Xiaomi | Collateral damage

On January 14, the U.S. Department of Defense released its latest list of what it called “Communist Chinese military companies” operating in the U.S., as part of the National Defense Authorization Act. The aim was “to highlight and counter the People’s Republic of China’s Military-Civil Fusion development strategy, which supports the modernisation goals of the People’s Liberation Army by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities.”

Since the first such list was released in June last year, the U.S. has named some of China’s most well-known state-run firms, such as the Commercial Aircraft Corporation of China (COMAC) and Aviation Industry Corporation of China (AVIC) that manufacture aircraft, the China National Offshore Oil Corporation (CNOOC), the China Nuclear Engineering and Construction Corporation (CNEEC), and the telecommunications giant Huawei.

The latest list, however, included a surprising name — Xiaomi, a 10-year-old smartphone and smart appliances manufacturer that has made a name for itself, both in China and abroad, for its cutting edge consumer products. The company immediately issued a statement, saying it “is not owned, controlled or affiliated with the Chinese military”.

The listing of Xiaomi sheds a spotlight on the unique space it occupies in China’s private sector, as well as the broader challenge that firms in China that have sought to differentiate themselves from state-backed entities increasingly face overseas.

Founded in 2010, Xiaomi (pronounced ‘sheow-me’) was a start-up that entered an already highly competitive smartphone market.

As founder and serial entrepreneur Lei Jun said in a speech last year marking the company’s ten-year anniversary, Xiaomi faced three players in China: global brands such as Samsung and Nokia, the four “domestic dragons” Huawei, ZTE, Lenovo and Coolpad, and “copycat manufacturers” who had a sizeable share. His mission, he said, was simple: “to make the world’s best phones, priced half so that everyone can afford them.”

Their initial modus operandi was to sell phones close to manufacturing cost, while making money off accessories and other smart devices from smart bands to air purifiers and smart rice cookers, and avoiding investment into brick and mortar retail stores. They relied on the Internet and in creating a buzz about their young brand. One such method was to create its own MIUI platform, an Android-based operating system that differentiated its products. This model allowed the company to make rapid inroads into its competitors’ markets both at home and abroad. As of August last year, Huawei still enjoyed a dominating 45% smartphone market share, according to a report from market intelligence firm IDC, greater than its next three rivals, Oppo, Vivo and Xiaomi, whose share is a little over 10%.

Overseas success

Xiaomi’s great success has been overseas. Last year, the company said it ranks in the top five in 50 global smartphone markets, and with the largest market share in India and Spain, second in France and Russia, fourth in China, Germany, Indonesia and South Korea, and fifth in Brazil, Malaysia and Singapore.

Mr. Lei has particularly highlighted the company’s success in India, where, according to IDC, it has a 24.8% market share ahead of Samsung and Vivo, as a landmark in its global ambitions. Its first phone was launched in India in 2015, when, he recalled, it failed to sell an ambitious 5 lakh units and was left with an unsold inventory of 1 billion RMB (around ₹1,000 crore). Rather than send the units back to China, Mr. Lei shipped them worldwide, which marked the then unknown company’s entry into Southeast Asia, Europe and Latin America. They ended up selling most of the inventory.

For Xiaomi, the listing in the U.S. could hurt its carefully built reputation as an upstart Chinese start-up. If Huawei was the all-powerful telecom firm that was loved by the state as a national champion even if it was a private company, Xiaomi has positioned itself as an outsider rival, a message conveyed even in its name, which means “millet”. Mr. Lei once said he was inspired by the humble crop and a Chinese saying that the Buddha, even in one grain of rice, could see a mountain.

The U.S. listing also highlights the broader global debate about how “private” Chinese companies can truly be, at a time when the Communist Party has increasingly made it clear entrepreneurs should be patriots first and serve the state, as underlined in recent actions against e-commerce giant Alibaba. Growing controls on the private sector within China are incurring costs beyond its borders.

On the spectrum of Chinese private firms, Xiaomi has sought to position itself as far as it can from hardware manufacturing telecom firms such as Huawei, cultivating the image of a company that relies more on individual consumers than state contracts. If the U.S. description of Xiaomi as a “Communist Chinese military company” might appear a stretch, that will matter little for President Donald Trump, as he leaves behind a parting gift for China. The greater concern for Xiaomi is how much it will matter to its customers, from India and Indonesia to Brazil and beyond.