Inside Xiaomi: The perks and perils of startups that join its ecosystem

Xiaomi’s flagship store in Shenzhen. Image credit: Xiaomi

In February, Huami, the major wearable maker for Xiaomi, held its US$110 million initial public offering in New York. The flotation came amid rumors of a listing for Xiaomi itself, reminding us that the Chinese giant’s ambition doesn’t stop at smartphones.

Back in 2013, Xiaomi spotted the Internet of Things wave and responded with a five-year plan to invest in 100 hardware startups. They would feed Xiaomi with an ecosystem of products surrounding smartphones, such as power banks and internet-connected devices like air purifiers. But now, the giant has broadened its horizon by funding lifestyle projects from toothbrushes to suitcases.

These startups get a hand from Xiaomi to grow, and a number of them have flourished under its wings. By the end of 2015, four companies, including Huami, had reached unicorn status with billion-dollar valuations. By 2017, the ecosystem had 99 startups and booked US$3.16 billion in annual revenue.

There’s a saying in China’s startup circle: If a consumer product wants to get support to grow rapidly, join the Xiaomi ecosystem. But doing so could compromise a startup’s independence.

Joining the rocket ship

Xiaomi’s ecosystem strategy, as the company describes it, is a marriage of funding and incubation for startups.

To begin with, Xiaomi maintains an internal troop of experienced product managers – most of whom are engineers – to hunt for teams who could build its next best-selling device. And these teams must share the company’s vision of building high-quality products with low price tags.

This is what Xiaomi did when it started offering smartphones: It accepted low margins and cut distribution costs by selling solely online. The phones took China by storm. In 2014, the then four-year-old firm toppled Samsung’s leading position in China with a 12.5 percent market share.

The giant invests in startups with mutual interests – taking a non-controlling share of below 50 percent – and helps them get off the ground. Revenues are then divided between Xiaomi and its investees.

“Taking non-controlling shares means that we are leaving maximum interests to the startups,” said Liu De, co-founder and vice president of Xiaomi, in a previous speech. “Under this system, you will find that they are much more incentivized and willing to fight on the front line.”

If a consumer product wants to get much-needed support to grow rapidly, join the Xiaomi ecosystem. But doing so could compromise a startup’s independence.

Taking off

The resources Xiaomi allocates to startups vary from case to case. But most come down to two areas: brand and distribution. These startups then gain the reputation that Xiaomi has built up over the years: value for money.

The drawbacks