Xiaomi CEO Lei Jun’s rather counter-intuitive success formula: don’t be greedy

Xiaomi is seeking to reclaim the smartphone sales crown in China within 10 quarters as it works toward a widely expected IPO

PUBLISHED : Monday, 09 April, 2018, 7:02am
UPDATED : Monday, 09 April, 2018, 3:49pm

As far as sales pitches go, “don’t be greedy” may be one of the odder formulas to sell to hard-nosed institutional investors. But Lei Jun, the billionaire co-founder and chief executive of Xiaomi, the Chinese smartphone and consumer goods maker, believes in it so much he wants to write it into the company charter.

“We must curb the tendency for greed and win absolute trust from consumers,” Lei, 48, said in an interview at Xiaomi’s Beijing headquarters. “So we’re now deliberating, I think we may write this into the company charter, that we will not, in perpetuity, exceed a certain number of percentage points in profit on our hardware. Our target is just this one or two percentage points. We want all consumers who buy our products not to hesitate.”

While that may be good news for consumers – Lei said Xiaomi’s products are typically priced up to 50 per cent lower than competing offerings of similar quality – will not putting a cap on hardware profit margins turn off potential investors ahead of a widely anticipated IPO? Lei’s answer: make the profit from higher-margin, fee-based internet services instead.

“Xiaomi considers hardware a means to an end, with the aim of being an internet company and making money from services”, said Kiranjeet Kaur, Singapore-based senior research manager at IDC. “However, at present making money on hardware to stay afloat may be very crucial too to survive in this environment before the ecosystem starts to pay off.”

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The company is targeting an IPO in Hong Kong later this year, which could be the world’s biggest technology listing of 2018, people familiar with the matter have said. Lei declined to comment on whether the company was seeking an IPO.

In coming years, smartphones would make up a smaller proportion of total revenue as Xiaomi increases the breadth of its consumer goods offerings, Lei said. At last count, Xiaomi offered more than 300 different products from powerbanks to suitcases, often co-branded with the more than 100 partners that it invested in.

Established in 2010, Xiaomi at one time was the world’s most valuable private start-up, worth more than US$46 billion at the end of 2014. In India, the world’s second largest smartphone market, Xiaomi shipped 8.2 million smartphones during the fourth quarter of 2017, giving it a 27 per cent market share and vaulting it to No 1, according to research firm Canalys. The effort ended the six-year reign of South Korean rival Samsung Electronics.

At a recent product launch in Shanghai, Lei unveiled Xiaomi’s new flagship phone Mi MIX 2S, Mi Gaming Laptop 15.6”and Mi AI Speaker Mini. “Xiaomi has to build up its internet services because relying on small profits but quick turnover is too risky,” said CK Lu, Taipei-based research head of research firm Gartner. “If Xiaomi fails at just one or two models or anything happens to its supply chain, Xiaomi will right away be in trouble, just like two years ago. Xiaomi has to spread the risks.”

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Lei has set an ambitious target for Xiaomi to retake the top spot in China’s smartphone market within 10 quarters. The company lost the sales crown in 2016 as rivals Oppo and Vivo expanded their retail network and chased sales aggressively. As of October 2017, Xiaomi has surpassed 100 billion yuan (US$15.9 billion) in revenues, ahead of schedule, and pledged to continue the push into overseas markets.

“What I want to achieve is that when consumers buy the product, they can close their eyes and buy,” Lei said. “It’s absolutely of high quality and absolutely at a very low price.”