In 7 years, Lei Jun has overcome many obstacles, transforming Xiaomi from a small company to a world-class enterprise with its own ecosystem to boot. On September 17th, Lei Jun joins us, an eager audience at the Yale Center Beijing, to share Xiaomi's story and business model. Lei Jun suggests that innovation is at the core of Xiaomi, with their products emphasizing high quality, low cost, and attractive design. By building such high quality products, he claims to be helping improve the ‘Made in China’ brand.
A Meteoric Ascent
Xiaomi Inc. was founded in 2010 with a simple mission: to upgrade China’s manufacturing sector adopting “internet thinking” and the “methodology of the internet” (互联网方法论). With a group of ten people and 30 million RMB ($4.5 million equivalent), we started from scratch.
Looking back to the last seven years, we have made so many incredible achievements. We first entered the smartphone industry, which was one of the most competitive industry worldwide with competitors like Apple, Samsung, Huawei, and Lenovo. And today still, it’s a fiercely competitive market with Apple and Samsung being the dominant players internationally. However, in two and half years, we defeated all domestic and international players and became the No.1 smartphone maker in China and No.3 in the world. After having achieved that, in 2014, we hit a revenue of $10 billion which made us the fastest growing company to have reached a revenue of $10 billion within such a short period of operation.
Creating the Phones
In the beginning, many people probably were astonished by the innovation of Xiaomi’s business model. Well, as a product-oriented company, we have more innovations in our core technologies. For instance, ‘bezel-less’ (“全面屏”), a recent buzzword comes from Xiaomi’s Mi MiX, is the first phone with an edge-to-edge display. Last month, Mi MiX won the Gold Award at the International Design Excellence Awards (IDEA). IDEA is one of the three most prestigious design award programs. Only 12 mobile phones have been awarded Gold in its 37 years of history.
On 1st September, Mi MiX was added to the world-renowned collection of the National Design Museum in Finland. When we asked them that why choose Mi MiX, I was surprised by the answer from the museum’s curator that Mi MiX "points out the direction of the future design of smartphones.”
This idea came up in early 2014. A group of engineers was discussing why the smartphone industry was getting boring, that all smartphones produced look the same. Why? Because the iPhone defined what a smartphone looks like ten years ago, and has been influencing the direction of smartphone design ever since.
Our engineers wanted to design something different. Of course, there are many directions. In discussion, we were saying probably it should look like a piece of glass, like in those sci-fi movies, and the front side of the phone should be all-screen. But at the time we thought that it’s not possible as there were so many technical problems to overcome. So, I decided at the end of 2014 that we were going to do a concept smartphone. Last October this concept smartphone astonished the tech media. And this year, we can see that Mi MiX not only points out but leads the direction of the future smartphone design, as almost all companies are launching bezel-less smartphones this year.
Since the launch of iPhone X, we have also been getting more attention. We launched the Mi Mix 2 the day before Apple’s iPhone X. And we’re selling better than iPhone X, because the idea of this screen design is led by Xiaomi. Besides, Xiaomi is influencing the application of a full ceramic body on smartphones. Furthermore, we made a great effort on the LTE frequency bands so that Mix 2 supports the largest number of bands and the world. We went to around 100 countries to do field tests and received excellent performance.
In terms of the system-on-chip, over the past three years we have been putting a lot of money in R&D and have debuted the Surge S1 Chip earlier this year. We also launched a mid-to-high-end smartphone with the chip, gaining positive feedback from consumers. So, we are actually doing a lot on developing core technologies.
Xiaomi values intellectual property as well as research spending. Last year Xiaomi had filed 6067 patents; it will take up to three years to get patents approved so in the next two to three years Xiaomi is going to receive a lot of patents. As of now, Xiaomi owns 4800 patents, half of them international.
Developing a New Business Model
For most of the people here, you must be very familiar with business model innovation.
I was constantly asked what type of company is Xiaomi? Some say Xiaomi is China's Apple. We are absolutely not Apple in China. In my mind, Xiaomi is more than a smartphone company. Xiaomi is a mobile internet company, as well as a ‘New Retail’ company.
Xiaomi is a hardware provider, making smartphones and TVs. When I founded Xiaomi, I wanted to revolutionize China's manufacturing industry. I wanted to alter the image of ‘Made in China’. I wanted to leverage China's strong manufacturing capabilities to make world-class products to benefit the world. That’s why I founded Xiaomi.
Making the coolest, best and most exquisitely designed product has a prerequisite: a huge amount of money.
In my opinion, the fundamental problem with China's industry is its low efficiency. That is, for every product we have in the market, there are too many channels to go through before the products could finally reach the hand of the consumers. That's the reason for the high price. Many of you here are Yale alumni. What you bought in the U.S. are probably made in China as well, but they are of better price and quality. That confuses me a lot; when what we made in China crosses the Pacific to the US, they are of higher quality and lower price. That made me wonder, how could I improve domestic business efficiency?
