Technology Issue Gives Xiaomi New Headache

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Includes: AAPL, NOK, QCOM
by: Doug Young

Bottom line: Xiaomi's newest technology headache, if true, could delay the launch of its fifth-generation phone, further sapping its momentum and making it difficult to reach its 2015 sales target.

The once invincible Xiaomi is starting to look increasingly mortal, with reports that the smartphone high-flyer may have to delay the launch of its newest model due to technical reasons. I'm not too knowledgeable on the technical issues in this instance, but the potential new delays for the release of the Xiaomi 5 appear to be related to fingerprint recognition technology that the company plans to build into the new models.

If these latest reports are true, the delays could put a big crimp in Xiaomi's ambitious sales plans this year as it attempts to maintain its breakneck growth. Maintaining that kind of growth looks increasingly difficult due to all the technical issues, combined with intensifying competition in Xiaomi's core China market. That competition is causing the company to abandon the online-only sales model that helps it keep costs down, which will ultimately undermine its profit margins.

Sourcing on the latest reports is admittedly quite sketchy, and comes from a microblog post from an unnamed source on the Twitter-like Weibo service. The source says that the fingerprint recognition technology being developed for chips sold by global leader Qualcomm (NASDAQ:QCOM) isn't ready for market yet, which is causing a major headache for Xiaomi (Chinese article). The company is currently scrambling to find alternate solutions to address the shortfall, the reports say.

Xiaomi released its first fourth-generation phone, the Mi 4, last July, so presumably it was planning a similar launch schedule around next month for the upcoming Mi 5. But this kind of technology issue, if it's really happening, would make a July launch extremely difficult, since it would be hard to find a new solution and have enough phones manufactured in time for such a major event next month.

Such a delay could make it difficult for Xiaomi to reach its 2015 target of selling 80-100 million smartphones this year. That would be up sharply from the 65 million smartphones it sold last year, but still well short of the triple-digit growth it has posted every year since it first began selling phones. Previous reports cited Xiaomi CEO Lei Jun saying the company sold 15 million smartphones in the first quarter of this year, up 36 percent from a year earlier (previous post). That means he was almost certainly counting on big sales in the second half of the year from the launch of its fifth generation phones.

This latest technology hiccup would come just a month after some of Xiaomi's current generation of fourth-generation phones being sold in India reportedly suffered from overheating problems (previous post). The company also had to deal with a patent dispute in India that has kept some of its products out of the market. Last but not least, it's facing a growing challenge at home from a resurgent Apple (NASDAQ:AAPL), a booming Huawei and new and similarly trendy line of smartphones just launched by the fast-rising LeTV.

Last week I wrote that Xiaomi's biggest enemy is itself as the company has built up incredibly huge expectations through its rapid and very high-profile rise during its first few years in business (previous post). The company was certainly impressive in those early years, becoming the leading smartphone maker in China and the world's third largest brand just five years after its founding.

But now it's finding out that companies can rise and fall quite quickly, especially in the fast-changing smartphone space where yesterday's king of the world can easily became tomorrow's has-been. Nokia (NYSE:NOK), Motorola and HTC have all learned that lesson in the last five years, and all three of those had far longer histories than Xiaomi. It's certainly far too early to put Xiaomi into that group, but its recent series of setbacks do show that the company's may be headed into a new, slower growth phase from its previous meteoric rise.

Disclosure: None.