Given recent activity by smartphone suppliers, it appears that independence from chip suppliers might be the preferred strategy for building international market share.
The up-and-coming Xiaomi recently lost its top domestic market share. The company is changing its design and manufacturing plans in hopes of gaining back that share, as well as making headway into international markets. The strategy is to gain more control over product development by making its own chips. Xiaomi recently joined Apple, Samsung and Huawei as the smartphone suppliers who use their own processors.
Of course, it is not only control over the development and manufacturing processes that can aid Xiaomi in its work to be competitive in the global marketplace. With the high end owned by prominent international brands, Xiaomi will be forced to compete on price. Needless to say, starting a chip-development division from scratch will be costly. The savings from cutting out a supplier will likely not be realized for many years. However, the Chinese government is jump-starting the effort by providing funding for the project. According to the Wall-Street Journal, Xiaomi has already received aid to develop its new Surge S1 processor from a development fund put together by Beijing’s Zhongguancun high-tech district and the country’s technology ministry.
Being able to preserve some profit margin in a low-priced device, tighten up the supply chain, and gain control on product development puts the Surge S1 on the track to be more competitive. Huawei demonstrates this—beginning to source its own chip in 2015 helped the company undercut Xiaomi on price.
Xiaomi has yet to gain much ground in North America or Europe, though it undoubtedly has those international markets in its sights as it plans to source its own smartphone processors. Not being dependent on Qualcomm has been a goal for many of these manufacturers and Xiaomi is no different. Today, almost every Android OEM besides Samsung or Huawei relies on Qualcomm and Mediatek for high-end smartphone processors. This year, many OEMs were unable to introduce their high-end flagship models on time because delivery of the latest Snapdragon 835 chip was behind schedule.
So far, those companies sourcing their own processors have had a higher level of success compared to their competitors. For example, Apple was able to own the high end of the premium smartphone market, in part, because of tight design controls of its own processors. With its own system-on-chip (SoC) operation, Xiaomi hopes to join the ranks of the top international brands.