Only when we improve business efficiency can we make our products better. I don't believe that Chinese people don't have the craftsman's spirit, neither do I believe that Chinese people lack innovation. I think we can make great products. When I found out this problem, I decided to cut out the middlemen as much as I could, and use the saved money for research and innovation. When I founded Xiaomi I mentioned, we had no budget for advertisement and sales channel and priced close to cost. Because of our high efficiency, we drove almost all the copycat smartphones out of the market. So, we forced the manufacturers in China to reform or die; if were they not able to improve their quality, efficiency and design, they would be out of the game.
We started our retail from e-business and then entered the offline market. We did lots of retail business innovation along the way, and spent a significant amount of money on products, quality control, improving business efficiency. That raised a new problem: If we kept doing what we were doing, we are not going to make money from it, and might potentially lose money if we don't operate well. In doing so, we limited our gross margin. This is different from what you learn from business schools. If we want our gross margin to be as low as possible, the whole corporate culture works to curb avarice. That, then, is what makes a company sustainable in the long run.
Keep Customers Coming Back
My biggest concern is that our user only purchases a smartphone every two years. They are only excited the moment they get it. But how can we keep the popularity of a brand and keep a company operating at high efficiency?
Well, we have transformed consumption from a low-frequency event to a high-frequency one. From a retail perspective, there must be more products. If we only sell smartphones, we will have to bear the higher cost of marketing, rent, and labor and we will have to sell our products at doubled prices just like every other company out there, and we will never be able to create any social value. Thus, since our smartphones sell well, we use the smartphone sales to boost the demand on our sales platform. When our sales platform sells well, it boosts the sales of other products like TVs and rice cookers, and vice versa. This is our business model: the delicate combination of products we have created an ecosystem. Xiaomi is a client-oriented company from the start. We always put our clients at the center. Whatever our clients want, as long as it satisfies everyone’s needs, suits our style, we will do it. We have broken all of the existing boundaries. You may find that Xiaomi does everything, but at the same time, you may also find Xiaomi only does very few things.
How to lay this business ground? Xiaomi might be the most complicated company in the world. What Xiaomi did first was to create a Xiaomi community. From the community, we made a product called MIUI, which is an operating system on smartphones. We began to manufacture mobile phones after two quarters, we did ecommerce after another two quarters. Every half year is a cycle; there are new requirements come along in every new cycle. Step by step, layer by layer, we come to where we are today. Today, when we look back over the past seven years, we feel that we have made every strategy right. The difficult point of intermediate control is that we must have a focus, which is our customer. We have to figure out how to satisfy our customers’ needs and how to add that additional layer.
We put 100% into every single product. For instance, the price of a wristband overseas was around 1400 RMB ($200). It can only stay for five days after charging, and it gets waterlogged during baths. I set several criteria when we were designing our product. First, it must last 60 days per charge. Second, it must be water-proof. Third, it must be priced at cost. Today, we sell our Mi-Band at only 79 RMB. It has a delicate and artistic outlook. It can last 70, 80 days after charging and it is waterproof. We made it to world number one right away at only 5% the price of our counterparts overseas.
The Importance of Design and Price-Performance (性价比)
Despite the high quality of Chinese products, we think the design is our national shortfall. This is why when I started Xiaomi, 2 out of our 8 partners were professional designers. We now place a very strong emphasis on design.
Xiaomi pays extra attention to the price-performance ratio. We believe that we can use the technology of ecommerce to do offline retail and we sell the same product offline at the same price online. But how do we reduce cost? If we can raise the planned sales of the product, for example from selling 100,000 units to selling 10 million units, the R & D costs can be reduced to only 1% of the original costs, which is almost negligible. Since the selling price is low, the marketing cost is very low, the cost of sales channel cost is very low, so we can create a positive cycle from the lowered cost of raw material and manufacturing due to our economies of scale. This is how we manage to keep our prices low at Xiaomi. Of course, some people assume that you must be selling low-quality products since your price is so cheap. But it is only because you do not understand how fast the world is changing.
The MUJI of Tech
I still don’t know how to describe Xiaomi in very few words. If I have to, I would say that Xiaomi wants to become the MUJI of the technology space. I guess most of you know how MUJI values design and quality and how it keeps offline retail stores at very high quality. Xiaomi also emphasizes high quality, artistic outlook, great price-performance ratio, rich product combinations, and we use internet thinking to do retail both online and offline.
Is it the case that only Chinese people like this kind of product? No. over the past two or three years, Xiaomi ranked top 5 in 12 countries, and we entered the markets of 46 countries.
We’re also starting to do a little bit of advertisement, which accounts for not even 1% of our total costs. We want to reach people who were not familiar with us in the past. Normally, guys have better understanding on technological and electronic products, so we would like to also familiarize females. So that’s why we invited heart throb Wu Yifan for endorsement. Of course, it takes some time. This is probably the story of Xiaomi.
Founder and CEO of Xiaomi
September 17, 2017
(Source: Yale Center Beijing)