Cell Phones

Xiaomi's Phones Have Conquered China. Now It's Aiming for the Rest of the World


Lei established a “10-to-10” schedule at the company

Photograph by ChinaFotoPress/Getty Images

Lei established a “10-to-10” schedule at the company

(Corrects location of Morningside Ventures managing director Richard Liu in 20th paragraph, and location of Xiaomi's office building in Beijing in 31st paragraph. Corrects the stylization of Xiaomi's product names throughout.)

On May 15, behind the curving, imperial facade of the China National Convention Center in Beijing, a veteran technology executive named Lei Jun walks onstage before a thousand raucous fans and members of the media. It’s a familiar scene everywhere now, and like many technology chiefs, Lei peppers his talk by ticking off some of the recent successes enjoyed by his company, the mobile device maker Xiaomi. Sales have been higher than expected; more than 50 million people use the company’s MIUI operating system. Then he gets to the new products, which today are a smart TV that can be controlled with an app and an Android-powered tablet computer, called Mi Pad, that comes in five colors and is priced to undercut the iPad mini. “I hope through our endeavor we can make Apple (AAPL) feel some pressure,” Lei says.

The crowd reacts to each product revelation as if it’s a World Cup goal. The hardware is indeed slick—the TV has the latest high-def specs, and the tablets are the first devices to use the newest processor from chipmaker Nvidia (NVDA). But Lei is delivering another, more potent message. He’s effectively giving an hourlong demonstration of an historic moment: China, for the first time, has its own technology brand that consumers truly lust after.

Following the event, the fans mill around in the Beijing smog, taking selfies with their MiPhones, waving Xiaomi signs, trading impressions of the new gadgets. Some made 15-hour trips to be here. Zhi Yuan, 28, who took a seven-hour train ride from Shandong province, proudly shows off his Xiaomi phone, the economical Redmi model. He likes it because it’s easy to use. Lei, he says, “can understand our wishes. He knows what Xiaomi fans want.”

Xiaomi (pronounced she-yow-mee) is one of the fastest-growing tech companies in the world. It’s the sixth-largest handset maker on earth and No. 3 in China, behind Samsung Electronics and Lenovo Group, according to research firm Canalys. Xiaomi’s recent growth is impressive, and its potential is even greater. In 2013, the company says, it sold 18.7 million smartphones almost entirely from its own website, bringing in $5 billion in revenue. Earlier this year, Lei set an internal goal of selling 40 million smartphones in 2014, then raised it to 60 million. In a financing round last August, venture capitalists gave Xiaomi a $10 billion valuation, about on par with 30-year-old PC maker Lenovo and Silicon Valley darlings Dropbox and Airbnb. At the same time, Xiaomi has branched out from smartphones to tablets, the large-screen HDTVs, a set-top box and home router, phone cases, and portable chargers, as well as a $16 white plush toy bunny—Mitoo, the company mascot, who wears a red-starred Chinese army hat.

While the phones and tablets have obvious echoes of better-known products from Apple and Samsung, they’re not clones. Xiaomi’s Mi 3 smartphone, its flagship, is appropriately light and thin (8.1 mm), with nicely beveled curves. A color-popping display from LG and a high-performance Qualcomm (QCOM) processor give buyers the same components they’d find in other top-of-the-line phones. The device runs MIUI, Xiaomi’s own version of the Android operating system. Regular software updates, which come at the end of each week, often incorporate ideas from users. One popular feature, originally suggested on a Xiaomi online forum, activates the flashlight and shuts down the battery-hogging display when a Mi 3 owner holds down the power button for five seconds. “Typically, Chinese companies have been relegated to copycat status,” says Chetan Sharma, a strategic consultant who advises businesses on mobile. “Lei Jun aspires to build a Chinese brand that stands up to the legends of the industry.”

