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Forget Apple, Xiaomi CEO now wants to be more like Costco

LiveMint logoLiveMint 05-04-2017 Saritha Rai

Bangalore: Xiaomi Corp. says it’s misunderstood. Once compared with Apple Inc. for its sleek smartphones and charismatic leadership, the Chinese start-up is seeking an image makeover as it tries to recover from a sales-growth slide.

And the brand its billionaire co-founder Lei Jun wants to be compared with: Costco Wholesale Corp., the Issaquah, Washington-based warehouse retailer that sells everything from wine and diamond rings to bulging boxes of cereal and fruit at knockdown prices. Xiaomi’s revenue will probably reach $15 billion this year as the Beijing-based maker of products ranging from pens and air purifiers to TVs and smartphones adopts a new business model and fine-tunes operations, Lei, 47, said in a recent interview.

“We are not Apple,” Lei, clad in a black polo shirt and blue jeans, said at Xiaomi’s Bengaluru office in India, its biggest overseas market. “We have the same value system as Costco. We want users to enjoy better products at an affordable price.”

While Apple commands premium prices and enjoys the highest margins in the brutally competitive $425 billion global smartphone industry, Costco sells merchandise at razor-thin profits while fuelling earnings from its 35 million annual memberships. As Xiaomi embraces a new strategy to fuel growth, Lei’s goal is to pull in more revenue from apps and services, which delivered $1 billion in sales from 10 million-plus monthly active users last year.

It’s a far different strategy than the one it used to claim the top spot among China’s smartphone makers and a valuation of $45 billion that made it, briefly, the most valuable startup in the world. Instead of the online flash sales and inexpensively-sourced components that it used to disrupt the mobile industry, Lei wants to bring internet-inspired efficiency to offline commerce. He’s also turning to India to revive Xiaomi’s fortunes as China grows more competitive.

‘Make history’

Here, 20-something workers in denim jeans and T-shirts huddle in groups or sit behind shiny white desks separated by foot-high red, yellow and green partitions. Exposed-brick support columns and tube lights suspended below bare pipes and air-conditioning ducts make the office feel more like it’s inside a Brooklyn loft than an industrial park.

Dozens of circular mobiles swing from the lights, with phrases encouraging staff to “Let’s make history together.” A scattering of motivational cartoons sketched on whiteboards promote Xiaomi’s aims and achievements. Now six years old, Xiaomi’s meteoric rise has been usurped in recent quarters by competitors replicating— and succeeding at—the very model that enabled it to vault ahead of Apple and Samsung Electronics Co. in its home market.

The risk for Xiaomi in India is that it will go the same way as China: toppled by rival brands such as Oppo, Huawei and Vivo.

Tarun Pathak, associate director at Counterpoint Research, said Xiaomi is taking a risky approach. The company’s rivals have been able to sell the same number of phones in India, even though their products cost as much as three times more. As Xiaomi seeks to expand sales volumes, it will have to sell more of its high-end models. “Their margins are thin and when they go offline, their expenses will shoot up,” he said.

Modi meeting

During his third visit to India—a week-long trip that included a meeting with Prime Minister Narendra Modi—Lei summoned a town hall-style staff meeting to rally a team he praised for making Xiaomi the No. 1 online-selling smartphone company in the country the past two quarters. Their goal now, he said, was to cement that position in the next three to five years.

In India, “incomes are low and everyone wants good products,” Lei said in a glass-walled conference room, flanked by several of his top executives. Lei is trying to reignite the buzz in the offline or “new retail” market, he said. “Everyone realizes the online market is very limited.”

In China, Xiaomi accounts for only a 10th of total smartphone sales, Lei estimates, leaving bigger opportunities in the traditional bricks-and-mortar approach. Lei aims to have 1,000 so-called MiHome retail stores with sales topping $10 billion annually in next three years, he said.

MiHome stores will offer just two dozen Xiaomi products, according to Lei. Pointing to a single line of $1 apiece writing pens, two types of air purifiers, and three kinds of smartphones, he says he envisages selling no more than 100 product types in coming years, versus the hundreds, or even thousands of stock-keeping units maintained by some manufacturers.

New beginning?

“Our toughest times have passed starting this year, and our main strategy now is to bring the internet way of thinking to offline in China,” Lei said. The plan is to integrate multiple links in offline commerce and avoid the bottlenecks that can occur as products move along the supply chain through manufacturing and repair to logistics and sales.

But even the “new retail” strategy risks being copied. Lei spoke publicly about it one morning and the head of an e-retailing behemoth used the same term hours later, he said. Competitors have in the past paid the ultimate price of copying Xiaomi’s approach, Lei said, declining to give names. “One company lost $1 billion last year, maybe even more,” he said. “Game over.”

Microsoft rival

Lei’s ideas were shaped by past ventures. He previously ran Kingsoft Corp., a software maker that competes with Microsoft Corp.’s enterprise software sales in China, and his e-commerce company Joyo.com was acquired by Amazon.com Inc. and renamed Amazon China. Lei is convinced his retail plan will revive the growth prospects that helped earn Xiaomi its lofty valuation.

Sales began to stagnate in 2015 and shipments plummeted in China last year, with the company refusing to release 2016 numbers. In January, former international head Hugo Barra left for Facebook Inc., raising questions about Xiaomi’s ability to navigate its way through what Lei had described as “unforgettable” challenges.

In India last week, Lei insisted that revenue never slowed during the past two years, and that “Xiaomi has resumed rapid growth.” Suggestions that the company’s value had sunk to $4 billion “hurt us a lot,” he said, refusing to be drawn into a discussion on its current value.

“It was never as bad as it was made out to be,” he said. “Our investors are not worried. I have explained to them clearly. And to our users, we say, ‘It takes 10 to 15 years. We need time. Trust Mr. Lei.’”

Enough cash

There is no pressure on cash flow and no need to raise funds, he said, adding: “We have more than enough cash.” Lei declined to comment on whether Xiaomi has any immediate plan for an initial public offering. Right now, he’s focusing on India, including the potential to open physical stores in the nation with the world’s largest youth population.

Xiaomi is planning a third factory in India, where Lei says he’s prepared to take more risks, including doubling investments to $1 billion over the next few years.

“In the next two years, we want more and more influence in India,” Lei said. How he will do that plays on his mind constantly he says, as he reaches for a black backpack and fishes for one of 10 phones inside.

“I keep thinking about how to perfect my products,” Lei says, clutching a phone with a metallic, pale blue finish. “For instance, how come Indians don’t like this ‘Tiffany blue’ colored phone?”

That’s just one of many things that perplexes Lei about the India market. But he’s determined to figure it out: “This is what keeps me awake at night.” Bloomberg

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