`Xiaomi Rising’: Bloomberg West (06/05)

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June 5 (Bloomberg) -- Full episode of "Bloomberg West." Guests: Former Google Executive Crid Yu; Operator CEO Robin Chan; Former Xiaomi Board Member Hans Tung and Bloomberg Businessweek’s Brad Stone. (Source: Bloomberg)

Only four years old and already more popular than apple in china -- xiamoomi is going global, launching in 10 new countries next year.

How has the apple of china become apple's biggest red in china?

We revealed the secret to their success in a bloomberg west special.

Welcome to this special edition of bloomberg west.

I'm emily chang.

It is one of the fastest-growing technology companies in the world.

One of the fastest growing tech markets in the world.

We are talking about a company that is only four years old that already sells more smart phones in china than apple.

We will be taking an in-depth look at their charismatic leader and its ambitious global land.

I want to bring in my editor-at-large, cory johnson.

His article is the centerpiece of this week's global tech issue of humbert -- bloomberg businessweek.

You spent 10 days there.

That is a long time.

This is a company that is called the apple of china.

Is it really?

I think, in a lot of ways, it is.

Xiaomi, in four years, has built a brand that consumers love.

It has grown very fast and sold 18 million smart phones.

It left a lot of customers disappointed.

The phones are hard to get.

They grew the supply chain so they could fill the demand.

Customers are hanging out outside -- you have people on trains for 15 hours to go to this event.

That's right.

They are drawn to the star power of the executives.

The founder has a long career in chinese technology.

He was the ceo of a software maker and is a prolific angel investor.

He brought together seven other tech titans in china, all who could have been ceos of their own companies, to found xiaomi together.

It is called the avengers, the dream team.

It was a symptom of his huge ambition.

Starting a mobile phone company.

Very expensive and very difficult to do.

A lot of people thought, how can you compete in the air of apple and samsung?

In partnership with a formal executive, he brought in these other founders and each of them have a piece of the company.

One guy handles the operative system.

Another handles design and another in charge of manufacturing the phones.

They have a big founding team.

When you look at the outside at the numbers, do they really show the promise of becoming a global player like an apple?

Net yet.

It's intriguing.

The growth is very intriguing.

The biggest -- the business model -- the way they have done things that other android phone makers have not able to do -- not been able to do.

Create a software that is customizable enough.

A very different business model, selling products only online.

Having support that customers can get to, but not the full retail experience.

The company had some big hiccups with inventory.

The phones sold out in a matter of seconds.

The other stuff they try to sell before phones, too.

They have been selling routers and other hardware goodman.

They have been sitting on inventory that went stale.

That is one of the secrets of running a successful technology business.

How they never really get stuck sitting on product that wasn't hot.

If they somehow managed to gauge demand accurately and get enough product to make customers happy without sitting on this stuff that is becoming an valuable -- on valuable by the second.

This is a company that should know how to do it and could not manage it.

Xiaomi is doing quite well.

Regardless of how successful this company is, people will look at how the model works and see if they can take these ideas and run with them.

I want to bring in the former executive at google in china.

He is joining us today from london.

As someone who has worked in china, what do you think of xiaomi's rise?

It is very impressive.

One thing we need to point out is that xiaomi's success is not because it is a low-cost copycat, which is very easy for us on the west to think of.

They have gotten this far because of the great products and affordable price.

As brad mentioned in his article , which is very well written, xiaomi's business model is very disruptive.

They are not a global power yet, but that business model could be disruptive to someone like apple or samsung.

Part of that business mo del is selling direct to customers.

They save a lot of money.

25% margin that the retailer is taking.

They don't advertise.

One of the first technology companies to grow up relying on social media.

It has attracted the founding team's star power.

Can import that over to other countries?

The google dna that runs through this company is very interesting to me.

I wonder, from your standpoint, what do you see about this company that has taken its notes from google?

There definitely is a flavor of commoditizing a layer and giving it away.

They are not giving away the hardware.

Most people speculate that they can't be making much margin on this.

They're ok with that.

Xiaomi is very much dependent on the android ecosystem and being able to be compatible with it.

Android is a google backed os.

Xiaomi actually, the miui is a layer on top of that.

If google was a more active participant in the chinese ecosystem, if it hadn't reorganized its operations.

If you could have your android in china, do you think the miui would be as successful as it is?

I think so.

The miui -- it is very much based on user feedback.

They push out software on a weekly basis.

