No one chooses to be the underdog in any sphere, but that is what many young hopeful tech startups do. Nearly 1,300 a month in the US alone try to duke it out with the big guns hoping to get their idea materialise from venture capital funds. Sadly the path to becoming a billionaire tech guru is littered with failure. The market is so competitive that in the US roughly 92% of fledgling companies fail within five years. Now imagine being an overseas entrant with arguably fewer resources to hand than those in Silicon Valley, and the chances of success fall even further.

While this sounds dire and utterly pointless to even consider getting yourself muddled up in, it is precisely what Xiaomi (Shao-me) has managed to overcome since 2010. What literally translates as “Millet Technology”(小米 科技) the tech conglomerate has risen to become a major contender in the $3 trillion global consumer tech market. Global sales of their “Mi” smartphones and internet-connected devices reached more than 300 million activated devices and a yearly revenue of $2.3 billion in 2017.

With these firms seemingly coming of age and reaching billion dollar profit margins, their expansion into overseas markets is likely to be inevitable. While Xiaomi has not firmly set its eyes on the US it is expanding aggressively into lower tiered markets that are easier to compete in. It is only a matter of time before sales from 50 plus countries builds a war chest that can be used for such expansion.

After all, many in China would think that the US, Japan, and European markets to be the premier innovation hubs in the world. So, having Chinese tech behemoths fighting toe-to-toe with Amazon and Google does show how the nation is becoming a leading innovator.

For the time being at least, the firm is set on expanding its portfolio away from its staple – the smartphone – but also moving in to lighting, air purification, voice assistants, AI and even rice cookers.

The Early Days and Cost

Given this meteoric rise, what is the secret to what people are calling “China’s Apple”? As always, it begins with the very early days of the company when its primary strategy was formed.

By offering top-spec phones at near-cost prices it quickly made a name for itself and drew a huge following. At a time when iPhones were selling for hundreds of dollars, customers with some cash in hand and some patience could get a similarly performing phone for nearly a third of the price. They also rolled in their own custom OS built on Android to provide a clean user experience with features that the customers wanted.

To lower costs, even further phone models were only being advertised online and could only be bought through pre-ordering. Phones were also officially launched many months later to extend their product’s lifecycle without needing upgraded components. As Xiaomi’s Hugo Barra explained:

“The vast majority of the components [in our devices] are still the same, so in terms of supply chain and component sourcing, we’re on the same supply contracts as Redmi 1, which means we’re still getting the same discounts on components,” he explained. “We can continue to ride the cost curve, so the importance of having a very small portfolio is significant — the fact that we only launch a few products each year, and (the fact that) we only have two product families.”

According to Tech-Thoughts, this positioning translated into much lower costs associated with expenses (selling, general and administration) needed for a company. Apple and Samsung spend ~$70 and ~$160 respectively in expenses per device shipped compared to Xiaomi’s $7. With profit margins being razor-thin and saving elsewhere has given it a real competitive advantage.

Manufacturing aside the company is also committed to making software updates, replacement parts and other services customers need. Xiaomi’s emphasis on customer relations is so ingrained in its culture that it even holds regular votes with its users on new features and concepts to add to it OS with updates delivered every Friday. The desire to nurture customers from the earliest stages stems from the CEO and founder Lei Jun’s experiences working at Kingsoft:

“When I was with Kingsoft, I had the opportunity to work with Nokia and Motorola, two mobile phone giants of their time. One day, I pointed out to their R&D boss, some inadequacies. After that, they merely acknowledged my input, but never acted upon what I had said. So I thought to myself, if I make a phone, you can tell me anything you wish for it or what’s wrong. If it is justifiable, we will work on it immediately. I’ll give you an update every week and you may even see your wishes come true within a week.”

The strategy has paid dividends as the end of 2017 has seen its annualised sales in Europe and Asia grow a staggering 91 per cent. If it is able to maintain this trajectory, the firm is comfortably set to overtake the more established brands of OPPO and Huawei, which could then make it the third largest in the world, just behind Samsung and Apple. Though the skeptical could place this thought in the land of fantasy, those old enough to remember the unlikely scenarios of IBM being unseated by a young and nimble Microsoft. In tech, just about anything is possible.

