Sitting in the very heart of Beijing, surrounded by two miles of majestic crimson walls, is the historic Forbidden City -- one of the world’s most well-preserved ancient palaces. It was here, on a crisp October afternoon, that Xiaomi’s Lei Jun let go a rhetorical punch against unnamed rivals, defending a principle he’s held dearly for the last eight years.

“Other phone makers sell exorbitantly expensive handsets, but expensive phones aren’t necessarily the best,” he said.

Xiaomi founder Lei Jun unveils the Mi MIX 3 smartphone on October 25, 2018. (Picture: Xiaomi via Weibo)

It was Lei’s third major phone launch this year, and the CEO is under a lot of pressure. In February, he set a lofty goal: In two and a half years, Xiaomi wants to recapture its former glory as China’s best-selling smartphone brand.

Lei only has 20 more months to achieve that. Yet the latest scorecard shows how hard it will be. Xiaomi sold 15% fewer phones in the last quarter compared to a year ago. Huawei, which launched a flagship phone just a week before Xiaomi, saw double-digit growth.

Some analysts say Huawei’s success comes down to putting high-end features into affordable handsets, giving consumers value for money -- a strategy that Xiaomi also prides itself on. At US$420, the Mi 8 smartphone gives you 6GB of RAM and 128GB storage with a strong processor -- not a bad deal at all. But somehow, it didn’t fly off the shelves.

“To people from that generation, there are more features on a smartphone than they actually use. Meanwhile in their minds, the image of Xiaomi is just too tawdry,” said Meishigenzheluan, a Zhihu user.

He described an encounter his mother had at a meeting: “People asked her, ‘Why are you using Xiaomi? Use a Huawei at least.’”

Accurate or not, it’s the impression that’s often heard when people in China are asked to describe Xiaomi smartphones. To understand why, you have to go all the way back to August 16th, 2011, when Xiaomi unveiled its very first handset in Beijing.

Wearing jeans and a black T-shirt, Lei carefully went through the specs of smartphones from four competitors -- HTC, Samsung, Motorola and LG. (The names change over the years, but Xiaomi has kept the habit of comparing itself with rivals at every launch event.) In the end, he invited the audience to guess the price of the Mi 1.

“5,000 yuan,” one man shouted.

People laughed. And so did Lei.

Then the answer popped up on the giant screen behind him: 1,999 yuan, which was about US$240 at the time.

The crowd roared.

Xiaomi CEO Lei Jun at the Mi 1 launch in Beijing on August 11, 2011. (Picture: Xiaomi "A Ball of Fire" via Tencent Video)

Xiaomi received 300,000 pre-orders within the first 34 hours -- that’s more than two phones every second. It turned out to be a blessing and a curse: While the success helped Xiaomi accumulate legions of loyal fans, it also cemented other people’s perception of its phones.

“I once tried to convince a friend to get the Mi Note 2. He was pretty excited until he asked about the price. ‘How much? 2,800 yuan [US$405]? How good can that phone be?’” wrote Zhorizonxiansen, a Zhihu user.

“This is a common mentality among phone users these days. If you use Xiaomi, you’re a low-end user, you’re a loser. If you say other phones aren’t good, you’re just broke and jealous.”

Another person, who described himself as a 27-year-old working in sales in a first-tier city, said he’s never met anyone at work who uses Xiaomi.

“Buying a phone isn’t about value-for-money. It’s not like you’ll buy a particular phone just because it’s cheaper than another one with the same specs. For example if your relatives, friends and colleagues all drive a BMW or a Mercedes, you could still get a Hyundai or Honda even if you don’t have money. Just don’t buy an Alto,” said Wenyusuruo, referring to a Chinese-made car brand.

It’s hard to tell if Xiaomi users are actually as poor as many in China believe. A recent report by Shanghai-based research agency MobData found that college graduates and those who earn more than 20,000 yuan (around US$2,880) a month actually prefer Xiaomi (and Huawei) phones. Oppo, Vivo and Apple users, on the other hand, earn less on average.

Yet the image has stuck. One reason could be that Xiaomi continues to churn out extremely cheap handsets. Its cheapest phone in China at the moment is the US$86 Redmi 6A, which costs nearly US$30 less than Vivo’s cheapest, the Y73.

Xiaomi is actively trying to boost its premium offerings in China. We contacted company spokesman John Chan, who directed us to their most recent financial report, which says the average selling price of Xiaomi smartphones in China increased 16% year on year. He declined to comment further.

Xiaomi's Mi 8 Pro, which has a transparent back that shows a fake motherboard with plastic parts. (Picture: Abacus)

So Xiaomi is rolling out fancier phones. But there seems to be one problem: Consumers aren’t buying them.

Counterpoint Research attributed Xiaomi’s declining sales in China last quarter to weak demand for the Mi 8. Meanwhile, last month’s Mi MIX 3 received mixed reactions from fans, with some lamenting that it lacks innovative features like an in-screen fingerprint sensor.

All that speaks to the intense competition in China’s contracting smartphone market, where Xiaomi’s value-for-money pitch has a hard time resonating with higher-end consumers. According to Counterpoint Research’s Mengmeng Zhang, Xiaomi’s mid-tier phones have similar specs to those from Huawei and sub-brand Honor, while Oppo and Vivo’s models are considered to have better designs than Xiaomi’s.

If there’s anything that could change people’s perception of Xiaomi, a new brand could be it. This year, the company launched Black Shark, a mid-tier gaming-focused series with glowing lights and joystick controllers. Last week, it announced a takeover of the smartphone brand under selfie king Meitu, known for its camera-heavy handsets targeted at women.

But for now, it’s still an uphill battle for Xiaomi. Like Lei Jun said, expensive phones aren’t necessarily the best phones, but maybe consumers don’t want the best phone per se -- just a phone they can proudly show off on a first date or a family gathering.

“Maybe it’s a bit hypocritical, but it’s true. When your friends are all using an iPhone, you can’t really take out a Xiaomi and brag about how good the Snapdragon 835 chip or the MIUI is,” wrote one Zhihu user. “Xiaomi is pretty good. It offers value for money. It’s hard to find any flaws with it. But if you have enough money, why not spend more to upgrade?”