Eyeing $4.5B In Sales This Year, Phone Maker Xiaomi Looks To Emulate A 340-Year-Old Chinese Medicine Company

Posted: May 10, 2013 in GT, Technology

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Whom do the idols idolize? Lei Jun, the CEO of Android handset and OS maker
Xiaomi, is arguably the face of tech entrepreneurship
in China as a long-time angel investor and serial
entrepreneur behind companies like Amazon-acquired
Joyo.cn and the recently IPO’d YY. He’s been called the “Steve Jobs of China” in the
sense that Xiaomi is an integrated hardware and
software maker that has altered Android for Chinese
tastes. They sell high-end Android phones at or
slightly above the cost of materials and profit through
accessories and eventually, software and services. While the country has been known for lower-end
hardware makers, Xiaomi is pushing the idea that
world-class products can be both made and designed
in China. The company has its own fanboys to prove it. Just
two years after launching their first device, Xiaomi
plans to sell 15 million devices this year, bringing the
company $4.5 billion in revenue. Last year, they sold
7 million phones. Sales in batches of 200K to 300K
phones on their website regularly sell out — sometimes in less than an hour. Lei Jun But Xiaomi also has incredibly high expectations to
realize; the company’s valuation is not just predicated
on raw hardware sales, but also on the idea that
Xiaomi will eventually be able to monetize software
services — something it has yet to prove against
giants like Alibaba and Tencent in the ridiculously competitive Chinese market. While founding the company three years ago, Jun
thought about the history of Chinese business and
entrepreneurship to find role models. “What kind of company in China can last for a
century?” he asked at the GMIC conference in Beijing
this week. He said he ultimately looked up to two companies: a
340-year-old traditional Chinese medicine company
called Tongrentang and hot pot chain Hai Di Lao. He said Tongrentang’s mission taught him two things
— never produce lower-quality products for the sake
of cost and never spare any effort in creating the best
quality products. Hai Di Lao, which is indeed a delicious hot pot chain
(yes, I’ve tried it), taught him about the value of
customer service. In a separate interview, co-founder
and president Lin Bin suggested that I order items not
on the menu or even praise the dishware in the
restaurant. “They take customer feedback very, very seriously
and always leave you with a surprise,” Bin said. In a way, Jun is critical of the prevailing business
culture in China. “There’s a big problem with integrity
in China,” he said. “People sell pigs but you’re not
eating pork,” he added on-stage, alluding to recent
health scares where rat meat has been marked as
lamb. Appealing to a Fanbase Paired with this focus on high-quality parts is a
marketing model that’s unusual for any handset
maker globally. Xiaomi sold 72 percent of its phones directly through
its online store last year, bypassing the costly
logistical headache of dealing with brick-and-mortar
retailers. Right now, they have two models: one that
retails for 1999 renminbi ($326) and a more basic
version that goes for 1499 renminbi ($245). They can do this because the company has
cultivated a unique participatory model of designing
phones. Every week, the company releases a new
version of its customized Android experience: the
miUI. Of their millions of customers, there are a few
hundred thousand “hardcore” fans who do the
teardowns, scrutinize every spec and offer
suggestions on how to change the phone. “Chinese consumers are actually very critical in the
sense that they compare not just the build and look
and feel of phones, but also everything that goes
inside — the CPU, memory, speed, the specs,” Bin
said. “They are pretty savvy about the money they
pay for these phones.” Jun uses Weibo, the public Chinese social networking
platform that sometimes draws comparisons to
Twitter, to solicit advice and communicate with
Xiaomi fans. He’s offered different levels of hard drive
storage based on user feedback. He said they even
added a sound recording app at the behest of a reporter. “We co-develop the phone,” Jun said in another
interview. “I’ve used more than 70 phones in the last
couple years. I have lots of suggestions, but will they
change their phone? Even Nokia? Most likely not. So
I created a model where I’ve invited all of my fans to
be involved in designing the phone. It’s one of the most exciting things for them.” He says this is a key part of why Xiaomi spends less
than its peers on marketing. “If you invented a feature in the Xiaomi phone, will
you tell your classmates and friends that you
invented a feature? Most likely you will.” Their approach ties into a big trend that is fueling a
hardware Renaissance globally: the ability to feel out
product-market fit through social media before a
capital-intensive manufacturing process — be it
through Twitter, Weibo or a Kickstarter campaign. Through that feedback and Xiaomi’s own in-house
engineers and designers, miUI includes
improvements over the standard flavor of Android.
Jun says that they’ve tweaked how applications run in
the background so that a Xiaomi phone can go up to
six or seven days without a recharge. (I’ve been carrying an older Xiaomi around and it has held up for
a few days at a time, unlike my iPhone, which needs
to be recharged every day.) There are also lots of UI
flourishes that are, frankly, Apple-like. Software For Profit And As A Protective Moat While Xiaomi has done well at positioning itself as
much more than a commodity hardware maker, one of
its next challenges will be to prove that it can make
money off software and services. Because it sells
phones at or near the cost of the build of materials,
Xiaomi will rely on accessories and services to boost its margins. Jun is reluctant to say whether Xiaomi is at heart
more of a software or hardware company (a question
that has also perplexed analysts of Apple). “We positioned ourselves as triathlon athletes,” Jun
said. “We do software, hardware and Internet
services, so if you would ask which part of the three
is stronger, my answer is: would you ask a triathlon
athlete whether they are best at running, swimming or
cycling?” They’ve shared some vanity stats showing traction,
although it’s hard to understand what they mean.
Xiaomi’s app store sees 3.5 million app downloads a
day, 3.5 million photos uploaded to its cloud service a
day and has seen 2 billion messages uploaded
cumulatively. Its messaging app MiTalk is way behind Tencent’s WeChat, which is the other big
China tech story of the year with 190 million active
users. There are some promising metrics, though. Bin says
Xiaomi’s customers are twice as active on the mobile
web as those of other manufacturers. That sort of
engagement could lend itself to interesting revenue
opportunities down the line in gaming and e-
commerce, although the company declined to share specifics. Two other growth areas for Xiaomi are international
markets and in other types of hardware. The company
is expanding to greater China — or Taiwan and Hong
Kong. Bin is reluctant to talk about even more
international markets, saying that the company just
wants to prove itself in these two areas first. There are unique challenges. For one, these markets
rely on more of the subsidized model that’s common
in the West where carriers lower the list price through
post-paid plans. In China, many consumers pay for
the full cost of the phone upfront. They also don’t
know whether the marketing model where they heavily engage a core set of fans will work outside of
mainland China. The other growth area is with Xiaomi’s new set-top
boxes. It was a rocky start with the initial sales of
the set-top boxes blocked by Chinese regulations
around TV content. But they re-launched two months
ago. Bin and Jun declined to share figures on sales
so far, except to say that Jun has seen second-hand models show up on eBay and Taobao for $90 (which
is about twice the list price of 299 renminbi). Bin is hesitant to share too many targets, because he
claims that Xiaomi doesn’t really even have that
many internally. Even the goal to get to 15 million
handsets is to produce that many, not necessarily to sell that many (although they invariably sell out). “We don’t have any KPIs (key performance
indicators) — not even internally,” Bin said. “Our KPI
is to get handsets to everyone who can place an
order online and make a full payment.”

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