Cilic, the 2011 runner-up, struggled throughout the match with his serve, eventually losing 3-6 7-6 (7-0) 6-4 to a player ranked more than 200 places below him in the world.
"I wasn't serving consistently well. When I had the break up in all three sets I would lose my serve," Cilic said.
"I'm very disappointed," the fourth seed added.
Sixth seed Alexandr Dolgopolov, local favourite Zhang Ze and Florian Mayer and all progressed with comfortable straight-set wins.
Alexandr Dolgopolov eased past Guillermo Garcia-Lopez 6-0 6-4, Zhang overcame compatriot Wu Di 6-4 6-1 while Mayer outclassed Fabio Fognini 6-1 6-2.
Argentine Carlos Berlocq however survived a second set wobble to beat Croatian-born Australian Marinko Matosevic 3-6 6-2 6-3.