Chinese smartphone manufacturer Xiaomi Corp is rethinking its strategy in India after underestimating changing consumer preferences. Despite being the largest vendor in India’s smartphone market, Xiaomi has been surpassed by Samsung in terms of market share due to the latter’s ability to offer more expensive, higher-quality models with innovative financing schemes to make them affordable.

Data from Counterpoint Research shows that Samsung had a 20% market share in India’s smartphone market during Q4 2022, while Xiaomi had an 18% share. The shift in consumer preferences to more expensive models has been dubbed a “premiumisation” trend, with sub-$120 phones seeing their market share fall to 26% in 2022 from 41% two years ago, while the share of premium phones, priced above $360, doubled to 11% in the same period.

Xiaomi’s struggles to adapt its product line-up to meet changing consumer needs show that businesses that fail to cater to shifting preferences in fast-growing economies with rising disposable incomes risk being left behind. One famous example of this in India is Tata Motors’ Nano car, which, despite being the world’s cheapest car at INR 100,000 ($1,200), was rejected by consumers who believed the low price tag indicated poor quality.

The push by Indian consumers for more expensive smartphones to consume video and other content is likely to benefit social media app providers like Meta and Apple, which have so far struggled to gain market share in India due to their focus on high-end phones priced from $605 to as high as $2,304.

Xiaomi and Samsung both consider India to be a key growth market, with smartphones their best-selling electronic devices. Xiaomi generated total revenue of $4.8bn in India in 2021-22, while Samsung’s smartphone sales reached $6.7bn out of total sales of $10.3bn.

Xiaomi’s response to its struggles in India has been to revamp its product line-up to focus on premium smartphones. The company introduced the Redmi Note 12 in January, whose top-end variant is priced above INR 30,000, and more recently, the Xiaomi 13 Pro, which is priced at INR 79,999 ($970) – its most expensive phone in India. These changes seem to be paying off, with the Redmi Note 12 generating sales of $61m within two weeks of its launch.

The financing schemes offered by Samsung and its partners have also played a significant role in the company’s recent success in India. Samsung’s loan scheme, which it operates with financing partners, offers “convenient and assured” loans to customers who may have no loan history, low credit scores, or no salary slips. The scheme generated $1bn in device sales last year, and it is believed that more than half of those who use the scheme are first-time loan seekers.

The growth in premium segment phones has been much higher in small towns than in big cities, with many first-time loan seekers coming from migrant worker communities. Xiaomi has also sought to tap into financing schemes, calling them a key growth driver for sales of phones priced above INR 15,000 ($183).

However, Xiaomi is already facing challenges in India, with the departure of at least five senior executives and increased government scrutiny due to frosty relations with neighbouring China. The company also has $674m of its funds frozen by the country’s financial crime agency for alleged illegal remittances to foreign entities, an allegation that Xiaomi denies.

As the Indian smartphone market continues to grow, it is likely that companies that can adapt to changing consumer preferences and offer innovative financing schemes will have an edge over their rivals. Xiaomi’s struggles show that even market leaders are not immune to the risks of failing.