What Blocked Xiaomi’s Korea Strategy?
Chinese smartphone giant Xiaomi’s strategy in the South Korean market is stalling. After establishing a local subsidiary in 2021 and launching an aggressive low-price offensive, its sales partner, Spitz Mobile, has withdrawn, reportedly facing hurdles in building its ecosystem.
Xiaomi’s strategy involves locking in customers with an “ecosystem” that connects not just smartphones but also home appliances and lifestyle products. However, in the South Korean market, this ecosystem failed to function effectively, leaving the company mired in simple device sales competition.
What can SME owners learn from this news? Rather than viewing it as a case study of a large corporation, let’s analyze it from the perspective of “reversible management.”
The “Irreversible Trap” Hidden in Ecosystem Strategies
What’s noteworthy in Xiaomi’s case isn’t the merits of the ecosystem strategy itself, but the inherent “difficulty of withdrawal” it contained.
An ecosystem is a strategy that prevents customer churn by linking multiple products and services. While it appears to be a robust business model at first glance, the flip side is a vulnerability where “removing one gear causes the entire system to collapse.”
In South Korea, Xiaomi contracted with a distributor to sell smartphones and set up supply chains for the various products that make up its ecosystem. However, when smartphone sales stagnated, the cost of maintaining the entire ecosystem became a heavy burden. When deciding to withdraw, the company faced not only terminating individual contracts and disposing of inventory but also the complex process of dismantling the entire ecosystem.
This also applies to the diversification strategies of SMEs. While linking multiple businesses to create synergies can be effective, the “complexity of that linkage” can raise the barrier to exit.
The Result of Not Drawing a “Return Line”
What withdrawal conditions did Xiaomi set when entering the South Korean market? They likely had targets for smartphone sales volume or market share. However, it’s highly probable that no “return line” was drawn for the ecosystem as a whole.
A “return line” is a clear benchmark: if conditions fall below this point, the business is shut down. If investment continues without setting this line, even as losses mount, the decision to withdraw is postponed by the hopeful expectation that “it will turn around soon.”
Xiaomi’s Korea strategy can be seen as a case where an “irreversible structure”—the ecosystem—was built in from the start.
SMEs Must Incorporate “Reversibility” into Their Design
So, what should SME owners do? The answer is simple: incorporate “how far you can return” into the design from the very beginning of a business venture.
Specifically, I recommend deciding on the following three points in advance.
Set Withdrawal Conditions First
Set clear, numerical withdrawal conditions, such as “withdraw if sales fall below 80% of the target” or “withdraw if losses continue for three consecutive years.” This allows decisions to be made based on pre-set rules, not emotions.
One IT company I advised resolved at a board meeting to “withdraw if the number of monthly customer acquisitions falls below 50 in the first year” when starting a new business. They ultimately failed to meet the target and withdrew before losses escalated. By redirecting those resources to strengthen their core business, the company’s overall performance improved.
Phase Your Investment Scale
Instead of making a large investment all at once, start with small experiments. Rather than trying to build an entire ecosystem at once like Xiaomi, first test the market reaction with a single product. Then, if you see positive signs, gradually expand your investment.
This “phased investment” is the foundation of reversible management. A large, one-time investment raises the psychological barrier to exit, delaying decision-making.
Include “Cancellation Clauses” in Contracts
When signing distributor or sales agency agreements, always include a clause allowing cancellation under specific conditions. In Xiaomi’s case, it’s unclear what terms were in the contract with Spitz Mobile, but if the contract was difficult to terminate, the withdrawal decision would have been even harder.
SMEs often end up accepting unfavorable terms in contracts with larger companies, but the cancellation clause is one of the most critical negotiation points. It’s vital to constantly consider, “If this business doesn’t work out, how will we exit?”
A Culture That Doesn’t See Withdrawal as “Defeat”
Finally, let’s touch on the mindset of the business owner.
The media will likely report Xiaomi’s withdrawal from South Korea as a “failure.” However, the real failure is “being unable to withdraw when you should.”
If a culture that views withdrawal as “defeat” is ingrained in an organization, no one will propose it. Consequently, losses snowball, ultimately endangering the entire company.
I myself experienced selling off an unprofitable business during the COVID-19 pandemic. At the time, there was an atmosphere within the company that “withdrawal = defeat,” and it took a long time to make the decision. However, by concentrating the remaining resources on our core business after the sale, the company achieved a V-shaped recovery.
Withdrawal is part of “selection and concentration”—a strategic decision for future growth. “Reversible management” isn’t about avoiding failure; it’s about management that can reliably recover from failure. I hope Xiaomi’s case serves as a catalyst for you to review your own company’s strategy.
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