“I admire giant companies like Huawei, Tencent, Sina and Alibaba, but I don’t want to create another Huawei, Tencent, Sina or Alibaba. My dream is to maintain my current company as a small one. (like a) small restaurant that people line up outside of to buy my products, and my friend will call me to reserve seats for them. ” – Lei, a keynote address to the 2013 Global Mobile Internet Conference, Beijing.
“How can I build a company in China that can last over 100 years?”Lei Jun, a back then 40-year-old investor and serial entrepreneur, always asked himself when he was thinking about founding a company to prove that high-end hardware can be made in China, despite the country’s reputation for manufacturing low-cost, low-quality goods. At that time, two very well-known and successful Chinese companies inspired him. One of them is Tong Ren Tang, a 340-year-old traditional Chinese medicine company. It taught Lei that a company should never produce lower-quality products for the sake of cost.
The other company is Hai Di Lao, a hot pot chain, which demonstrates how successful a restaurant can be by putting extremely strict emphasis on the superior customer service for over ten years. These two core values, high-quality product and service, eventually became the foundation and guidance of Lei’s new venture – Xiaomi Corporation, a smartphone company. In Lei’s prior career, he served as the CEO of Kingsoft, a Chinese antivirus software firm, and now remains chairman of the board. Lei is also the founder of Joyo, an online retailer he created in 2000.
He sold the company four years later to Amazon for $75 million. Aside from his entrepreneurial success, Lei is also a renowned investor in Chinese companies, in which he owns minority stakes in a number of Chinese online enterprises. This experience gives him great insights into the growing Chinese internet industry. In 2010, Lei founded Xiaomi Corporation with six other co-founders from Google, Motorola and Kingsoft. Even though his prior successful career victories, Lei had never done hardware on mobile devices before he founded Xiaomi.
Many people were suspicious of whether his mobile company would be able to survive. However, Lei was very confident. He said “How can I be successful in it? This is something I couldn’t be successful in by myself, so I found people who knew the [mobile, hardware, and internet sectors] and brought them together. ” Lei handpicked his team from Microsoft, Motorola and Google, with the goal of creating a smartphone company that could take on Apple in the Chinese market. Only three years after its founding, Xiaomi’s performance surprised the whole country, and even the world.
The company has now already become one of the most innovative and impactful technology giants in China. Since the release of its first smartphone in August 2011, Xiaomi has rapidly gained market share in Mainland China, Taiwan and Hong Kong, and achieved $2 billion revenue on 7. 19 million phones in China. Compared to iPhone’s price of around $900 in China, Xiaomi phone’s price is only about $300. Undercutting the iPhone has helped Xiaomi gain more than 5% smartphone market share in China, overtaking Apple’s 4. 8%, and become the sixth largest smartphone maker in 2013.
A recent report shows that Xiaomi’s flagship Mi 2S, released in April 2013, was the most popular phone sold in China in the first half of 2013, followed by Samsung’s Galaxy S4, which was launched at about the same time. In July, Xiaomi announced that it had sold 7. 03 million handsets in the first half of 2013, which was translated into RMB 13. 27 billion (about $2.
16 billion) in revenue. It means that Xiaomi has gained so much momentum that it sold almost the same number of phones in the first half of 2013 as it did in 2012. In 2013, it's hoping to ship 15 million handsets.Recently, the young smartphone maker’s last round of fundraising evaluates Xiaomi as a $10 billion business.
To put it into context, Xiaomi’s is now worth the same as Lenovo’s market value of $10 billion and almost twice BlackBerry’s current market valuation of $5. 5 billion. China Mobile Phone Manufacturing Industry China, the world's largest mobile phone market, is highly competitive for handset makers, and has exhibited strong growth. In 2012, China accounted for 26. 5% of the world’s smartphone shipments, according to new data from International Data Corporation (IDC), well ahead of the U.
S. market at 17. 8% (Exhibit 1). IDC says China’s market is driven by “strong end-user demand and an appetite for lower-priced smartphones. ”China's mobile phone market is dominated by products with price under 2000 RMB (about $290).
