Entrepreneur Lei Jun’s smartphone startup used social networking to win over Chinese, but can he repeat overseas?
Founder, Chairman and CEO of Xiaomi Global, Lei Jin (L) and Vice President, Hugo Barra gesture during the launch of Xiaomi’s Mi4i smart phone and Mi Band in New Delhi on April 23, 2015
By Eva Dou
The Wall Street Journal
NEW DELHI—When Xiaomi Corp. launched a new smartphone here in April, there was an air of chaos. Employees were still stuffing gift bags that morning, and a few staffers from Beijing headquarters, pressed for time, arrived on tourist rather than business visas.
After Xiaomi Chief Executive Officer Lei Jun stepped onstage, his first time speaking publicly in English, he veered off script. His odd phrasing went viral in online videos of him repeatedly asking the crowd, “Are you OK?”
No matter. The Chinese smartphone seller’s online offering of 40,000 phones sold out in 15 seconds. Hundreds lined up outside the launch venue, including 17-year-old Raghav Goyal, who drove seven hours to attend and said the Xiaomi phone was a much better value than its big-name rivals.
“Apple is gone!” he shouted after the unveiling. “Apple and Samsung are gone!”
That is the kind of zealotry Mr. Lei, 45, is counting on to replicate overseas his success in China, where he has used an unusual mix of social-network marketing, fan-appreciation festivals and his own tech-star status to become No. 2 in smartphone-market share after Apple Inc.
Little known in the West and just 5 years old, closely held Xiaomi (pronounced sh-YEOW-mee) is in ways still a disorganized startup. But it is also among the world’s fastest-growing smartphone companies and most valuable startups, with a valuation of $46 billion by some estimates.
Selling full-featured phones at near cost, it has come to battle Apple and Samsung Electronics Co. for the No. 1 spot in China. It dented Samsung SSNHZ 0.00 % ’s China market share badly in 2014, one factor forcing the South Korean company to post a sharp profit drop and to rethink its strategy.
Xiaomi’s high-end 64 GB Mi Note Pro smartphone costs 2,999 yuan ($489) in China, compared with 6,088 yuan for a 64GB Apple iPhone 6 and 5,288 yuan for a 32GB Samsung SSNHZ 0.00 % Galaxy S6.
But Mr. Lei has bigger, global ambitions, of which his push into India is part: to create the first Chinese consumer brand that is cool abroad. China, he says, is no longer about cheap manufacturing and copycats. “Xiaomi’s mission,” he says, “is to change the world’s view of Chinese products.”
Mr. Lei’s mission echoes that of South Korean concerns a generation earlier. Companies like Samsung SSNHZ 0.00 % used low-price me-too gadgets to build global brands and grab market share from Japanese electronics makers, who had done the same still earlier to American companies.
In seeking to turn his brand into one the world recognizes, Mr. Lei wants to build on the Xiaomi name’s remarkable rise in China. Xiaomi sold its first smartphone in mid-2011. In the 2015 first quarter it had 13.7% of the Chinese market, just behind Apple’s 14.7%, according to IDC. Xiaomi says its sales more than doubled last year to 61 million smartphones and it expects to sell up to 100 million this year.
A brand called ‘Mi’
Xiaomi’s phones, branded “Mi” for English versions, have yet to demonstrate that Mr. Lei’s business model in China—where Xiaomi doesn’t advertise much and sells mostly online—will translate abroad. It doesn’t disclose sales outside China; IDC estimates about 8.6% of its 2014 smartphone shipments were abroad.
Mr. Lei has had to alter his approach in India, where most consumers buy in physical stores, by striking a deal with brick-and-mortar retail channels. Xiaomi expects to enter Brazil this year, but Mr. Lei says it will be cautious about entering other countries after concluding it needs time to grow in markets it already sells in, including Singapore and several other Southeast Asian countries. Xiaomi says it doesn’t have immediate plans to sell phones in the U.S.
