014, Lei Jun consulted with Hu Wenxue, director of the Beijing Haidian National Taxation Bureau, and said that the operating conditions of Internet companies change greatly. If one indicator fails to meet the standard, can it be calculated based on the three-year average? With Xiaomi's product and personnel composition, it is not difficult to achieve the latter two indicators. The only variable is the R&D cost.

　　2. Cost-effectiveness changes from an end to a means.

　　In the past two years, Xiaomi has returned to its technological route and regained its growth momentum in adversity. This is more due to the combined efforts of product innovation, new retail and marketing. The concept of cost-effectiveness has not contributed much. On the contrary, Xiaomi has launched a series of products with low cost-effectiveness. Xiaomi's biggest danger lies in the fact that the concept of cost-effectiveness itself is becoming a core competitiveness.

　　3. Have you eliminated the middleman?

　　In Lei Jun's cost-effective strategy, using his new retail to replace the middle links and reduce channel costs is an important part. This is based on three observations: first, the online channel costs continue to rise and are already on par with offline; second, the concentration of e-commerce is getting higher and higher, and the profit concessions during the 618 and Double 11 promotions are out of control; third, the growth of online users has slowed down, and the 3:7 ratio with offline users has gradually stabilized and is irreversible.

　　For two consecutive years, Xiaomi and Honor have been fighting fiercely on Double 11. In order to increase sales, they had to offer extra discounts, which put Xiaomi, which has a lower average unit price, under greater pressure. The situation is similar this year. As of November 7, the top three in JD.com's real-time mobile phone rankings are Apple, Honor and Xiaomi.

　　Whether the cost control of new retail is more effective remains to be proven. According to Lin Bin's calculations, the area of ​​Xiaomi Home in first- and second-tier cities must be controlled at 200-400 square meters to ensure that there is no loss. This is determined by the flow of customers. The average decoration cost of a single store is about 500,000 yuan. Ultimately, the efficiency per square meter of Xiaomi Home is guaranteed by increasing the number of items purchased per capita and the repurchase rate. This is the basic logic of cost-effectiveness, and of course it also depends on the ability of Xiaomi's ecological chain to expand its product categories.

　　4. Value for money will be the market logic in India rather than in China.

　　When Meizu's Li Nan said "the price-performance ratio is dangerous", he meant that at that time, Meizu's mobile phone sales were completely dependent on thousand-yuan phones such as Meizu Blue, Meizu Blue Note2, Meizu Blue 2 and Meizu Blue Metal. The mid-to-high-end MX5 and PRO 5 had limited impact. In order to enhance the brand image, it was necessary to control the production capacity frenzy at the key node of 25 million shipments.

　　Today's Xiaomi continues this idea, but the connotation is slightly different.

　　According to IDC's Q3 data, Xiaomi shipped 27.6 million units worldwide, 15.7 million units in China, and nearly 12 million units overseas, but it mainly relied on the Indian market, having previously completed 4 million units of monthly shipments, which shows that India has become the main driving force for Xiaomi's growth. The main selling models on Xiaomi's Indian official website are Xiaomi MIX2, Xiaomi A1, Xiaomi Max2, Redmi Note4, Redmi 4 and Redmi 4A, and the two new models are Redmi Y1 and Redmi Y1 Lite. Except for Xiaomi MIX2, which is a flagship model to showcase the brand image, the others are low-end products, indicating that India has become an absolute main battlefield for cost-effectiveness.

　　Lei Jun tried to replicate the glory of cost-effectiveness in India and to inject services into Xiaomi Home in China to get rid of its low-end image, but both are risky. The former is affected by the overall environment of Sino-Indian relations and Indians' perception of mobile phones is improving (Xiaomi advertisements call itself "India's rice", causing some Indians to mistakenly believe that Xiaomi is a domestic brand). The latter depends on whether Xiaomi Home can create a technological and fashionable atmosphere like Apple Store, and thus firmly bind fans in the frenzy of business + religion.

　　The pressure on cost-effectiveness within Xiaomi is also increasing day by day. When Xiaomi MIX was released, co-founder Wang Chuan suggested a price of 9,999 yuan, but Lei Jun insisted on 3,999 yuan. This led to his statement at the Yabuli Forum: "When almost everyone advised me to sell Xiaomi products at a higher price, I felt lonely because they did not understand my dreams and pursuits."

　　For Xiaomi, cost-effectiveness is more of Lei Jun’s personal obsession than a strategy.

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