Products at this price have accounted for 60% of the whole mobile phone market, competing with China's local brands, informal mobile phones and international brands. In 2012, the mobile phone output in China claimed around 1. 210 billion, up 9. 2% over 2011.
Worldwide, 75% mobile phones are made in the mainland China, compared to 70% in 2011.China's mobile phone output in 2013 is expected to reach 1. 28 billion sets, up 5. 8% over 2012. There is cut-throat competition among Samsung, Apple, Taiwan's HTC Corp and local firms, like Huawei Technologies Co Ltd and ZTE Corp.
Low-priced smartphones, such as those provided by ZTE, Huawei and Xiaomi, have eaten into Apple's share of the market (Exhibit 2). Samsung came out on top, with 24. 3% of China's smartphone market. The key to competing with the likes of Apple and Samsung would be to push out high-quality devices with good technical specifications at affordable prices.Apple of China? Xiaomi is often said to be the “Apple of China”, an image that Lei has fostered since he founded the company. Even the two companies’ phones look really similar (Exhibit 3).
However, Lei once said: “The more you get to know Xiaomi, the more you will realize the difference between Xiaomi and Apple. ” The first and most prominent difference is the two phones’ ecosystems. Apple is famous for its closed-end ecosystem, which is famous for its simplicity. It provides a clear and streamlined user experience that is completely controlled by Apple.It pays less attention than its peers to what users want, instead, it imagines what users want.
Customers will only know what they will get at the product launch. Xiaomi is different. Xiaomi is pushing its open system to the limit. It’s all about customizability. Users can tweak almost everything about their phones, or even abandon the preinstalled MIUI operating system altogether. Moreover, Xiaomi outsources designs and features online from its so-called Mi-Fans, and constantly tweaks its version of Android operating system with the suggestions of Mi-Fans.
Through engaging the Mi-Fans by incorporating user feedback into the design of its latest sets and Android skins, the company not only gained customer loyalty, but also helps the company keep its development costs down. Xiaomi releases a new version of MIUI, which is scrutinized by a few hundred thousand hardcore users, on every Friday, pushes out a new phone every 9-12 months and seeks to break even on each handset. To some extent, the company and the users create the product together. Xiaomi’s design approach represents the innovation as search process, which promotes the cross-boundary thinking and ensures a broad enough funnel of ideas.
This crowd-sourced approach to developing a product is the complete antithesis to Apple’s secretive, top-down approach. Secondly, Xiaomi’s marketing isn’t particularly similar to Apple’s, either. There are certainly similarities in terms of their presentation styles, but different from Apple’s global, buy-it-everywhere blowouts, Xiaomi effectively used its “hunger marketing” strategy and very limited sales windows. The unusual marketing tactic proved successful: In December 2012, Xiaomi announced that it will sell phones directly from Sina Weibo, China’s top microblogging platform with 400 million members.Within two days of the announcement, Xiaomi said it had sold 50,000 smartphones in five minutes, with 1.
3 million additional reservations. In August 2013, the first batch of its new phone – Xiaomi Red Rice, 100,000 units, was snatched within 90 seconds after they were announced available. Xiaomi’s smartphones are typically made available in batches of 200,000 to 300,000 on its Web site. Facing the complaints from the people who didn’t get the phones, Xiaomi doesn’t acknowledge that its limited supplies are meant to inflate demand.Instead, the company responded that gauging consumer reaction before rolling out more handsets is the way that it keeps the prices down. While Xiaomi started out designing everything in-house, Foxconn is doing the manufacturing at this point.
Thanks to the modularity of the manufacturing process, Xiaomi is able to ramp up its production using Foxconn's tooling and Inventec's manufacturing resources. There are signs that it may become one of Foxconn’s top five clients this year. However, Xiaomi is not yet at the point where it custom-designs its own chips. Thirdly, there is a real difference between Apple and Xiaomi: price.Apple markets its products as luxuries, especially in China. They’re expensive, and often viewed as status symbol.
