Reuters reported Wednesday on a possible initial public offering (IPO) from Xiaomi, one of China’s largest producers of mobile phones. Xiaomi is not a name that most Americans are familiar with, as its products are not sold in the U.S. If this IPO goes through, however, that may change.
Here in America we are familiar with Apple, Samsung, LG, and Motorola, since their phones are U.S. market leaders. There are dozens of mobile phone manufacturers in China being sold under brands that Americans have never heard of. Companies such as Xiaomi, ZTE, Vivo, Oppo, Huawei, Meizu, and Haier all compete in a crowded marketplace. Why are there so many players? Because the market for mobile phones in China is big—really big.
As of September 2017, China has about 1.39 billion mobile telephone subscribers. To put that into perspective, America’s total population is around 325 million. China’s market size and population density enables many players to enter the mobile phone market successfully. In the U.S. a company would need 20% of the market to be considered a top player. In China all that one needs is 2% of the market to reach minimum efficient scale.
This suggests that China is a market in which barriers to entry are either low or difficult to maintain. This also suggests that incumbent players will see a wide number and variety of new entrants to the market. Apple is one of many players in the Chinese marketplace and by no means the leader.
If the Xiaomi IPO proceeds, it will fit in well with China’s current economic policy initiatives. Of the multitude of products being made in China, very few bear a recognizable Chinese brand. While some non-Chinese have heard of Lenovo and Haier, no Chinese companies have the recognition and global presence on the scale of South Korea’s Samsung.
China wants to change that. Realizing that its low-cost labor advantage is rapidly diminishing, China must innovate and take greater control of the entire value chain in order to grow. Today, Chinese companies must design, manufacture, and sell their products in order to capture greater portions of their value.
Official policy pronouncements from Chinese President Xi Jingping have implored Chinese companies to engage in a “going out” strategy. That is, China wants to develop a set of national champions that can operate in globally competitive markets such as the U.S. and compete against some of the best brands in the world. In so doing Chinese companies can both learn and experience what it takes to be globally competitive with technologically innovative products.
Xiaomi’s highly anticipated IPO would represent a watershed moment for Chinese industry. Many are likely to follow, as domestic Chinese companies come of age in a global landscape until now dominated by non-Chinese brands.
Arthur Dong is a distinguished teaching professor at Georgetown University’s McDonough School of Business.