In a nutshell “The Xiaomi Way” of getting work done is through a multi-pronged approach of having a democratised and user-driven business model, while products are being busily made through a constellation of smaller entities. The tangible results are a loyal following who sense Xiaomi’s commitment to design and quality.

The Comeback From Failure

Xiaomi’s billionaire founder Lei Jun – often called “the Steve Jobs of China” – faced a setback in early 2015 and 2016 when smartphone sales reportedly fell to 40 million, from 70 million just a year earlier. The contraction caused it to retreat back from overseas markets like Indonesia and Brazil, while the company blamed supply-chain problems due to rapid growth.

Perhaps its largest failure was a consequence of its over-reliance on online marketing. Those less savvy with the internet, like those in more rural areas, were left out of the loop.

From failure comes plucky optimism. Seeing the near universal consumer appeal that a shopfront gives Apple and Samsung, Xiaomi has also ventured this now well-trodden path. The firm is set to open stores in Indonesia to gain further traction in brand recognition.

In many ways, the firm is becoming a symbol of China’s newfound confidence in the global marketplace. No longer is it

While internationally China’s old reputation of being a maker of lowest quality is being stubbornly shed, at home at least, the old made-in-china brand no longer fits the emerging made-in-china.

The New Ecosystem

In recent years, however, the company has sought to divest itself from smartphones, the absolute linchpin of its success, and move into the Internet of Things (IoT) space. As Hugo Barra explained, it all started with a battery:

“The initial goal was to populate our ecommerce store with interesting products that people will love and that will cause them to keep coming back,” Barra says. “If all we sold were phones, we probably won’t have much traffic because people only buy phones once in a while. So the idea was to have a family of products that will allow us to have a full on e-commerce store. The first thought was, ‘Let’s focus on mobile accessories,’ and that’s how the first product in which we invested, the Mi power bank, came into being.”

A quick solution would be to harness the power of its home turf’s manufacturing base; Shenzhen. The 18 million strong metropolis a few miles away from Hong Kong is perhaps the largest electronics development area in the world. It’s the source of most of the phones in the world as Apple, HP, and every other household name has a manufacturing base there. The company concluded that it would be elementary to find a maker to design and build its peripherals. Later, the straightforward task of placing their logo on the top was all that was needed. Unfortunately, this was not the case.

The company realised that many product makers and developers are not geared for the long-haul of development. Many are cutting corners, using low-quality materials and ill-designed products to get rich quick. The issue facing the company is that sub-par devices, that are seamlessly interoperable with Mi devices, could devalue the brand. Just imagine being a thoroughly satisfied user of a Mi phone, and through the halo effect, you then decide to buy a compatible smartwatch for swimming. You later find out that it comes with a litany of problems and so goes Xiaomi’s reputation – straight to the rubbish bin.

Unlike Apple, the company wanted to divest its role in centralising its innovation and ecosystem but instead draw in companies. Lei Jun’s idea was to literally fund start-ups and bring in companies which could then produce products in parallel to Xiaomi. Working alongside each other the firms are attempting to complement and build upon the work of other companies. Being also being small it further helps them by being nimble enough to react to market conditions in their niche. So while Xiaomi makes the new generation of its phones, there will an army of companies teeming to build instantly compatible lights, robots and just about anything else.

Zimi was the first company to receive funding to build the Mi Power Bank for its phones and devices. Xiaomi was instrumental in guiding the company through its product design and manufacture. The ability to nurture startups and successfully transmit a corporate culture that translates into good design led the company to sell more than 50 million power banks to date. In fact, it is almost always sold out on their online store.

According to Shunwei Capital – a firm with over $2 billion invested in Chinese tech firms – Mi’s ecosystem of 77 companies generates $2.5 billion USD annually. It has also managed to gain a 20% market share in China’s air purifier market and has sold 18 million headphones and 4 million cameras in 2017 alone. The “Ecosystem Model” has given the company a “third leg” to stand on from the traditional “two legs” of gaining revenue from hardware and software alone.

Onwards

Yesterday’s annual conference by Xiaomi indicated a few tidbits to what the firm is vying for in the year ahead. The launch of its new MIUI 10 OS which will be integrated into all devices to build an intelligent network. Demonstration of a new LED overhead projector as well as showcasing a new home assistant robot which can follow the user around the home on wheels.

It is clear that the firm is making a leap further into IoT devices and firmly placing the user at the center of its tech universe.

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