Xiaomi, on the contrary, claims that it sells its phones at almost no profit. Whether that’s actually true is debatable, but that’s certainly a drastic difference in the way the two companies price their products. It has been a huge part of the reason why Xiaomi has turned so successful within such a short time frame.Apple-Amazon- Google Business Model "Xiaomi looks a bit like Apple but is really more like Amazon with some elements of Google." – Lei Jun said to Reuters The phone business is very low margin today.
Per one market research report, the market for the sub-$200 smartphone is estimated to be on the rise and is expected to reach 750 million units from now to 2018. Most smartphone companies, including Apple, are starting to position themselves to benefit from this market. Xiaomi smartphones are quite different from the league as they carry high-end specs but are priced like a mid-range smartphone because the company is aiming at revenue from services rather than devices.Xiaomi’s handsets currently range from 799RMB to 2,499RMB (US$130 to US$408), about half the price of an iPhone in China. The recently launched Mi3 has a five-inch 441ppi screen capable of 4k resolution, a 13 megapixel camera, but only costs 1,999RMB, ($327) for the 16GB version and 2,499RMB ($408) for 32GB. Xiaomi’s capability to make high-quality smartphones with low cost is the result of the high level of modularity in the handset manufacturing industry.
The level of abstraction and modularity enables the low-end disruption.Modularity has a profound impact on industry structure. In particular, there are three key ingredients for the conditions of modularity – specifiability, measurability and predictability of component attributes and interfaces. These features enable independent, non-integrated organizations to buy and assemble components easily. The new architecture provided conditions that allowed the emergence of product modularity and what has been termed ‘structured technical dialogue’, permitting efficient coordination between firms for the assembly of a standards-based product.On the other hand, China's mobile Internet business is estimated to be worth around $30 billion by 2015 from roughly $9 billion in 2012.
Xiaomi’s big idea is to sell high-end smartphones at or slightly beyond the cost of materials and eventually monetize higher margin through software and services, and at the same time make that phone experience even better. It is like Apple iPhone users pay for software from the App Store. At the same time, the business model of Xiaomi is similar to that of Amazon, especially Kindle Fire, where profits come from the online business.To a certain extent, it’s also like the Nexus phones -- building business on services by selling mid- to high-end smartphones at cost. In addition to the company’s major revenue source – gaming, other revenues are mainly generated from the built-in browser with paid placements on the start-page, paid search, and the app center.
Moreover, the company has been selling paid theme designs that the sales must be minor compared with gaming. In the midst of emergent stage, Xiaomi is chasing aggressively for growth, while has been very patient on profitability.Even though the company is already profitable now, its monetization plans in the near future. It now sells the best possible products at the lowest possible prices – which means they’d try to gain as many users as possible and profit from them later and gradually. Looking around, companies with considerable user bases, Qihoo, Sogou, UCWeb and the like, are all trying to profit from every possible source, gaming, CPM/CPC-based advertising, CPC/CPS-based e-commerce transactions, paid digital content, and etc.
When it comes to a customized Android ROM? It works the same. What Xiaomi’s success means to Android and Apple?Xiaomi Phone is powered by the company's self-developed MIUI Android (2. 3. 5) system.
MIUI is a heavily customizable Android ROM based on the works of CyanogenMod, a Chinese startup that officially offers its free software to 12 well-known Android handsets, including the HTC Desire, Samsung Captivate and Motorola Droid. Google's Android operating system is used by many smartphone makers such as Samsung, Sony, HTC, and Lenovo. Google licenses it free to all the vendors, which continued to reign as the top mobile operating system in China, according to Kantar Worldpanel's latest figures (Exhibit 4).Everyone's loss is Android's gain in China.
Now let’s look back on Apple. It is gaining market share on its home market while losing it everywhere else. Not very long ago, market share was a term that never concerned the Cupertino-based company, which enjoys much higher profit margin than its peers. Not until recently that Apple has realized that it may have to release some type of "affordable" iPhone aiming at emerging markets, especially the world’s largest and quickly growing Chinese market.