Xiaomi faces new low-cost competition at home, where it is also selling more phones through physical retailers that charge higher prices. And it lacks the patent portfolios that big rivals use to fend off lawsuits. Sweden’s Ericsson has sued Xiaomi in India, claiming Xiaomi’s phones infringe on its wireless patents. Xiaomi declines to comment on the case. Ericsson says it sued “as a last resort” when Xiaomi didn’t respond to attempts to discuss licensing.
Mr. Lei, at Xiaomi’s fifth-anniversary news conference this spring, spoke of the expectations on his company to perform. “Sometimes when I think about it,” he said, “I can’t breathe.”
Xiaomi, like many tech companies, pays contract manufacturers to build its products. Its lineup includes television sets, routers and smart wristbands that it designs itself, and it has invested in startups that make everything from air purifiers and smart light bulbs to a GoPro GPRO -like action camera and Segway-brand scooters.
Phones are its biggest sellers. It designs them with specifications similar to those of Apple’s iPhones, Samsung’s Galaxy line and other models. In product launches, it compares features of its new smartphone with the iPhone’s, then announces the price—half the iPhone’s or less. Its latest model, the Mi Note Pro, is encased in glossy white glass and is about a millimeter thinner than an iPhone 6 Plus.
Xiaomi keeps marketing costs low by spending largely on cultivating a fan base instead of on ads. It holds fan parties every few weeks in a different city, where executives meet enthusiasts and give gifts. It has an army of employees to interact with consumers on social media.
It sells the majority of its phones online, where prices don’t need to include a profit margin for retailers. It sells them at near cost, Xiaomi executives say.
Mr. Lei’s goal is to get customers eventually to buy Internet services that are more profitable than Xiaomi’s smartphones, such as games, apps, videos, financial services and advertisements in its content.
“In the smartphone world, there is no one comparable” with its business model, says Aditya Awasthi, research head at LexInnova, a Houston tech-consulting firm. “It’s a new-age smartphone company.”
Born a schoolteachers’s son in central China’s Hubei province, Mr. Lei found inspiration to be an entrepreneur after reading about Apple co-founder Steve Jobs. At Hubei’s Wuhan University, which gave students only four hours a week on computers, he says he sneaked extra time and carried a paper dummy keyboard to practice. After college, he founded a software startup with classmates.
“We did very average,” he says, “and that was a big blow to me.”
In 1992, he joined a software firm, Kingsoft Corp., becoming chief executive in five years. Kingsoft missed the early rise of China’s Internet industry, he says, and he resigned in 2007 after its initial public offering. He rejoined Kingsoft as chairman in 2011; he is still chairman and its largest shareholder.
“He reflected a lot on himself, on Kingsoft, and why we missed the big trends in Internet,” says Hongjiang Zhang, Kingsoft’s CEO. “He’s someone who really wants to do something that has huge impact.”
‘A pig can fly’
Mr. Lei says he learned that seizing the right opportunity was as important as hard work. “Even a pig can fly if it stands at the center of a whirlwind,” he says.
After several years in semiretirement, “one day I woke up and thought, ‘I’m already 40 and I’ve achieved nothing,” he says. “I had a dream when I was young to found a global, first-rate company.”
In April 2010, he founded Xiaomi with Bin Lin, a former Google Inc. and Microsoft Corp. MSFT executive. The name means “millet,” a Chinese staple that is nutritious but inexpensive. While consumers in China at the time could buy expensive foreign smartphones or cheap Chinese knockoffs, there was a void between that Mr. Lei decided to target.
“He told me he’d sell over the Internet, engage users actively,” says Hans Tung, an early Xiaomi investor and GGV Capital managing partner, of Mr. Lei’s January 2010 pitch. “We both believed e-commerce and mobile Internet would be the big trend.”
Mr. Lei offered stock to woo veteran engineers and executives from Silicon Valley companies, early investors say. He invested his own money and attracted funds from concerns such as Qualcomm Inc. QCOM venture-capital arm. “It all added up to something very different from the scores of other OEMs I had met in China,” says Jeff Lorbeck, senior vice president of Qualcomm China, referring to gadget makers.