China’s Plan to Rule the World: Make All the Gadgets
XIAOMI BECAME THE world’s most valuable startup following a straightforward plan. “We noticed a trend of switching from feature phones to smartphones in China,” says Liu De, who co-founded the company in 2010. “We thought, ‘Hey, there could be a big opportunity there.'” So Xiaomi made good phones, stirred up excitement for them online, and sold them at a good price. By 2014, it was the fifth-largest seller of smartphones on the planet and worth $46 billion.
It didn’t last. Fellow Chinese upstarts Oppo and Vivo now outsell Xiaomi, which has seen its Chinese market share drop by more than a third. Users are now buying their second or third phones, and are willing to pay more to get more. Even as the average price for a smartphone dropped worldwide, it spiked in China as people embraced flagships like the Huawei P9 and Oppo R9. Xiaomi may be worth a fraction of what it once was, and faces the question that’s plagued the likes of BlackBerry and Apple: You had one good idea. Now what?
For Xiaomi, the answer is build the coolest, most desirable phone anyone’s ever seen, and move into any market that isn’t already saturated. Oh, and instead of making and selling smartphones, make and sell just about everything.
Xiaomi’s first successes came from the rise of smartphones and its early understanding of e-commerce. Now De says another wave is coming. The Internet of Things, he believes, could be bigger than phones. “Every electronic device you use in your life could also become smart,” he says. Xiaomi started exploring the idea in 2013, and quickly realized no single company could dominate the entire sector. Consumers own one phone but will have dozens, even hundreds, of connected devices.
Instead of trying to build them all, Xiaomi went shopping. It has invested in 77 companies, giving them access to its designers, marketers, and massive supply chain in exchange for a 10- to 20-percent stake and the right to brand and sell those products. “We’re using our entire platform to lift these companies to the next level,” De says. It has sold more than 50 million connected devices under that strategy, and seen four of its portfolio companies hit a market cap over $1 billion. The Mi Air Purifier, the most popular air purifier in China, emerged from a small startup under Xiaomi’s watchful eye. Xiaomi proclaims itself to be the world’s most successful hardware incubator.
This outsourced-but-integrated approach could make Xiaomi among the first to offer a complete portfolio of connected devices, controlled by a single app—Mi Home. It wants to be The Everything Company. And because it sits right next to some of the world’s biggest manufacturers, Xiaomi just might pull it off. No waiting weeks or months for prototypes to come back, no sending engineers and product designers on expensive trips to faraway factories. “It’s a unique model that I haven’t seen before, and that I think is only viable for a company that comes from China,” says Hugo Barra, the company’s global VP and English-speaking spokesman. Xiaomi isn’t alone in thinking this way, either. LeEco, Huawei, and Lenovo are among the companies who’ve found they can do more, faster, than competitors in the US and Europe.
But ultimately, everything comes back to the smartphone. It’s the most important device people own, the most popular device on the planet. If Xiaomi (or anyone else) wants people to buy its other stuff, it must sell a lot of phones first. And the best cheap phone won’t win anymore. Only the best phone wins.
Aiming High
About two and a half years ago, CEO Lei Jun told a small team of engineers to start working on a new phone. He didn’t give them a deadline, but he did give them a goal: Create a phone without a bezel. He wanted something that looked like a piece of glass, that felt different than the slew of identical handsets on the market. With such an audacious goal, Jun thought it might finally free Xiaomi from the endless cycle of incremental improvements.
This was no easy task. This clandestine team had to figure out how to ditch the speaker and make the case transmit sound. The engineers tossed the proximity sensor in favor of an ultrasound, gesture-recognizing one. They moved the camera to the bottom of the phone and shrunk it by half. They ended up with a device that was 93 percent screen, the closest anyone’s every come to a bezel-free phone. Xiaomi called it the Mi Mix and sold it as a limited-edition “concept phone.” It sold out in 10 seconds.
“It came at a time when people were questioning us,” Barra says. “All of a sudden they’re like, ‘Oh man, this is Xiaomi.’ Now they’re back to paying attention to our products instead of just thinking about shipment volumes and all these other boring business metrics.”
Those boring business metrics matter, though. People notice when you miss your sales targets (2015) and end the year with a melancholy note from the CEO promising “the worst is over” (2016). Of course, he did end that note saying 2017 would be all about artificial intelligence and internet finance and other big things, and he said the company’s mission is “innovation for everyone.”
He means everyone, everywhere. Including here.
The China Brand
Xiaomi’s first product to officially go on sale in the US was the Mi Box, a $70 Android TV set-top box. Before launching it, Xiaomi beta tested it with 100 members of the Android TV sub-Reddit. That sounds masochistic, but it’s in line with the company’s MO. “Our playbook is very simple,” Barra says. “We look for hardcore fans, people who love technology, and we focus on having a conversation with them.
Like other companies that have reached their saturation point in China (or have been rejected there outright), Xiaomi is currently focusing on India. The country looks a lot like China did not long ago: massively populated and largely unconnected. First movers with a solid product can quickly establish a lead. And so Xiaomi launched the Redmi Note 4 there this week. “Even this year, we’ll have one or two products selling in India that start to approach the volumes we have in China,” Barra says.
The rest of the world won’t be so simple. The US in particular poses a problem to Xiaomi and everyone else. “Its biggest challenge will be trying to get in through traditional channels,” says Tuong Nguyen, an analyst at research firm Gartner. Xiaomi excels at selling phones online, but Americans don’t buy phones that way, and getting into an AT&T store is tough. “Huawei, who’s been in it a lot longer than they have, can attest to how hard that is,” Nguyen says. It’s the same story in Latin America. “It’s often much cheaper and more convenient for me to walk to the store and look at the phone, rather than look at it on my phone, because bandwidth is so expensive,” Nguyen says.
Another problem: People don’t associate Chinese brands with innovation or luxury. They aren’t cool. And don’t forget that President Trump has made it clear just where he stands on China and everything made there. Still, the growth potential is so great that Xiaomi can’t not try. It helps that the time is right for an Everything Company with a suite of connected devices. “I don’t need more boxes,” Nguyen says. “I have lots of boxes that do many things. But I don’t have boxes that work together.”
Everyone wants to build the one system that unites all things, the sole platform for all the connected thing in your life. If one company could not only build the platform, but the things as well, it would change everything. And it may only be possible if that company is made in China.
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