Once a Darling, Xiaomi Is Facing Tough Questions About Its Future

Not long ago, China’s Xiaomi was being called the next Apple, an epithet that rankled some at both companies. “I don’t see it as flattery,” scoffed Apple’s Jony Ive, who said of Xiaomi’s business model, “I think it’s theft, and it’s lazy.” Meanwhile, Xiaomi CEO Lei Jun felt the analogy was off the mark. “You can say it looks a bit like Apple. But it’s really more like Amazon with some elements of Google.”

This year, Xiaomi is looking like Apple in a way few expected: It’s already struggling with slowing growth.

In a few weeks, Xiaomi will turn six. It’s rare for any tech company to go from startup to global giant in such a short span of time. But if Xiaomi’s growth came at a breakneck pace, it is also showing signs of reaching maturity just as quickly, facing the growing pains of a middle-aged tech company even before it can celebrate toddlerhood.

In early 2015, Xiaomi was a company coveted by investors and feared by competitors. The firm had earned $12 billion in revenue in 2014, a year when sales of its smartphones more than tripled to 61 million units. Thanks to a private investment round that raised $1.1 billion, the company had a $45 billion valuation. Some investors, like Russian billionaire Yuri Milner, believed that figure would rise to $100 billion.

Today, Xiaomi remains China’s most highly valued unicorn and worldwide is second only to Uber. The company saw 16 million pre-registrations last month when it updated its flagship Mi phone. Meanwhile, the company is pushing into new countries like India and Indonesia while pumping out new gadgets. But that $100 billion valuation is likely going to have to wait. Because while Xiaomi is still growing, it’s doing so more slowly than the company had projected—or investors had expected.

These days, instead of fielding comparisons to Steve Jobs, Lei has found himself on the defensive. He recently spoke out against rumors that Xiaomi not only needed more cash, it was having trouble finding it. “There’s no pressure to raise funds,” he told Sina Tech, saying Xiaomi still has $1.5 billion in cash. Lei did admit he’s spoken with regulators about an IPO in China, an option he had previously ruled out.

What changed? Xiaomi’s smartphone sales in China fell from a 227% growth rate in 2014 to 17% in 2015. Xiaomi initially said it would sell 100 million phones in 2015, then ratcheted the estimate down to 80 million. It ended up selling 70 million. This year, Xiaomi is hoping to boost growth with the release of the well-reviewed Mi5 last month.

That may not happen, and the main reason is that China’s smartphone market is getting saturated: IDC estimates it to grow between 1% and 2% this year after growing 2% in 2015. Not long ago, the market was doubling every year. The slowdown is leading to a consolidation of the market that is already shaking out smaller, copycat manufacturers and favor the big players like Xiaomi.

Even so, the firm’s bigger rivals appear to be benefiting more than Xiaomi, which saw its market share inch up to 15% in 2015 from 14% a year earlier, according to Strategy Analytics. Huawei, meanwhile, saw its share jump from 10% to 14%, while Apple’s share rose from 7% to 11%. Apple, with its aspirational brand, and Huawei, thanks to investment in R&D and marketing, are both growing twice as fast as Xiaomi in China and could overtake it this year as the market leader.

A Xiaomi spokesperson declined to offer revenue figures for 2015 or projections for 2016, but said that the 70 million phones sold last year measured growth that outpaced the broader Chinese smartphone market.

Xiaomi’s early appeal was tied to its original business model for selling smartphones. The company designed its hardware and user interface to feel like a high-end phone, then sold them to compete with low-end phones. To save costs, Xiaomi only sold online and spend little on marketing, relying instead on large-scale flash sales events and a lifestyle brand built through word of mouth.

The plan was never to remain a smartphone company, but to add on new revenue streams through online services, while offering a variety of consumer electronics through its web site. Xiaomi now sells 2,000 non-phone gadgets, many manufactured through companies it owns a stake in. Among them, a fitness band, earphones, a router, a smart TV, air and water purifiers, a Segway-like scooter and, soon, a smart bicycle and a VR device.

The trouble is, these new markets may not be doing so hot either. Internet services are also disappointing, although they are growing. According to Reuters, Xiaomi’s Internet services–primarily games, but also payments and cloud storage–rose 150% to $564 million last year. Fast growth, but less than 5% of the company’s total revenue and far short of Xiaomi’s internal target of $1 billion. Xiaomi declined to comment on the report.

The non-phone devices made by Xiaomi’s ecosystem of manufacturers aren’t selling as well as its smartphones. According to Technode, more then 10 million fitness trackers and 17 million sets of earphones had sold as of late 2015, but these products retail for less than $20 apiece. Xiaomi is also having trouble competing against incumbents in the TV market. In tablets, it must also fight Huawei and Apple in a market that shrank as much as 10% globally last year. As for its Amazon-like e-tail ambitions, Xiaomi was ranked as the 21st largest e-commerce site in China last October.

None of this argues that Xiaomi is anywhere near a failure. But given its early promise, it’s looking like it could disappoint early investors. The company has many years ahead of it and a lot in its favor: a devoted customer base, a growing lineup of products and services, a plan to expand into India and other markets, and a cash stockpile that could help it continue to grow.

But what looked like a new global tech brand a year ago is now looking like one more overvalued also ran, unless Lei changes things.