China’s Xiaomi Plans to Give the World IPhone Cool at Half Price


As China’s Xiaomi Corp. began selling smartphones in Singapore this year, each batch sold out in just a few minutes. So when the company asked people on Facebook to spread the word that more phones would be available soon, one fan was having none of it.

“Spread the word so that my friend can compete with me to buy the phone in under 8 minutes?” wrote Zen Yeo, a 31-year-old documentary film director. “You must be kidding me.”

Such is the fervor for Xiaomi. Though the Beijing-based company is little known beyond Asia, it has become one of China’s top competitors in four years. Xiaomi’s appeal: It offers the technology and style of Apple Inc. (AAPL) or Samsung Electronics Co. (005930) at less than half the cost.

Now founder Lei Jun, 44, is taking his formula abroad. He’s beginning in markets with Chinese populations like Singapore and has hired Google Inc.’s Hugo Barra to lead the effort. Lei’s goal is to boost sales fivefold to 100 million phones in 2015.

“We’re moving as fast as we can,” Barra said. “We’re working around the clock with our supplier and manufacturing partners to meet demand.”

Xiaomi reflects a shift in China’s economy, with technology companies gaining prominence to match state-owned enterprises in sectors like oil and coal. The country’s standouts include Internet portal Tencent Holdings Ltd., computer maker Lenovo Group Ltd. (992) and Alibaba Group Holding Ltd., the e-commerce company headed for a multibillion-dollar initial public offering.

Make People ‘Scream’

Xiaomi is an example of a Chinese company succeeding through innovation and creativity, precisely the characteristics they’re supposed to have in short supply. The company’s phones run on Android, the operating system available free from Google and used by Samsung, among others. Lei makes his phones stand out through sleek design, software that anyone can customize and prices rivals won’t touch. He’s said that, more than revenue or profit, he wants to create products that make people “scream.”

Though the Singapore launch has been strong, the question for Lei is how well Xiaomi will translate in other new markets. Beyond China, his brand lacks the profile of BlackBerry Ltd. and Nokia Oyj (NOK1V), never mind Apple or Samsung. The task is doubly complicated because Xiaomi’s secret to keeping prices low is that it doesn’t advertise and sells directly over the Web.

“If nobody knows about you, certainly they are not going to buy online,” said Jeongwen Chiang, chairman of the marketing department at China Europe International Business School in Shanghai. “There will be some difficulty to overcome.”

Market Riptides

Lei founded two companies before he was 30, selling one to Amazon.com Inc. (AMZN) for $75 million and leading another, Kingsoft Corp., to its initial public offering. He remains chairman of the Beijing-based developer of business and gaming software.

In Xiaomi, which means millet in Chinese, he has built a successful company even as the riptides of the mobile-phone market have battered former leaders such as Nokia, BlackBerry and Motorola Mobility. Xiaomi’s valuation hit $10 billion with a fundraising round in August, or double the value of Waterloo, Ontario-based BlackBerry now.

“They did the right thing at the right time,” said Sandy Shen, an analyst with Gartner Inc. “Xiaomi addresses a segment that has been underserved by major brands, which craves the coolness of the latest technology at affordable prices.”

In expanding abroad, Lei is beginning in Southeast Asia, where the Chinese diaspora gives him a head start in name recognition. Xiaomi will begin selling phones in Malaysia in a few weeks, with Indonesia, Thailand and the Philippines following shortly, Barra said. The company is actively looking at India, Brazil and Mexico, too.

Production Challenge

Xiaomi will continue to focus on Web sales as it expands abroad, though it may try new approaches in certain spots.

“We will continue to follow our model of online sales and mobile operator distribution while allowing ourselves to experiment with other channels where it makes sense to do so,” Barra said. “We are constantly trying new things at Xiaomi.”

Brydan Foo, a 23-year-old Singaporean student, tried for months to import a Xiaomi phone without any luck. When the company’s Redmi phone went on sale in February for S$169 ($135), he scrambled to buy one before it sold out.

“From last year, I started to notice this Xiaomi,” Foo said. “The main thing that got my attention was the price. There have been a lot of similar products in terms of quality and design at easily three times the price.”

One challenge is expanding production to meet demand. Like most other major mobile-phone makers these days, Xiaomi doesn’t make its own devices and relies on contract manufacturers, such as FIH Mobile Ltd. (2038) and Inventec Corp. (2356), to build them.

‘Thunderous Army’

Xiaomi has to persuade suppliers of its prospects so they’ll invest in plants and machinery -- and rapidly, given its growth. Xiaomi has boosted supply commitments 31-fold since November 2011 to 3.2 million devices a month as of December.

“We will continue to improve manufacturing capacity as we expand into more countries,” said Bin Lin, Xiaomi’s president and co-founder. Lei declined to discuss overseas expansion plans.

Xiaomi’s rise has been aided by Lei’s track record as one of China’s most active entrepreneurs for more than two decades. Lei, whose name can be translated as “Thunderous Army,” is one of the most popular figures on Chinese social media, with more than 8 million followers of his Sina Weibo microblogging page.

He isn’t as well-known beyond China as fellow technology pioneers, such as Alibaba’s Jack Ma and Baidu Inc.’s Robin Li. Unlike them, Xiaomi’s chief executive officer doesn’t speak English.

Lei has said he learned computer programming on the Apple II model in high school and considers its designer, Steve Wozniak, to be an early inspiration.