That also is a very google thing, isn't it?

Launch something and continue to innovate on it.

They have not called it a beta.

It you could imagine that they would call their phone a bit of fun.

One of the cofounders was a longtime google executive.

One of the most interesting things about all the founders as they all came with their different backgrounds and brought their own superpower to help give xiaomi what it used today to get to the top.

The reason he felt free and was able to have the entrepreneurial spark and leave google was because they reorganized its operations.

A lot of those googlers in beijing felt that their work was being lost by google's reorganization in china.

He told me that was the spark that had him -- set him free to build this company.

I want to talk about the suite of products they have.

You went to the tablet launch.

Take a listen to the ceo at that lunch talking about what he thinks -- at that launch.

We want to make the best android tablet out there.

I hope that our efforts will put some pressure on apple and prove that not all android tablets are being hidden away in drawers.

We want to make a good android tablet that everybody likes to use.

This is a guy who is often compared to steve jobs.

He was not wearing a black t-shirt and jeans there.

Do you see echoes of jobs?

He is much more humble.

Some of it came from that clip.

He apologized in some ways for the low memory version of the mipad.

Maybe he is accustomed to being -- the ipad is a great product.

Steve jobs never would have done that.

We will talk much more about him and how this company is climbing to the top with brad stone and cory johnson.

The former google executive in china.

Stay with us.

Xiaomi may be huge in china, but the company has global ambitions with plans to enter 10 new markets this year.

We will look at whether they have what it takes to succeed abroad, including a possible entry into the united states.

? the chinese tech company that launched just four years ago, but has already grabbed a bigger share of the chinese market than apple.

Here is a look at xiaomi's rise from scrappy startup to smartphone power player.

They may be a new kid on the block, but the scrappy chinese cell phone maker is no longer little.

The ceo helped found the company in april of 2010. four months later, they officially launched their first android-based firmware called miui.

Just like apple, they have introduced new products every year with great fanfare.

How did they rise so far so fast?

First, there is the price.

At $270, the flagship product costs half the cheapest iphone in china.

Xiaomi sells directly to consumers online with limited quantity available.

A recent sale in china brought in $241 million in orders.

The flagship product launched last year.

They sold 100,000 phones in under 90 seconds.

Xiaomi lancer expand outside of china to 10 new markets and triple shipments from 19 million-16 million phones -- 60 million phones.

This $10 billion startup is starting to think a lot bigger.

They have been a smashing success in china.

Can it become a major player in the rest of the world?

Our editor-at-large come cory johnson, back with the spirit as well as brad stone.

And former google executive -- they're trying to expand to india, russia, brazil.

10 international markets.

Can they be as successful abroad as they have been in china?

They have some challenges.

They have a couple of advantages in china.

One is proximity to the supply chain.

It they work with invent tech -- they sell the phones as soon as they get them.

When you extended to other countries, you extend the supply chain.

It you add cost and increase the price.

And inventory that they are trying to avoid.

You don't have the same tar power of the chinese founders.

A people buy phones through carriers in other countries.

It is not clear how well that ports to other markets.

Deep knowledge of mobile and the smartphone ecosystem that xiaomi poached from google.

What do you think hugo brings to the table?

Can he be the one that makes this company successful abroad?

I certainly think, of anybody in the planet, he is a great higher.

Something we talked about before, which is the fact that xiaomi is -- miui is a variant of android.

It needs to be harmonious with the rest of the android ecosystem and on good terms with google.

We have talked a lot about handsets and the price of handsets.

The strategy of xiaomi is to make money on software and services.

I think we have a lot to see from xiaomi in terms of how it makes money.

Most people think it's making very small margins.

On handsets to get adoption.

When they pick up the services, i think we are in for a show.

Will xiaomi try to expand into the united states and can they do it?

We spoke to hugo about this thing.

The u.s. market is not in our plans for this year.

It's an insanely competitive market.

Getting there requires that you are ready.

We will work up to that.

We don't know when that will be.

Is the goal.

Can they do it?

It's a long way off.

They have a lot to prove.

This market is controlled by a couple of major carriers are a verizon and at&t. i don't see a place for the xiaomi model now.

But they will evolve that.

There is an interesting fundamental thing that is happening right now.

Taking phones off the plans and letting the consumer pay through the monthly bill.

It's a big change of the u.s. phone business.

We will have the carriers lock a customer in through the payments of the phone but the phone won't be subsidized.

The carriers love this.

The phone makers kind of like this.

