RISE OF XIAOMI: Inside the humble Chinese start-up poised to become this year’s biggest IPO

Lei Jun, chairman and CEO of Xiaomi Technology. Picture: Getty Images

Lei Jun is a busy man.

On a recent Saturday, his first full day in Xiaomi’s Beijing headquarters in three weeks, the founder of the world’s fourth-largest smartphone maker had scheduled 11 back-to-back meetings with board members, government officials, colleagues and customers.

Nursing a venti cup of Starbucks coffee, Lei was in a reflective mood when he met with South China Morning Post in mid-afternoon. On the verge of deciding where to list his US$100 billion company, Lei is being wooed by stock exchange officials from New York to Hong Kong, Shanghai and Singapore, trying to pitch their bourses for what would probably be the largest global initial public offering (IPO) in four years.

A successful offer, expected in summer, could make Lei China’s wealthiest man a few months before he turns 49 in December.

Lei, a computer coder by education, has built Xiaomi (pronounced ‘shao-mee’) from a start-up into a company with 15,000 employees and 100 billion yuan (US$16 billion) in sales in seven years. He maintains a hands-on approach to overseeing a product range of several dozen smart devices and household products.

“I started Xiaomi after turning 40, and had figured out 90 per cent of the business model before starting the project,” Lei said. “We created this business model that we call “tipping”, which is to sell our hardware at zero-or-low profit margin, but monetise our complementary services.”

Xiaomi’s valuation has more than doubled from its most recent 2014 fundraising when it was valued at US$45 billion, according to a person familiar with the guidance in the company’s IPO plan, requesting anonymity for discussing a confidential matter.

With Lei’s stake estimated at 77.8 per cent by Chinese media Yicai Global, that valuation would make him China’s wealthiest man, surpassing the US$45.3 billion fortune of Tencent’s founder Pony Ma Huateng, and the estimated US$39 billion wealth of Alibaba Group Holdings’ founder Jack Ma Yun.

For investors seeking a piece of the company, they will have to figure out Xiaomi, with more than 70 products carrying the Mi brand, from neck pillows and ballpoint pens to air purifiers and smartphones. It may even make cars in India.

“I call it the triathlete of the New Economy, where Xiaomi makes hardware and devices, sells its products through e-commerce and offers services on the internet,” Lei said.

Image: SCMP

Xiaomi, which means millet in Chinese, sells its products at cost, or with a profit margin of 1 or 2 per cent, Lei said. He is so proud of the strategy that he wants to write it into Xiaomi’s corporate mission statement to lock it down, and avoid anyone “messing with it after 50 years.”

He believes in a certain degree of decency in business. “We sell our smartphones at affordable prices, but if you use our browser, watch streaming video on our phones, or use our online services, we earn a profit,” he said.

That pricing strategy has paid off in India, making Xiaomi the top brand on the subcontinent with 27 per cent market share, according to Canalys’ data.

“China has understood that providing value for money is very important in emerging markets,” said Narayana Murthy, founder of India’s second-biggest technology company Infosys, during an interview in Hong Kong. “Look at Xiaomi: I don’t find it any worse than any other brand, but it is so inexpensive and so much value for money. Why would I waste 10 times the price and buy anything else?”

Lei founded Xiaomi in 2010 with seven engineers and technologists, including the alumni of Google, Motorola and software company Kingsoft. Yunfeng Capital Management, the US$1.1 billion private equity fund of Alibaba’s chairman Ma, is a Xiaomi investor. Alibaba owns the South China Morning Post.

He is driven, decisive and very passionate about technology, several people who have worked with Lei or have received his investments said in interviews with the Post.

More than anything else, the native of Hubei province said he is motivated by the belief that Chinese manufacturers can cast off the stigma as makers of cheap, low-quality bootleg products.

Putting his belief into practice, Xiaomi started life producing smartphones with specifications found on the best overseas models, selling them at less than half the price.

“When Samsung and LG were selling their phones at 5,000 yuan (US$795), most Chinese vendors were pricing their products at less than 1,000 yuan, and using the cheapest technology. But Lei started with the most expensive specifications,” said Wang Xiang, a former Greater China President at Qualcomm.

Shopping for a chip supplier, and armed with nothing more than an idea, Lei made a passionate, two-hour presentation to Wang in 2010. Wang was so convinced that he assigned several dozen engineers out of Qualcomm’s 100-strong team in China to support the start-up, he recalled.

The first Xiaomi smartphone, the Mi 1, featured Qualcomm’s top-of-the-line Snapdragon S3 Dual Core processor, with front and back cameras, at a price tag of 1,999 yuan, less than half of what imported Android phones were selling for. The Mi 1 received more than 300,000 pre-orders in the first 34 hours when it went on sale in 2010.

Image: SCMP

Wang would later persuade his San Diego-based employer to join in the second round of Xiaomi’s fundraising and become an investor, an unprecedented move by the chip maker.

“I brought the Qualcomm CEO to meet Lei, who once again gave us a speech that lasted for hours,” Wang said. “He sold his idea to us, and brainwashed us to become Xiaomi fans.”

Three years after launching Mi 1, Lei hired Hugo Barra, Google’s product spokesman for Android, as vice-president of international operations. Wang himself was so enamoured with Xiaomi that he left Qualcomm to join the start-up in 2015, and was promoted two years later to senior vice-president, replacing Barra last year when the Brazilian left Xiaomi to commence his own venture.