Xiaomi’s real invention is its business model. It sells online, never in stores, and avoids conventional advertising, devoting only about 1 percent of its revenue to marketing. (By comparison, Samsung earmarks 5.4 percent.) Instead, the company relies on China’s social networks, Weibo and WeChat, and the free press Lei gets as a national tech hero. The money Xiaomi saves on marketing lets it buy top-notch components while keeping retail prices down. The Mi 3 costs 1,699 yuan, or $270; the iPhone in China starts at more than twice that. A Mi 3, or any Xiaomi phone, is a great deal if you’re lucky enough to snag one—the latest models routinely sell out. Xiaomi sells handsets in batches, usually of around 100,000. The first Mi 3 release, the company trumpeted, was bought up in only 86 seconds. It’s the technology equivalent of Air Jordans.

Lei’s newest goal is to take Xiaomi beyond China and into Brazil, Mexico, Russia, Turkey, India, and five countries in Southeast Asia. “The creative economy here continues to rise, entrepreneurship is surging, and our innovation abilities are growing,” Lei said in an e-mail translated from Chinese, since he does not speak or write in English. “We’re the world’s largest consumer market. After several decades of effort, this is the trend. Chinese technology companies are coming to the rest of the world.”
 
 
Lei was born in 1969 to what he calls an ordinary family in Xiantao, a midsize city in Hubei province. Always good at math, he entered the computer science department of nearby Wuhan University on a scholarship in 1987. In the library his freshman year, he discovered a Chinese translation of Fire in the Valley: The Making of the Personal Computer, the seminal history of the U.S. tech industry and the early careers of Bill Gates and Steve Jobs. The book inspired Lei, who got his degree in two years and joined Kingsoft, then a small, Beijing-based purveyor of office-productivity software that was clearly imitating Microsoft (MSFT).

Chinese migrants to Beijing, it’s commonly said, work harder than city natives to prove themselves, and Lei was no exception, putting in round-the-clock hours. After five years he was named Kingsoft’s chief executive officer and ran the company alongside its founder. Newspapers in the late 1990s dubbed him the láomó, or “model worker,” of Zhongguancun, Beijing’s emerging technology district.

It wasn’t an easy ride. For much of its early life, the embattled Kingsoft was staving off bankruptcy. Piracy of its products was rampant, and its word processing software, WPS Office, went head-to-head with Microsoft Word. Over the course of a decade, Lei tried to find safer ground, steering Kingsoft into video games and security software and spinning off an e-commerce company, Joyo.com, which was acquired by Amazon.com (AMZN) in 2004, though for a relatively paltry $70 million.

Lei finally took Kingsoft public in 2007, raising $99 million on the Hong Kong Stock Exchange largely on the strength of its online gaming revenue. Its market capitalization was a meager $400 million. He resigned from the company two months later.

Local news accounts cited health issues as the reason for Lei’s departure. Friends say he was merely fed up. Younger entrepreneurs, such as Jack Ma at e-commerce conglomerate Alibaba Group, Pony Ma at the entertainment company Tencent Holdings, and Robin Li at local search leader Baidu (BIDU), had built vastly larger Internet empires. They were the true stars of the Chinese technology scene. “[Lei] was financially secure, but he didn’t feel reputationally secure,” says Robin Chan, an angel investor who backed Xiaomi. “He wasn’t being considered in the same breath as Jack Ma and Pony Ma, which is where he is now. It drove him.”

After Kingsoft, Lei started a personal venture capital fund, structuring his investments around mobile, social networking, and e-commerce companies. In 2007 he backed Vancl, an online apparel and household goods retailer. The company almost folded in 2011 after loading its warehouses with products such as handbags and brooms that didn’t sell. “It was a very important lesson for Lei Jun to not get trapped by inventory,” says Hans Tung, a venture capitalist who invested in both Vancl and Xiaomi.