If that were to change the u.s. business model, it could start to open up the window for companies like xiaomi with a different model.

Steve wozniak thinks that xiaomi products are good enough for the u.s.. he visited in january and says they have excellent products and are good enough to break the american market.

One of the interesting points that you spoke with you go about in your article was this idea of an even cheaper, bargain-basement priced smartphone.

A $50 phone.

A lot of companies are pursuing that.

They need to evolve the software and services and get their margin there.

We have not seen a lot of that yet from xiaomi.

They have a social network that ultimately left -- swamp.

They are still on the search for other revenue models.

If they can find that, they can make money on services.

Grandson of brad of bloomberg businessweek.

We are continuing after this break.

How can xiaomi price smartphone so cheaply?

We look into their unusual business strategy and why it's critical to their success.

? welcome back to this "bloomberg west " special," xiaomi rising." they made a conscious decision to have a different business model.

They priced their phones barely above cost.

Spent next to nothing on marketing and sold their phones online and released them in batches of around 100,000 phones.

The results, surging sales helping xiaomi overtake apple in the chinese smartphone market.

Cory johnson and redstone -- brad stone.

I want to talk about pricing because, obviously come in china, they are happy cost.

-- they're smart phones are half the cost.

Let's take a listen to the cofounder of xiaomi.

How he describes their pricing model.

The way we price our handset is almost like any other handset before.

We do not improve -- and crew other costs -- incrue other costs.

The price is right at the rock-bottom price.

The build of the material.

I don't get it.

How do they make money?

Do they?

We don't know what the margins are.

They don't do marketing.

Those are expenses.

They ride the cost curve down.

They start selling the mi3 and break even.

The phone has a year-long lifecycle and by the end of it, they are making a 15% margin.

As those component costs fall among margins start to appear.

They also try to make some money from different types of services and so on and use software updates to make the phone current.

They release a software update every friday.

They love to try out new things and look for bugs.

They help the company develop new features.

Maybe that's the microsoft inspiration.

Our first version will stink and we know it.

Create scarcity around that and have a line around the block.

Then fill the supply chain later you have the potential for profit because, in those first weeks and months, you don't. as a component costs falls, then they build up the demand.

What do you think is the smartest thing that xiaomi does and what do you think could lead them to face some challenges down the line?

The companiey is making a luster loverly.

Each phone is barely covering its own cost trade -- making a loss deliberately.

Messaging is the hot thing at the moment.

You look at big players come in quitting facebook.

-- you look at the big players, including facebook.

One of the most valuable things about blackberry is the messaging platform.

That is something that i have to believe is in the works.

The other thing that they should look at is content distribution like music or streaming.

And video.

Those things -- we are seeing much more video consumption on mobile.

Interesting third content distribution.

-- interesting.

Content distribution.

We will talk about that later in the show.

He has a cultlike following in china.

We will talk about china's steve jobs.

? welcome back to a special edition of bloomberg west.

Xiaomi rising.

We are taking a look at the rapid rise of xiaomi.

One of the world's most dominant smartphone makers.

The cofounder, lei jun, is known as the steve jobs of china.

Who is he and how has his personality helped drive xiaomi 's success?

Lei jun may not like for his company to be compared to apple, but one look at him onstage and you can't help but think of steve jobs.

It's not and next then.

As an engineering student, he read a book about jobs and decided to emulate him in style and substance.

He's not never go has his hand in many places in the technology field in china.

He understands the holistic view of what consumers want on mobile devices.

He spent six years at king soft working his way up to ceo.

While come at the same time, founding an e-commerce company and investing in social sites.

He teamed up with a former google engineer and a couple of other compass founders and xiaomi was born.

While apple might have inspired him to start the company, he p his quick to point out the differences.

A lot of people call us china's apple.

His only captures part of it.

We are different from apple and more like amazon with candle.

A little bit apple, a little bit amazon.

Growing fast enough to be a big threat to both.

For more on the man behind xiaomi, i want to bring back redstone -- brad stone.

An in-depth look at technology companies outside silicon valley.

I want to bring in the former xiaomi board member.

Thank you all for joining us.

I have to talk about the t-shirt.

You used to wear the -- he used to wear the black t-shirt all the time.

Is that on purpose?

It's definitely on purpose.

Press has come out since his first launch.

The comparison to steve jobs was too much.

He revered steve jobs very much and he did not want able to mistake that he is the next steve jobs.

Who is lei jun?

