After a rapid four-year rise to become one of China’s largest smartphone makers, Xiaomi Corp. has hit slowing sales growth and faces rising competition from others who have adopted its low-price, online-focused strategy. Now it is one of China’s largest smartphone makers and is expanding overseas, but experts wonder whether its business model is sustainable and whether its success can translate abroad.
Lei Jun, co-founder and chief executive of Xiaomi, sat down with The Wall Street Journal. Below are interview excerpts, translated and edited for length and clarity:
WSJ: Xiaomi has accomplished a lot but is facing many challenges as well. What are the biggest?
Mr. Lei: First, we need to manage overly high expectations for Xiaomi, both internally and externally. We used to grow several-fold a year. But the global economy is a mess, and we
33% in the first half of this year. Everybody said, “you’re not growing fast enough.” That’s absurd. We’re still a five-year-old startup. This kind of expectation weighs heavily on us.
Five years ago, we had no baggage. We started from zero. Now everybody challenges us, and we feel like we’ve got something to hold on to and we need to win every battle. I don’t think this is what I want. We can easily get lost in this competition. What we want to accomplish is we want to be a stronger player in the smartphone industry, not a bigger player. So we need to manage expectations both internally and externally and follow our own pace. The core is to maintain the baseline – user experience and product innovation. How are we going to make products that can wow people?
Second, we need to prove that our business model can be copied overseas successfully, at least in one market. We’ll need to try our best to be successful in a few emerging markets in a big way. We give ourselves three years to be the top three or even No.1 smartphone brand in India. Our business model isn’t about how many phones we sell. We can’t monetize unless we become a highly influential player in a country or a region. For example, we’re doing business in Taiwan and Hong Kong, but their population sizes are too small and it’s very hard to operate online businesses. The core of an online operation is population size. Therefore we want to sell to 10% to 20% of the population in India and other big countries. Then we’ll have the influence of a huge media organization and the opportunity to monetize in various ways.
The challenges we face are the expectations to hit those numbers. Our competitors are getting stronger too. We were the innovator, the challenger and the disruptor, and people didn’t take us seriously. All of a sudden we became No.1 in the market, then everybody turned their fire on us. We were under quite a bit of PR and competition pressure in the past year or so.
WSJ: Xiaomi President Bin Lin said online that it would be tough to have any big breakthrough in smartphones in the next five years. How will Xiaomi innovate? How can you win the competition?
Mr. Lei: China’s smartphone industry is in elimination games now. Cellphones have always been the most competitive market globally. It’s unbelievable that there are still a few dozen phone companies in China now. There aren’t many left around the world. This elimination game will last for another two to three years. We focus on making good products and double our market share. We still have a lot of room to improve. Once we get better at what we do, I’m sure we’ll be able to double our market share. The more competitive the better for me because I have first-mover advantage and scale advantage. The competition might be too bloody, too bitter for others. For me, it had better get bloodier.
As for innovation, hard to break through doesn’t mean breakthroughs are impossible or unnecessary. While it’s hard to innovate in big ways, there are many things in the user experience that’s worth it for us to think harder and innovate. In the past you made a phone, hoping to sell it to billions of users in the world. Now you can’t think in this way. You’ll have to design different phones for different crowds in different scenarios. It will be hard to have big innovations targeted at all users. But innovating for different user scenarios hasn’t really started. Every group of people has its own needs.
WSJ: Can you explain Xiaomi’s business model? If you’re not making profit from hardware, where do you make profit from?
Mr. Lei: I’ve explained this 10,000 times. Perhaps it’s because Xiaomi is the first company that tells you that hardware can form a platform too. We see how Tencent, Baidu, Google and Facebook set up their platforms. Xiaomi found that if you get it right, phones can form an online platform too, and a huge one. How huge is it? Today 130 million Chinese use Xiaomi phones. That’s 10% of the population. Almost all our users are young, so we might have influence on 20% to 25% of the young population. They watch TV, listen to music and read books and news. Xiaomi provides all of these. Doesn’t this make Xiaomi a huge content channel? Each day, our users use their phone 115 times and spend four and half hours on their phones. Just imagine what a powerful broadcast platform I have!
WSJ: Xiaomi made two important hires this year, one for intellectual property and the other for chief financial officer. Where is Xiaomi in IP? By hiring a finance chief, does it mean you’re considering an IPO?
Mr. Lei: Former Qualcomm global senior vice president Wang Xiang joined Xiaomi in July. He’s in charge of our IP. We should be able to make progress in this. Xiaomi pays great attention to innovation. Last year we applied for 2,700 patents. This year’s goal is 4,000.
As for IPO, we won’t consider it within the next five years. The reason is simple. I hold controlling stakes in five public companies and understand the pros and cons of going public. I believe five years from now will be better timing for Xiaomi to consider an IPO.
WSJ: Has the macroeconomic situation affected Xiaomi?
Mr. Lei: Of course it has. The Chinese yuan devalued. So did the Indian currency and the Indonesian currency. The Brazilian currency was even worse. If we don’t adjust our prices, currency devaluations would mean we lose money. Fortunately, our international business is still small, less than 10% of our revenue.