In the fall of 2009, Lei started meeting with Lin Bin, a local Google (GOOG) executive with notions of founding a startup. Lin was in charge of Google’s mobile efforts in China, overseeing about 50 engineers. That fall, the pair met in the lobbies of hotels across Beijing, first to discuss Google’s relationship with a mobile browser company called UCWeb, which Lei had invested in, and then to discuss Lin’s entrepreneurial ambitions.

Lei was about to turn 40 and was infatuated with the dawning smartphone craze. He carried two dozen phones in his backpack, which he meticulously studied, as well as an Amazon Kindle that he had dismantled to understand how it worked. He talked obsessively about the software that ran on smartphones and how it could be improved for China’s massive population of mobile phone users, which was about to surpass 1 billion.

The pair would meet at night and, though both had families with young children, talk well into the morning. They were natural friends, both driven and deeply technical.

Lin eventually figured out there was something else going on during these midnight meetups. “I suddenly realized he wanted to do the startup with me,” he says. “It didn’t make any sense. I checked the guy’s fortune. He was wealthy enough to retire 10 times for 10 lives, he was so successful at investing. And many [of his investments] were on the path to an IPO, which would make him a hundred times richer.”

“Chinese technology companies are coming to the rest of the world”

In early 2010, Google declared it was reorganizing its operations in China in the face of mounting censorship demands by the Chinese government. It was the nudge Lin needed. He told Lei he was ready to leave Google and start a company together. Lei wanted to create not just mobile software tailored to the Chinese market, but actual smartphones, too. He also wanted to sell the phones exclusively online, so they could save on the 20 percent to 25 percent cut paid to retailers, and deliver high-quality phones at prices affordable to the Chinese masses, who on average earned a little more than $2,000 a year.

The partners set up shop in a small office near the Third Ring Road in the north part of Beijing. Lei would be CEO and product chief; Lin, president in charge of daily operations. One of their first tasks was finding a name for the venture. Their first choice was Redstar, after the communist symbol, which was sure to inspire patriotic fervor in Chinese customers. But the trademark was taken. Someone then suggested the word Mi, or rice. The romanized spelling was fortuitously short for “mobile Internet” and, less auspiciously, for “mission impossible.” They considered using the Chinese words for black rice and big rice, before settling on a more humble alternative: small rice, or Xiaomi.
 
 
Investors were skeptical that a new Chinese brand could make a dent in the crowded smartphone market. “People thought they were crazy,” says Richard Liu, managing director in Shanghai for Morningside Ventures. “Everyone knew it would take a huge amount of money to enter the phone business, because the competition is so strong.” One prospect said, “The only way this could work is if Nokia (NOK) and Motorola went out of business and there was a hole in the market,” recalls Chan, the angel investor. That proclamation, absurd at the time, wasn’t too far off the mark.

Lei (fourth from left) and Lin (far right) with Xiaomi’s other founders in 2013Courtesy XiaomiLei (fourth from left) and Lin (far right) with Xiaomi’s other founders in 2013

Liu, who’d backed UCWeb, first heard Lei’s pitch over the phone, in a call that lasted from 9 at night to 9 in the morning. Liu recalls that Lei described a smartphone company that moved with the speed of an Internet startup, listening and responding to users, selling hardware at or near cost, and earning a profit on accessories and Internet services. Liu ended up supplying half of the initial $10 million in capital. The VC arm of Qualcomm kicked in a minority investment.

Lei and Lin then set about assembling an uncommonly large founding team, with accomplished high-tech veterans who could independently manage the interlocking parts of the company, including hardware, software, design, and manufacturing. To lure senior Chinese executives away from other technology companies, they awarded them the status of co-founder and the stock that comes with it. (There are now eight Xiaomi founders; both Lei and Lin forgo a salary.) Hong Feng, a member of Lin’s team at Google, joined to run the MIUI group. In his first interview with him, Hong recalls, Lei spent an hour talking about how he might redesign the alarm clock on the smartphone because users don’t really need to see every minute (few set their alarm for 7:37 a.m.). That feature hasn’t actually launched. “There are many things we talked about that we haven’t gotten around to actually doing yet,” Hong says.