He could have retired 10 times over.

He decided to start a smartphone maker.

Why?

Interesting -- when i first got to know him and learn his ambitions, as not nor, most think about building a weapon and going to war with one weapon.

He said, let me build an entire military apparatus.

I will have a phone, a browser, an entire ecosystem around taking advantage of a mobile internet revolution.

That is how he looked at it.

What really drove him was -- this is what got him going.

He had some scars from his earlier e-commerce forays.

And apparel retailer in china.

He founded amazon china.

He did not sell joyo for a lot to amazon.

He was an early entrepreneur in the internet space in china.

He had king soft and then joyo.

He felt that he did not capture the right trend the right way.

When he was doing startups, others were just starting out.

Seeing all of these guys become internet giants, he tried hard with king soft and failed that.

He is the hardest working guy in the business.

He thought of mobilele as the next big trend.

He works six days a week.

Seven days a week.

I.e. mail him at midnight and he responded -- i e-mailed him at midnight and he responded at 1:00 in the morning.

Would you say he is on the scale of alibaba?

The real question is, how much bigger does he go?

It's a unique company word has capabilities and aspirations to build globally.

With an internet company wrapped with a candy of colorful hardware, you see an opportunity for him to go into other markets that chinese internet companies have not gone to before.

Why a company that was trying to crack a mature market?

Why did you think he had what it takes?

When i met him back in 2009, he had an idea to start a company that would do os, app and hardware.

A crazy idea.

Iphone made it work, but that was steve jobs.

He had done some of the things in king soft -- if anybody could pull it off, it would be him.

They were lacking the hardware piece.

That was the risk in the early round.

There was no hardware guy at all.

For the first six months, 70% of his time was spent recruiting.

That's why you see an amazing cofounding team.

The avengers.

They explored a lot of options.

They found this hardware guy who created the ming phone series for motorola.

They had to go with him -- they went to see every single supplier on earth.

Even low level managers.

On the day the earthquake in japan -- they went out the next day to talk to sharp to ask for lcd screens.

Lei jun does not speak english.

Jack is the international investor for alibaba.

There actually are, almost all of the cofounders are global.

He come from google and microsoft.

There is a capable culture there.

The long-term trend is, like you go, you'll start to see more global talent coming onto this platform in scaling up the company.

You brought the earliest model of the xiaomi phone.

If you said the first phone was like a brick.

It has not gotten a lot better -- there have been comparisons made to apple.

It looks like the iphone.

Some aspects have been copied.

Some people have said that.

Is there any truth to it?

They have come with their own flavor.

It is pound for pound, spec for spec one of the best phones out there.

They really focus on building something based on a live operating system.

Where they have new users telling them what to do.

That is the fundamental design syst difference.

I think it feels live an engaged and dynamic.

The big difference is, apple, phones in china are unaffordable.

It feels like lei jun set out to create something that was economically feasible for chinese consumers.

Steve jobs is a god.

He knows exactly what consumers want to buy.

Lei jun said he is not.

He created an ecosystem where every consumer can voice his opinions on a weekly basis.

People get recognized for their contributions.

How much of the local love for xiaomi is just a deep-seated desire to have a chinese favorite?

There were a lot of local brands.

Lenovo, a lot of rapid will firms.

Xiaomi came out with an economic sense of doing things that got people so involved that it became so special.

We will continue this conversation after the break.

Early investors in xiaomi here with us.

Coming up, xiaomi made its first waves outside of china when they poached hugo barra.

? this is a special edition of "bloomberg west ." many people had not heard of xiaomi until hugo barra said he was leaving for the chinese upstart.

How did they convince them to make the move?

We are with two early investors who influenced barra's decision.

I know you were the person who connected hugo with lei jun and xiaomi.

How did you do it?

It started with an e-mail.

To lei jun saying, hugo, he has done very well in google because he is such a key man on android.

He gets a lot of the recruiting offers.

We talked about it and said, the world is your oyster.

You can do anything.

You are in a great spot.

Do something incredible.

The opportunity was, could you take this company global and be the ambassador and the pace of this young brand?

After that e-mail, the bulls started running.

It took a year.

About one year.

There is a harmonization of opportunity, culture, coming for the company.

The company had to get to a certain skill where hugo could be deployed.

All of those things had to all and place.

How much has he had to adjust the business model for singapore and malaysia?

It has done incredibly well.

The fan base interaction is something that precedes itself.

