Former Google Inc (NASDAQ:GOOGL) executive and now Xiaomi Vice President Hugo Barra has bared how his company is undercutting rivals including Apple Inc. (NASDAQ:AAPL) in price in an interview with TechCrunch.
The secret why Xiaomi can price its phones aggressively against the likes of Apple Inc. (NASDAQ:AAPL) and Samsung Electronics, it turns out, has something to do with supplier relations and how long each Xiaomi smartphone model stays in production and available in the market, Barra, who was formerly a key executive for all things Android at Google Inc (NASDAQ:GOOGL), revealed.
“A product that stays on the shelf for 18-24 months — which is most of our products — goes through three or four price cuts. […] The reason we do these price cuts is because we’ve managed to negotiate component cost decreases [with our suppliers] over time, which ends up leaving us with a bigger margin than we’d like to have, so we do a price cut,” Barra is quoted by TechCrunch as saying in an interview in Beijing.
As an example, the former Google Inc (NASDAQ:GOOGL) executive who now is the Vice President for International at Xiaomi said that their Mi2 and Mi2s phones are basically the same. These phones, he said, were on sale for 26 months. Another example of a long shelf-life phone for Xiaomi is the Redmi 1 launched in September 2013. The Redmi 2, its successor, was just launched this month, a full 16 months after the first Redmi.
In contrast, Apple Inc. (NASDAQ:AAPL) typically updates its phones every year. Though the company has considerable power negotiating price with suppliers, the longer refresh cycle for Xiaomi seems to be working in the Chinese company’s favor against Apple and other rivals, the former Google Inc (NASDAQ:GOOGL) executive’s comments suggests.
“The vast majority of the components [in our devices] are still the same, so in terms of supply chain and component sourcing, we’re on the same supply contracts as Redmi 1, which means we’re still getting the same discounts on components. We can continue to ride the cost curve, so the importance of having a very small portfolio is significant — the fact that we only launch a few products each year, and (the fact that) we only have two product families,” Barra is quoted as adding.
Xiaomi has great ambitions. It CEO, Lei Jun, recently launched a direct competitor to the iPhone 6 and iPhone 6 Plus made by Apple Inc. (NASDAQ:AAPL) in the form of the Xiaomi Mi Note and Mi Note Pro. The top executive has also said that he sees the Chinese company as the world’s largest smartphone maker within five to 10 years.
Robert Karr’s Joho Capital owned 112,964 Google Inc (NASDAQ:GOOGL) shares by the end of 3Q2014. Also by the end of September, Robert Raiff’s Raiff Partners owned 195,000 Apple Inc. (NASDAQ:AAPL) shares.