Xiaomi produced MIUI first, making it available free online in mid-2010 as a software package that technically proficient owners of Android phones could install over their phone’s default operating system. The software, downloaded half a million times in the first few months, was lauded by Android enthusiasts for its user-friendly, common-sense features, such as an easy way to record phone calls and send text messages simultaneously to groups of friends.

The company forged a hard-driving office culture. The founders agreed to work from 10 in the morning to 10 at night—10 to 10, they called it—six days a week. They also set a goal of pushing out a new version of their software at the end of each week. Xiaomi still does this, making MIUI updates available to a core group of beta testers who work for free to try the preliminary software and hunt for bugs.

Lei and Lin planned to wait a year before starting work on their first phone. But the founders were unhappy with MIUI’s performance on other companies’ hardware. Xiaomi also unexpectedly snagged a new co-founder, Zhou Guangping, or “Dr. Zhou,” who in 2005 had been responsible for producing Motorola’s popular Ming phones in China.

Lei, Lin, and Zhou canvassed suppliers, offering to pay cash upfront for components such as batteries and camera modules. They visited screenmaker Sharp in Tokyo in spring 2011 and contracted with Taiwanese manufacturer Inventec to assemble the phones.

The Mi 1 was announced in August 2011 to a packed crowd of 2,000 MIUI fans and press. Lei wore a black shirt and jeans, intentionally provoking comparisons to you-know-who. Part of the Mi 1’s buzzy appeal was that it was packed with the newest components, such as the latest dual-core chip from Qualcomm. It was a huge gamble—“confidence from nowhere,” as Lin puts it. The phone also had a tantalizingly low price—1,999 yuan, or about $300 at the time, a third of the price of an imported iPhone 4.

Over the next six months, Xiaomi sold out three separate batches of the Mi 1, each a few hours after they went on sale. The company says it wasn’t deliberately constraining supply to stimulate demand. “There’s a saying here: Don’t be greedy. Greed can kill a hardware company,” says another vice president and co-founder, Huang Jiangji.

There were plenty of glitches after the Mi 1 went on sale. Buyers complained it took several weeks to receive phones. Others grumbled about shoddy customer service, forcing Xiaomi to hire more phone reps and open a network of small repair shops around the country. But the device kept selling, and since the cost of components fell while the price stayed the same, the phone eventually netted the company a 15 percent profit margin.

Xiaomi originally estimated it might move 300,000 Mi 1s. It sold more than 7 million. A year later it introduced the Mi 2, which was the first phone on the market to feature Qualcomm’s newest Snapdragon processor. Xiaomi would sell more than 15 million units.
 
 
Xiaomi’s 5,200 employees are jammed into two crowded office buildings near the Fifth Ring Road, in a former wool-manufacturing district in the north part of Beijing. A stray mutt, adopted by employees and named Prosperous Wealth, is tied up in one lobby. Behind Prosperous Wealth, rows of twentysomethings sit in cubicles, handling customer service calls. Many wear orange T-shirts featuring Mitoo, the communist bunny.

“There’s a saying here: Don’t be greedy. Greed can kill a hardware company”

In March, Lei announced the purchase of land for a Xiaomi office building in Zhongguancun, where he was once hailed as the model worker. The office park will provide a home not only for Xiaomi but also Kingsoft; Lei returned to the software company as chairman in 2011 after its fortunes declined even further. The office park will take several years to be completed. Another thing that won’t happen soon is a Xiaomi IPO. “It’s only a four-year-old company,” Lei said via e-mail. “We have to focus on how to provide better products and services. Xiaomi has no plans to go public within the next five years.”

The pace at Xiaomi has slowed somewhat since the early days, though employees continue to pull 10-to-10 schedules before major product launches. “But we are still happy every day,” says Joy Han, a Xiaomi spokeswoman.