Joyo.com Sale

After completing coursework at Wuhan University in two years, Lei helped found software maker Kingsoft in 1992. He served as CEO from 1998 through 2007, during which time he oversaw the company’s expansion from office application software into Internet security and online games.

While running Kingsoft, Lei helped establish other Internet companies, including co-founding Joyo.com in 2000. Lei built Joyo.com into China’s largest online retailer of books, music and videos. Amazon bought the company in 2004 and it became the core of the Seattle-based company’s China operations.

That track record has made it easier for Lei to line up backers for Xiaomi, said Richard Liu, managing director of Morningside Venture Capital. Morningside is the earliest and single-largest external investor in Xiaomi, Liu said, without supplying the value of the investment or size of the stake.

“Lei is very capable so, no matter what he wants to do, he has a high chance to be successful,” said Liu, who has known Lei since 2003. “He’s a world-class entrepreneur with vision, leadership and ambition to really build up a global company.”

Xiaomi Fundraising

Xiaomi initially raised $131 million from backers including Singapore’s Temasek Holdings Pte., Qiming Venture Partners, Qualcomm Ventures, IDG Capital and Morningside. Its fundraising valuation in August puts it close to the almost $12 billion market value of Lenovo Group Ltd., the Beijing-based computer and smartphone maker that’s been around since 1984.

“Xiaomi is going to be a huge company,” said Hans Tung, one of its earliest investors and a board member from 2010 to 2013. “They don’t have any immediate plans for developed markets like the U.S. Instead, they are trying to be big in Southeast Asia, India and Latin America.”

Xiaomi’s rise is all the more dramatic because it comes as hardware companies everywhere have struggled. Personal-computer makers like Dell Inc. have floundered as PCs became commoditized, and mobile-phone makers have gone through a brutal shakeout. Even Samsung, the world’s largest smartphone maker, has posted two straight declines in quarterly profit.

China’s Rise

China has been a fortuitous base. The wireless market has exploded to become the largest in the world, with 1.25 billion users now compared with 647.7 million in March 2009.

That’s bolstered the fortunes of Chinese phonemakers, from Xiaomi and Lenovo to Huawei Technologies Co. and Coolpad Group Ltd. Huawei and Lenovo were among the top five smartphone vendors worldwide last year, shipping a combined 94.3 million units, according to researcher International Data Corp. Global shipments surpassed 1 billion units for the first time.

Xiaomi captured 7 percent of the China market in the fourth quarter, ranking just ahead of Apple, according to researcher Canalys. Lenovo, Coolpad and Huawei also sold more than Apple, often with devices costing as little as $100.

Social Media

Xiaomi has distinguished itself through its approach to social media and marketing over the Internet. Lei pushed the strategy early on, and his status as a tech industry celebrity helped him draw attention. In addition to his personal followers, the company’s Weibo microblogging account is tracked by more than 8.5 million followers.

The company caters to these hardcore fans, who support the brand by word of mouth and make up for the lack of advertising. Xiaomi’s website lets customers give input on product plans through the company’s blog and interact through discussion groups. To celebrate the company’s fourth anniversary this month, Lei declared a “Fan Festival” online shopping event with discounts and coupons. Lei autographed invoices for some buyers.

Apple is getting more aggressive on Xiaomi’s home turf. It just cut a deal to sell phones through China Mobile Ltd., the world’s largest carrier, after only being available on two smaller operators. China Mobile will expand iPhone sales to more than 300 cities by year’s end from 16 in January, Chief Executive Officer Tim Cook said on a Jan. 27 conference call.

Xiaomi vs. Apple

In China and beyond, Apple may struggle with customers looking at specs, rather than brands. Compared with the iPhone 5c, for example, Xiaomi’s Mi3 has a larger, sharper screen; a camera with higher-density pixels; and speedy quadcore processors from Nvidia Corp. or Qualcomm Inc. The Mi3 sells for 1,999 yuan without a contract, compared with 4,488 for the Apple device.

“From the standpoint of processor, screen size and camera, it is superior to the iPhone,” said Jessica Kwee, a Singapore-based analyst with Canalys. Carolyn Wu, a Beijing-based Apple spokeswoman, declined to comment on competition with Xiaomi.

Lei and Xiaomi have been described as China’s answer to Jobs and Apple because of the obvious similarities. Both companies make smartphones and their physical designs are similar -- rectangles with rounded edges and touch screens. Lei also favors jeans and black shirts, like the Apple co-founder.

Not Apple

Still, the tactics and strategies are very different. While Apple engineers are famous for secretly concocting new products at the Cupertino, California, headquarters and then presenting them as gifts from the heavens, Xiaomi solicits customer input and incorporates their thoughts. The Chinese company also lets people modify their phones’ software and swap out batteries or SIM cards. Apple doesn’t even let customers touch the iPhone’s battery -- and got sued because of it.

Pricing is a reflection of deeper differences. Apple positions its phones at the top of the market -- premium products that people should pay up for. Lei has said that Xiaomi is more like Amazon than Apple in that respect. It sells products as close to cost as it can -- making money on content and services.

The question is whether that approach will work overseas, in markets with lots of cheap phones and where Xiaomi hasn’t built up brand-name appeal. It likely will become more difficult as the company moves beyond countries like Taiwan and Singapore where Chinese speakers are familiar with the upstart.

“In a mobile-phone landscape, Xiaomi’s rise to prominence is not an everyday occurrence,” said Melissa Chau, senior research manager for client devices at IDC Asia/Pacific in Singapore. “Whether they can rise to the next big milestone of becoming a global player is their next big challenge.”

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