China’s tech giants battle for smart speaker supremacy as price war rages on

6 min read
A smartspeaker on display at Xiaomi’s flagship store in Beijing on July 7, 2019. (Image credit: TechNode/Wei Sheng)

While Amazon dominates the US smart speaker market with its Alexa-powered devices, competition in China remains fierce as some of the country’s biggest names in technology engage in an ongoing price war to vie for market share.

China supplanted the US as the largest market for smart speakers globally earlier this year. Sales hit 10.6 million units in the first quarter, a recent report from research firm Canalys shows. The country accounted for just over half of all sales of the devices globally in the first three months.

In the two years since their emergence in the Chinese market, smart speakers have evolved from niche gadgets into some of the most popular electronic devices among Chinese households. Their meteoric rise has been the result of a price war between some of the country’s biggest tech players that slashed average prices to under $20. While experts contend that the low pricing strategy may help educate consumers, there are concerns that the low-end devices could fail to meet users’ expectations.

Amazon introduced a new means of human-computer interaction in 2014 when the company launched its first Echo smart speaker, running Alexa. Apple co-founder Steve Wozniak lauded Echo as the “next big platform” in computing in an interview with CNBC in 2016.

After that, US tech giants piled in, with Facebook, Microsoft, Google, and Apple all announcing smart speaker products in the following years.

Major Chinese players like Alibaba, Baidu, and Xiaomi, joined the party in mid-2017. Sales skyrocketed from a mere 60,000 units in 2016 to 9 million last year, making the country the largest market worldwide, according to a report by German market research firm GFK.

Heavyweight players

Chinese e-commerce giant Alibaba launched its first smart speaker Tmall Genie in July 2017, allowing users to order items from its Tmall premium shopping site from the comfort of their sofas.

Tmall Genie, which uses the Hangzhou-based firm’s intelligent personal assistant service AliGenie,  initially went on sale for RMB 499 ($72.5). The price was low compared with the first generation Amazon Echo, which sold for around $180 but the market reaction was lackluster. Sales of AliGenie only numbered in the several tens of thousands, Chinese online media outlet Qdaily reported in November 2017. However, fortunes changed when Alibaba slashed prices for the annual Singles’ Day shopping festival on November 11 that year.

The company sold the speakers for RMB 99 via coupons and discounts, an 80% reduction of the original price. By the end of the 24-hour shopping festival, Tmall Genie had become the first smart speaker on the Chinese market to hit 1 million unit sales. This compares with total smart speaker sales in the country of 1.65 million units for the whole of 2017.

By March 2018, Alibaba had accumulated 2 million sales, a feat that had taken Amazon over one year to achieve with its Echo.

In the same month of Tmall Genie’s initial launch, Chinese smartphone maker Xiaomi joined the battle releasing the Mi AI Speaker. The product is capable of controlling other smart products around the home via voice assistant Xiao Ai.

The RMB 299 smart speaker hit the market in September 2017. Xiaomi said all stock sold out from the Beijing-based company’s online store 23 seconds after release, though it didn’t reveal how many were actually snapped up.

A smart home solution and AI Speaker HD on display at a Xiaomi store in Dongcheng, Beijing on July 7, 2019. (Image credit: TechNode/Wei Sheng)

In March 2018, Xiaomi launched the Mi AI Speaker Mini, a low-end version of its original product, priced at RMB 169. For its annual Mi Fan Festival on April 3, Xiaomi cut the price to RMB 99, achieving parity with Alibaba’s Tmall Genie.

The low pricing strategy drove up sales significantly. Xiaomi said that more than 1 million users registered to buy the product during the festival.

The company sold 600,000 smart speakers in the first three months of 2018, reported Canalys. This number more than tripled to 2 million in the second quarter, installing the firm as China’s second-largest smart speaker vendor after Alibaba.

November 2017 marked the entry of a major new player when Baidu launched its Raven H product. The name derived from Raven Tech, the AI assistant startup that the search engine giant acquired in 2016.

Priced at RMB 1,699, Raven H was almost 10 times more expensive than other products available in the country and it failed to gain a foothold in the market. A report from The Information in June 2018 states that Baidu only manufactured 10,000 Raven H smart speakers, which is in sharp contrast to the several million units sold by both Xiaomi and Alibaba.

The failure led to Baidu pursuing the same strategy as Alibaba and Xiaomi. The firm unveiled its Little Fish smart speaker brand in March 2018, powered by its conversational AI assistant DuerOS. The device was priced at RMB 599 but was sold at a promotional price of RMB 299. In June 2018, the company launched a cheaper version of the device, which brought the price down to RMB 89.

The strategy paid off and Baidu became China’s third largest smart speaker maker after Alibaba and Xiaomi, with shipments of 1 million devices in the third quarter, Canalys data shows.

Price War

Behind the price war, there is a booming market for smart speakers. Canalys expects in April total units sold to hit 59.9 million at the end of this year, growth of 166% compared with the year-ago figure.

“The benefit of the price war is that it brings high market penetration in a short time, and it will be an effective measure for educating consumers,” Liu Hao, a researcher at the China Consumer Electronics Association, told TechNode.

“But the low pricing strategy won’t help the industry move forward; instead it will disappoint consumers’ expectations by selling them cheap stuff,” he said.

David Watkins, director at Strategy Analytics, told TechNode that Google and Amazon sold their devices at a very low cost to accelerate user number growth and now Chinese players are looking to replicate this success with even more aggressive promotions and deals.

“Given the sudden growth in sales in China over the last few quarters I would say that they are proving successful,” said Watkins.

Canalys predicts that smart speaker penetration will reach 13% this year though this is dependent on the ability of companies to win over new users, according to Watkins.

At the end of last year, Amazon and Google cut the prices of their smallest smart speaker products, the Echo Dot, and the Home Mini, to as little as $29 from $50 for the shopping season, reported Reuters.

The report indicated that the respective component costs of the two devices were around $31 and $26, respectively, and the figures didn’t include overheads, shipping, and other expenses, meaning they were likely sold at a loss.

Although Xiaomi aims to lower the threshold for smart speakers by providing products at low cost, the company does not aim to pursue loss leader pricing–sell at a loss to attract consumers, Tang Mu, the general manager of Xiaomi’s smart hardware division, told TechNode.

“Loss leader pricing is not a reasonable business model, because it means high expectations for future market volume, and the smart speaker market has not yet reached that stage,” Tang added.

Shared ambitions

Chen Xiaoliang, founder and CEO of SoundAI, a voice recognition technology provider for Xiaomi and Baidu’s smart speakers, told TechNode that the low-pricing strategy was a better way of marketing than advertising because smart speakers are still a new concept in China.

However, the country’s smart speaker makers are not as ambitious as their US counterparts because they have different purposes, he added.

“Chinese companies are selling smart speakers as a potentially profitable product, but they don’t envisage a scenario in which smart speakers represent the main focal point of people’s interaction with machines,” said Chen.

Voice interaction is the most natural way of asking and searching for answers, he said. “Amazon is ambitious because it is determined to dethrone Google as the top search engine, which would save it billions of dollars in search engine advertising.”

Watkins of Strategy Analytics still contends that Baidu and Alibaba share similar ambitions to Amazon and Google. “They see AI assistants as the next computing platform, and if they want to remain relevant then they must build a strong presence in that space.”

Companies in both China and the US alike have to evolve their products based on changes in consumers’ behavior as they moving away from desktop and touchscreen interfaces toward more direct voice-activated platforms, he said.