The hardest worker, employees are fond of pointing out, remains Lei. Lin estimates that his partner easily works 100 hours a week. Huang Jiangji, who oversees the company’s new $110 home media server, has a four-hour morning meeting every Saturday with the boss to go over product plans. The server, if all goes according to strategy, will allow users to easily control the coming wave of new devices, such as smart thermostats and appliances—many of which Xiaomi no doubt wants to make itself.

In an end-of-the-year e-mail, Lei implored employees to work harder to meet the challenge laid down by Chinese rivals Huawei Technologies and Lenovo, which have larger market shares and are now targeting Xiaomi’s prices and customers. “This means that we will face a more severe test,” Lei wrote. “We are a pioneer in driving change, but whether or not a pioneer can become a true leader in the industry depends on our future efforts.”

On the 11th floor in the main building, in a corner office, is the realm of Hugo Barra, the Brazilian-born Google executive who made news by joining Xiaomi in 2013 to lead its overseas expansion. As he talks, Barra paces his spare office, which overlooks the old tenements that once housed the workers of the demolished wool factories. Barra’s shelves are stocked with Mitoo dolls and other knickknacks. Evidence of his five-year tenure at Google hangs on the walls, including a framed Pac-Man doodle that once appeared on the search engine’s home page.

Barra is naturally bullish about the company’s prospects abroad, and one new weapon is the $130 Redmi smartphone, which Xiaomi introduced last year alongside the pricier Mi 3. The phones look alike, but the Redmi sports an inexpensive processor from Taiwan’s MediaTek. Barra even mulls the prospect of a $50 smartphone that might one day upend the economics of mobile. “I don’t think it’s possible today, with the quality of software and hardware that we would expect,” he says, “but I expect that could change over time.”

Lei speaks at a product launch on May 15 in BeijingPhotograph by ChinaFotoPress via Getty ImagesLei speaks at a product launch on May 15 in Beijing

Xiaomi has to show it can use Western social media tools such as Twitter (TWTR) as well as it has exploited Weibo and WeChat. It must extend its supply chain across oceans and adjust its business model to countries where carriers sell handsets and customers aren’t accustomed to buying phones online. It must also overcome the association that Chinese brands have with piracy and counterfeiting. And Xiaomi will have to learn to do with less free, worshipful publicity. “Lei Jun is a relative nobody outside China, so leveraging his fame may be a little bit more difficult to do,” says Michael Clendenin, managing director of China’s RedTech Advisors. “Guerrilla marketing won’t be as easy.”

Perhaps Lei can use scarcity to his advantage yet again—making Xiaomi phones as rare and coveted in foreign markets as they are back in Beijing. Outside the convention center, the crowd of Xiaomi fans finally begins to thin out. Ma Yun Yan, 24, has dyed red hair, a pink baseball cap, and a T-shirt that reads “Don’t trust anyone.” She took a three-hour flight from Nanning to attend the event and is considering a Mi Pad with a yellow plastic back, because “yellow is bright and young.” Nearby, Zhao Zhe, 29, says he’s a big fan of MIUI but complains the Mi Pad is “not cheap enough” and says the experience of trying to buy a Xiaomi gadget online is mafan—a lot of trouble.

The crowd may be hoping for a final appearance from Lei, but they leave disappointed. He is somewhere else, though he continues to post all afternoon and evening to his 8.6 million followers on Weibo. “We’ll definitely fully push forward on Android tablets,” he writes to one fan concerned about the Mi Pad’s competitiveness. “We have great determination.”

With Bruce Einhorn and Christina Larson
Stone_190
Stone is a senior writer for Bloomberg Businessweek in San Francisco. He is the author of The Everything Store: Jeff Bezos and the Age of Amazon (Little, Brown; October 2013). Follow him on Twitter @BradStone.

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