Since Xiaomi’s revenue took off, Lei has turned into the elder statesman of Chinese tech investments, with both Xiaomi and his venture fund Shunwei Capital investing in an estimated 450 companies in China and overseas. India would be Xiaomi’s major stepping stone to the world, with a US$1 billion plan to nurture 100 Indian start-ups over five years.

“He has a very grand vision of whatever he wants to do,” said Mandeep Manocha, founder of Manak Waste Management in New Delhi, which operates the Cashify online service for selling used smartphones and laptops, invested by Shunwei. “He believes that if you want to build something, you need to think about it on a large scale, and figure out how to outpace the competitors quickly, so you can become the No 1 in the market.”

The pitch

Pitching to Lei requires deep knowledge, presentations that cut to the chase with no extraneous padding, said Madhusudan Ekambaram, co-founder of Finnovation Tech Solutions in Bangalore, India, which operates an online instalment store for students called KrazyBee.

“He had a poker face, and we didn’t know whether he liked our business idea or not,” Ekambaram said, recalling his pitch to Lei and two dozen Xiaomi business and technology heads. “We did not know how to react during the meeting.”

But Lei lived up to his reputation. After KrazyBee’s afternoon pitch, Lei’s team responded the next morning with a commitment. Xiaomi and Shunwei would participate in the third round of KrazyBee’s fundraising.

Xiaomi India product lead Jai Mani, co-founder and vice president Wang Chuan, India managing director Manu Jain India global vice president and product manager Sudeep Sahu. Picture: Getty Images

Lei’s decisiveness filters through Xiaomi’s culture. The journey from start-up to 100 billion yuan in global sales was completed several years ahead of schedule, and Xiaomi went from market entrant to No. 1 in India in three and half years.

Up to 70 per cent of Xiaomi’s sales came from seven models of smartphones, 20 per cent from scores of household and appliance products made with partners, while an estimated 10 per cent came from internet services.

Lei’s corner office is stacked full of knick-knacks – visitors’ gifts, from an American football to gadgets – some of which are his muse for innovation and improvement.

He is most animated when discussing technology. He would grab random items off his shelf to make his point about Xiaomi’s workmanship. There’s a Xiaomi ballpoint pen in Mac white, selling for 9.9 yuan, with a faux rose gold-plated premium version going for 25 yuan.

Ideas emanate from his product development team and from customers’ feedback, Lei said.

The Xiaomi Power Strip was Lei’s idea. Selling for 49 yuan in China and US$17.77 on Amazon, the three-socket extension cord comes with three USB ports, and is made of flame-retardant material, again in Mac white. The sockets are configured for the three-pin Australasian and the two-pin Europlug standards, but unusable for UK plugs.

During an interview, he would summon Xiao Ai, the 169-yuan smart speaker, to demonstrate its artificial intelligence. Speaking in Chinese, Xiao Ai would provide an accurate readout of the current temperature, but got lost with the air pollution index.

“We need to take a gradual approach in the globalisation of our products,” he said. “We need to strengthen the control of our quality and manage our brand. So we have to control our growth pace before we build up the capacity to manage our quality and our brand.”

Image: SCMP

Xiaomi took its eyes off the ball in 2016, giving Huawei, Oppo and Vivo the opening to surpass it with sales in China. With two new products launched last year, Xiaomi has turned the corner and refocused its strategy, Lei said, enabling him to set an ambitious target to regain its China sales crown in 10 quarters.

He has reason for optimism. Xiaomi was the fastest-growing vendor among China’s four home-grown smartphone makers in the fourth quarter of 2017, increasing shipments by almost 58 per cent for a 13.9 per cent share. That beat Apple, whose shipments shrank by less than 1 per cent, with a market share of 12.9 per cent.

Xiaomi’s IPO could match, or surpass Alibaba’s US$25 billion debut in 2014, bankers said. To attract Xiaomi and other tech companies including Alibaba’s e-payment platform Ant Financial Holdings, exchange officials across Asia’s biggest IPO markets have pulled out all stops.

Hong Kong last year pushed through the biggest amendments in the city’s listing rules in decades, to let technology companies with multiple classes of shares and pre-revenue biotech firms raise capital.

China’s securities regulator showed its goodwill by approving a 27 billion yuan IPO application by Foxconn Industrial internet in five weeks, inclusive of a weeklong public holiday, a record speed compared to the normal two years required for listings in China.

The Chinese government is also rolling out Chinese Depository Receipts (CDRs) for overseas-listed companies like Alibaba, Baidu and potentially Xiaomi, to be available to Chinese investors.

Lei would not comment on any aspect of Xiaomi’s IPO plans, whether it’s the destination or the fundraising amount.

Does Lei aspire to be China’s version of Steve Jobs, or Jeff Bezos? Xiaomi’s shops look remarkably similar to Apple’s stores, where customers can play with the neatly arranged phones at wooden tables, flanked by large, bright product banners on the walls.

“I have no interest to be Jobs II or Bezos II,” Lei said. “I think Xiaomi’s business model is very different from theirs, even if it has absorbed some of their uniqueness. Ultimately, the Xiaomi business model is an innovation of our own.”

With additional reporting by Iris Deng and Coco Liu in Hong Kong

This article first appeared at SCMP.com. Copyright 2018. Read the original article here. Follow SCMP on Twitter or Facebook.

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