Xiaomi, a three-year-old
Chinese mobile phone company, recently completed its latest round of
financing. The firm is now valued at $10 billion, more than what
Microsoft paid for Nokia's handset business and equal to the value of
Lenovo, the world's largest PC maker.
Xiaomi's latest product
launch in Beijing was almost a rock concert. Its devoted fans—some
adorned with glow sticks—overflowed into the aisles as Lei Jun, the
company's founder and CEO, strode onto the stage to give a detailed
description of the new product. To drive home his message, Mr Lei wore a
black polo shirt, jeans and black converse shoes, similar to the
trademark outfit of the late Steve Jobs, Apple's former boss.
Critics say Xiaomi
products are cheap imitations of Apple's ingenuity. Xiaomi phones
contain high-end components such as a Qualcomm processor and a Sharp LCD
touchscreen, all assembled by Taiwan's Foxconn – which also makes the
iPhone.
To begin with, Xiaomi
sells its handsets only in China. Customers don't need to have a
long-term contract with a telecom operator, and the phones are sold for
1,999 yuan ($326). A comparable model from Samsung would cost at least
twice as much.
The phones are only sold
online, via the Xiaomi website, and are not available in shops. This
cuts out middlemen and enables Xiaomi to pass the saving on to
consumers. Each model is made available in batches of 200,000 to 300,000
and sells out so quickly that some analysts claim the company is
creating artificial shortages to generate buzz through "scarcity
marketing." Mr Lei says Xiaomi produces according to market demand in
order to avoid wasting resources in unsold inventory.
Xiaomi's users are at the
heart of its new product development. The phones are pre-installed with
MIUI – a highly customizable Android interface that allows hundreds of
thousands of advanced users to tinker with the interface and invent new
features. The most promising user suggestions get included in the
official release, allowing other users to comment or make further
improvements. While Apple releases its iOS every 18 months, Xiaomi
releases a new MIUI every week. Its fan base has translated the original
MIUI into 24 different local languages for markets outside China, all
done without a dime of R&D investment from Xiaomi.
Because it sells its
handsets at cost, Xiaomi positions itself as an internet start-up to
monetize other businesses. In August 2013 Xiaomi earned 20 million yuan
by selling services, up from 10 million yuan in April. Although some may
argue that selling games, custom wallpapers and virtual gifts has
limited growth potential, China's internet giant Tencent sold $5 billion
worth of virtual goods last year. Some big names are convinced by
Xiaomi's strategy. Investors to date include Singaporean sovereign
wealth fund Temasek, Qualcomm, and Yuri Milner, the founder of Russian
investment firm DST.
A new China story?
When Chinese firms go
abroad, they typically leverage their manufacturing scale at home to
compete internationally with low-cost products. Haier, Huawei and Lenovo
all went down this path before moving up the value chain.
Xiaomi, however, is
different. It outsources all the assembly and owns no factory. It
focuses on practicing open innovation, building a community of users,
and branching out into different mobile services in a concerted effort
to monetize its installed base of phones—not very different from the
strategy of many Silicon Valley start-ups. Perhaps the strongest
endorsement came from a former Android executive, Hugo Barra, who joined
Xiaomi in October and is now in charge of the company's international
expansion.
This new class of Chinese
companies represents an important potential growth engine as the country
looks to move away from a manufacturing/investment growth model to one
based on services and consumption. Xiaomi–which means "little rice" in
Chinese—may not be that small after all.
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