Xiaomi, What Americans Need To Know

Xiaomi’s smartphones are currently sold only in China, Hong Kong and Taiwan, but its hire of Hugo Barra as Vice President of Xiaomi Global is a clear signal that the three-year-old company plans to break into international markets soon.

Its track record of rapid growth and savvy marketing means that it may not be long before Xiaomi, which means “little rice” in Mandarin Chinese, starts making a big footprint in the U.S. smartphone market. For those of you who are still thinking “Google-love-quad-Xiaomi-WHAT JUST HAPPENED?,” here’s a quick primer on Barra’s new employer.

Rapid Growth

Xiaomi Tech was founded just three years ago, but it already has a valuation of $10 billion after completing its latest round of fundraising earlier this month. To put that into context, Xiaomi is now on par with Lenovo’s market value of $10 billion and almost twice BlackBerry’s current market valuation of $5.5 billion.

The company only started selling smartphones in October 2011, but it recently raised its sales target for 2013 to 20 million smartphones, up from its previous 15 million goal.

Handpicked Team

Xiaomi is staffed by former employees of Microsoft, Motorola and (of course) Google. Barra joins former colleague Lin Bin, who was previously the Vice President of Google China’s Engineering Research Institute and Engineering Director of Google before co-founding Xiaomi as its President.

Xiaomi’s founding team was carefully put together by co-founder and CEO Lei Jun with the goal of creating a smartphone company that could take on Apple.

Many profiles in the Western media center on a narrative that presents Lei Jun as a startup founder who aspires to be “the Steve Jobs of China.” Lei Jun has encouraged that comparison, but it belies the fact that he is already one of China’s most influential and successful tech entrepreneurs.

Lei Jun’s resume includes Joyo.com, which was purchased by Amazon in 2004 for $75 million and is now Amazon China and chairing the board of UCWeb, the largest mobile Web browser in China. He also founded YY, which had its IPO in November.

Lei Jun has said that he wants Xiaomi to push the idea that high-end hardware can be made in China, despite the country’s reputation for manufacturing low-cost, low-quality goods. In May, Lei Jun told the GMIC conference in Beijing that he modeled Xiaomi after two unlikely sources of inspiration: a 340-year-old traditional Chinese medicine company called Tongrentang and hot pot chain Hai Di Lao. Lei Jun says these two companies taught him never to produce lower-quality products for the sake of cost, as well as the importance of customer service.

Challenging Samsung In China

A recent report showed that Xiaomi’s flagship Mi 2S was the most popular phone sold in China in the first half of 2013, followed by Samsung’s Galaxy S4. The Mi 2S was released in April, at about the same time as the S4.

Xiaomi still trails Samsung in overall market share. According to Analysys International, in the second quarter Xiaomi had a 2.5 percent share of China’s smartphone market, compared to 18.6 percent for Samsung and 4.6 percent for Apple.

If smartphone sales continue to grow at their current pace, however, Xiaomi has a good chance of making a significant dent in Samsung’s market share. Xiaomi announced in July that it had sold 7.03 million handsets in the first half of 2013. Over that period, it made RMB 13.27 billion (about $2.16 billion) in revenue. That means Xiaomi sold almost the same number of phones in the first half of 2013 as it did in all of 2012, and made more than double the amount of revenue in the first half of 2013 as the $957.46 million it netted in the corresponding period a year ago.

Savvy Marketing

Xiaomi’s sales can be attributed in part to its willingness to try offbeat marketing strategies. In December 2012, Xiaomi announced that it will sell phones directly from Sina Weibo, China’s top microblogging platform with 400 million members. The unusual marketing tactic proved successful: within two days of the announcement, Xiaomi said it had sold 50,000 smartphones in five minutes, with 1.3 million additional reservations.

The company has gained a loyal fanbase by incorporating user feedback into the design of its latest sets and Android skins, which in turn helps the company keep its development costs down. Every week, Xiaomi releases a new version of miUI, its customized Android skin, which is then scrutinized by a few hundred thousand hardcore users.

Xiaomi’s smartphones are typically made available in batches of 200,000 to 300,000 on its Web site and sometimes sell out in less than an hour. Xiaomi has dismissed complaints that its limited supplies are meant to inflate demand. Instead, the company insists gauging consumer reaction before rolling out more handsets helps it keep prices down. Xiaomi is ramping up production, however, and there are signs that it may become one of Foxconn’s top five clients this year.

Monetization Questions Remain

Xiaomi’s plan is to sell high-end smartphones at or slightly beyond the cost of materials and eventually monetize through software and services. Its handsets currently range from 799RMB to 1699RMB (US$130 to US$278).

The company has not revealed its profits, but investor Hans Tung, a partner at Qiming Venture Partners, has said that Xiaomi makes about 10 percent profit on its handsets.

Xiaomi still has to prove, however, that its business strategy will bear fruit. Xiaomi’s sales figures are living up to the company’s hype from a consumer perspective, but as Kim-Mai Cutler noted in May, Xiaomi still has to show that it can monetize software services, an area in which it faces competition from Chinese tech giants such as Alibaba and Tencent.

It remains to be seen what Xiaomi’s plans for its business strategy are now that Barra, Google’s former Vice President of product management for Android, is on board to head its international expansion, but we might find out soon: Xiaomi’s next big press conference, at which it is expected to launch its latest product lineup, is on September 5.