“Odd man out”

The story
Chinese mobile phone maker “Li” was founded in April 2010 by Lei Jun. Listed by Forbes as
one of China’s wealthiest entrepreneurs, Mr Lei was already worth $1.7bn, having co-founded
three successful technology start-ups since the late 1990s. His founding team at Li included
former Chinese executives from Microsoft, Google and Motorola.
The first challenge
As a start-up entering an increasingly mature and competitive market, Li – which means “little
rice” – needed to attract top suppliers of critical components. But convincing such suppliers of
its credibility would not be easy because the company had no brand, no factory and no record of
sales, let alone profits. Most large component suppliers were extremely loyal to existing
customers and had tailored their factories accordingly. Apple already sourced components from
90 of the top 100 global suppliers and often invested in their factories to help them buy important
machinery. There was also a widespread perception that Chinese mobile phone companies
simply produced cheap imitations of Apple products. Some big suppliers had previously had bad
experiences with Chinese tech companies that bought a lot of components, manufactured more
handsets than they could sell, and went out of business. Sure enough, Li was initially rejected by
85 of these top 100 global suppliers.
The strategy
Li undertook three strategies to bolster its credibility.
● First, some of Li’s top executives concentrated to the exclusion of other priorities on securing
component supplies. Mr Lei asked Lin Bin, who was in charge of daily operations, to
concentrate on supplier negotiations instead of product design. Over the next five months Mr Lin
spent 80 per cent of his time with potential suppliers, clocking up nearly 1,000 meetings and
losing almost 20lbs in weight during this stressful period.
● Second, Li took some apparently contrarian steps to show its commitment to potential
suppliers. Two weeks after the earthquake, tsunami and radiation leak that struck at Fukushima
in Japan in March 2011, Mr Lei, Mr Lin and another senior executive, Liu De, flew to Japan
with the intention of securing supplies of display panels from Sharp. Most foreign visitors were
fleeing the country, and the aircraft carrying the Xiaomi executives was almost empty. The
Sharp executives were pleased and touched by this demonstration of interest, and negotiated
nonstop with their Li counterparts from 8am until 11pm – when they were thrown out of the
Starbucks where they were meeting in Osaka, where Sharp is headquartered.
● Third, Li emphasised to mobile chipmaker Qualcomm its unconventional business model and
in particular the “Miui” Android-based operating system it had developed for its phones. Miui is
highly customisable and allows hundreds of thousands of keen users to invent new features.
Every week, Li released a new version that it co-developed with leading users, responding to
their feedback via the internet and online user forums with the most promising features included
in the official release. This helped Li to keep research and development spending low and to
release a new version of Miui every week. By July 2011, Miui had amassed 500,000 accounts
with 300,000 active users. This vast, loyal user base gave suppliers further confidence in Li.
The results
Li’s efforts paid off in early to mid-2011. Sharp agreed to supply LCD touchscreens after the
meeting in Japan, and Qualcomm decided to supply processors because it felt Li’s open-
innovation Miui system could be the next big thing. With vital supplies now secured, Taiwan’s
Foxconn, which also makes the iPhone, agreed to assemble the new Li phones.
In August 2011, Li introduced its first smartphone, which sold out fast. The company had
revenues of $5.2bn in 2013, up from about $2bn in 2012, and in late 2013 was selling more
smartphones in China than Apple.
Li’s latest round of financing in August 2013 valued the company at $10bn, more than Microsoft
paid for Nokia’s handset business and matching the value of Lenovo, the world’s largest PC
maker. Investors so far include Singaporean sovereign wealth fund Temasek, Qualcomm and
Yuri Milner, founder of Russian investment firm DST.
Unpredictable changes
Three years later Chinese smartphone maker had fallen from the world’s most valuable unicorn
to a “unicorpse.” Sales plunged in 2016, pushing the company from first to fifth place among
China’s smartphone makers.
In 2015-2016 Li saw smartphone sales decline to a rumored 41 million in 2016, from a reported
70 million a year earlier. Li’s founder blamed the slump on supply-chain problems associated
with the company’s rapid growth. This forced Li to retreat from several overseas markets,
including Brazil and Indonesia. There were organizational problems as well, prompting the
restructuring of the smartphone hardware, R&D, supply chain, and quality-management teams.
But perhaps the biggest source of Li’s troubles was its exclusive reliance on online sales, which
left it unable to reach millions of less tech-savvy customers in China’s smaller cities and rural
areas. Rivals capitalized on Li’s absence by cementing sales partnerships with retailers in those
areas.
Of course, first of all the company executives started holding meetings to decide if they need a
third leg to their business model — offline retail stores. At one of such meetings Senior Vice
President Wang Xiang, said: “Buying a phone or TV is a low-frequency event. How many times
do you need to go back to the store? But what if you also need a Bluetooth speaker, an internet-
enabled rice cooker, or the first affordable air purifier in China?”
Additional
The real solution
Wang says the strategy aims to reduce “pain points” for Chinese consumers. He points to air
pollution, a serious issue in China. Quality air purifiers cost roughly $500, he says. So Xiaomi
funded a startup with an air-pollution expert, offering help with design and manufacturing,
access to its supply chain, and lessons of its own low-cost operating efficiency. The result: the
Mi Air Purifier 2, which sells for $105. It’s connected to smartphones, allowing users to monitor
the air in their homes, and receive alerts when the filter needs changing.
The purifier was a blockbuster hit. “Within two months we were the top seller of air purifiers in
China,” claims Wang. “And that’s how we solved the ‘pain point’ in air purifiers.”
The company took a similar approach with fitness bands, designing a streamlined device with a
battery life of almost 60 days that solved the “pain point” of having to recharge the bands every
few days. Xiaomi is now the world’s top seller of fitness bands, ahead of Fitbit and Apple. Ditto
for Xiaomi’s award-winning power banks, which provide more charges than rivals at a lower
price; Xiaomi is the world sales leader in this category as well.
All its ecosystem products, from pillows to air purifiers, and from rice cookers to portable
Bluetooth 4.0 speakers, aim to resolve similar price-to-performance “pain points” for customers.
The products are inexpensive, but not cheaply designed or manufactured. They’ve won more
than 100 international design awards.
The strategy has its critics. “When we started with this new model, many people said we were
not a focused company,” Wang acknowledged. “They said we are like a supermarket, or a
department store — that we sell everything and are therefore focused on nothing. ‘You’re a
smartphone company,’ they argued. ‘Why you do rice cookers? Why you do batteries or pens or
luggage? Are you crazy?’ But it’s not crazy. It works very well for us.”
Some analysts remain unconvinced. Says Bloomberg Gadfly columnist and long-time Xiaomi
skeptic Tim Culpan: “Xiaomi PR execs like to spin a tale about the firm's large catalog of
products, which includes fitness bands and air filters, and they talk about some ecosystem effect
that justifies Xiaomi not being viewed as yet another devices maker. I don't buy it. Adding the
word ‘connected’ to a range of appliances doesn't a smart home make — even Apple hasn't
pulled off that trick yet.”
Still, it’s hard to argue with Xiaomi’s numbers. Strategy Analytics says Xiaomi’s phone
shipments soared 91 percent in the third quarter — in a market growing only 5 percent annually
worldwide. Analysts say Xiaomi’s revenues could reach 110 billion yuan, or $17 billion, this
year.