The reason we all thought it would be harder for hugo -- hugo has helped this company expand internationally.

He is about to get more ambitious.

India, brazil, mexico.

That is a long supply chain.

What will the prices are to look like in these markets?

They have built a global supply chain.

They have plants in mexico.

Going from exit go to brazil is manageable.

India will be coming out of asia.

The cost could be higher.

The lack of choices in india will make it easier for them third can the supply chain expand that far?

That is the better.

With hugo and the emerging global team, with the business model which is the efficient, sustainable -- can they put the pieces together?

This is what they are going.

We had an interesting quote from lei jun about how big he wants the company to be.

I'm actually not that interested in being a big company.

I hope to be a good company.

Focusing seriously on a few products.

This is my personal goal.

I hope to have a small company where i can be at the front line of the product line.

I have no interest in being a boss.

What?

[laughter] the company raised $90 billion last year.

They valued the company a $10 billion.

What is the capital situation now?

The company is cash flow positive and that an compositor.

If anything, they will be raising money only to price the body of the stock.

There is a way to value the company.

I laugh at that segment because he is very modest.

What is the valuation of xiaomi?

I have heard the russian investor invested in facebook, has been buying private shares.

Has it repriced the stock?

There are rumors that the price is higher.

We want the truth.

It has not been confirmed yet.

What do you think is next for xiaomi?

Is this a company that goes public?

I think it keeps going.

It's up to the team to find that narrative.

One of the interesting things you point out -- they have a phone and a tablet and a set top box.

Now, a smart tv.

You liken it more to nest than apple.

Will we see more smart devices in the family?

I don't think there is any boundary to their ambition.

The brand is very malleable and expeansive.

You will start to see more and more products.

Lei jun said that he was seeing imitation from lenovo.

Some handsets, low-priced, online only.

What does that mean for xiaomi?

Now that the cat is out of the back, i can imagine that samsung will let them come into this market and let them underprice it.

They are all great companies.

They have been in manufacturing and carriers for a long time.

Xiaomi has come up with an internet dna way of doing things.

Others will have to adjust accordingly.

If microsoft could beat google in search come i think it's very possible for every company to acquire the internet dna.

They achieved that skill with the community of users in such a way that it's not just a phone company.

They are selling hard way.

It's really a live form -- let form.

It's a -- platform.

Where is this company in four more years?

It's a very interesting question.

A lot of devices will be internet-enabled.

China is the manufacturing center of the world with the supply chain ecosystem.

Can xiaomi have a family of gadgets?

Products in the house branded xiaomi.

Early xiaomi investors.

Thank you both for sharing your slice of the story.

Coming up, more with brad stone.

The comparisons are thrown around all the time.

Is xiaomi the apple of china?

We will make a conclusion, next on "bloomberg west." ? welcome back to a special edition of "bloomberg west." xiaomi sent shockwaves through the tech world when they started out selling apple in china.

Many wondered, how could a company less than four years old cell more smartphones than the iphone?

They unveiled their very first tablet, the mipad.

Can they pose a real threat to apple outside of china?

Cory johnson and brad stone -- does xiaomi have an edge because they have a mascot?

Here is the mascot.

They sell these for $16. xiaomi has a lot of fans and brand loyalty in china.

This is a tech company with chinese characters.

It's worth noting that this says as much about apple in china as it does about xiaomi.

Apple products are expensive in china.

The iphone 5c is $700-$800. easy for xiaomi to come in and underprice it.

Apple has really had one hand behind their back in the chinese market.

They have not been on china mobile until just recently.

They have not had the freedom to open a business in china like they would.

On a global basis, you're looking at apple -- those numbers are not even close when you look at how big apple's businesses.

They do have the partnership with china mobile now.

We should mention, samsung is the number one smartphone seller in china.

Apple is number four, behind xiaomi.

I wonder whether xiaomi has what it takes to get to the top.

For them, the challenge is supply chain.

It sold 18 million phones last year, but they left a lot of customers disappointed.

The mi3 is only now fully available.

For them, their challenges execution.

Getting invent tech to produce these phones.

You don't want a lot of supply.

Apple is a $421 billion company.

Xiaomi is maybe $10 billion.

The interesting to paris and is how the business works, not what the businesses today.

The brand as it compares to apple?

It is just as strong in china.

Outside, it is unknown.

Xiaomi rising.

How high will it go?

Thank you.

That does it for our special.

?

This text has been automatically generated. It may not be 100% accurate.

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