Xiaomi’s Buying Spree Gives Apple, Samsung New Reasons to Sweat

Xiaomi Corp. zoomed past Apple Inc. and Samsung Electronics Co. in China smartphone sales just three years after releasing its first model. Founder Lei Jun is now on a buying spree to take that momentum beyond handsets.

Since November, the maker of Mi devices has participated in more than $600 million of investments in three companies and announced it bought into dozens of startups making everything from an air purifier to low-energy light bulbs.

Xiaomi, which doubled revenue to $12 billion last year, could be just getting warmed up. Lei wants to be No. 1 in smartphone sales and has committed to spending $1 billion on content as he seeks to build a brand bigger than Apple and Samsung within a decade. Much like with Apple’s success, the idea behind his investments is to assemble enough products and services that customers will be glued to Xiaomi.

“Xiaomi is expanding into the smart home and following the lead of Apple, Samsung and others,” said Neil Mawston, executive director of researcher Strategy Analytics. “We expect Xiaomi to build an ecosystem of Mi devices and apps for the home, office and car.”

Lei’s push has credibility because of Xiaomi’s roots in software. The Beijing-based company only started selling phones after developing an adaptation of Google Inc.’s Android software called MIUI, which now has more than 85 million users worldwide. Xiaomi is the world’s fastest-growing smartphone maker and ranks No. 3 globally.

Restaurants, Doctors

Xiaomi has added applications -- including data backup, music and a photo gallery -- and offered themes that allow devices to be customized. The company followed with a popular instant-messaging app, cloud services and software to explore restaurants, purchase movie tickets, track packages and make medical appointments.

“We have made significant progress, investing in more than 20 hardware companies making smart products,” Lei said in a letter to employees this month. “We believe that this ecosystem we are building will be Xiaomi’s most important competitive advantage in our rapid growth ahead.”

Carolyn Wu, a Beijing-based spokeswoman for Apple, and Jini Park, a Seoul-based spokeswoman for Samsung, declined to comment on competition with Xiaomi.

“Most other Android players are not software companies; they have hardware DNA,” said James Roy, a Shanghai-based analyst at China Market Research Group. “Xiaomi seems to be different, and they are investing in it.”

Surging Valuation

Xiaomi’s extra services and its low-cost model of selling from its website helped the company flourish in China, where Google is largely absent, said Neil Shah, a Mumbai-based research director at Counterpoint Research. Competing overseas will be harder for Xiaomi, which started sales in India and Singapore, and it may take years to catch Apple and Google.

“Xiaomi has done a fair bit to differentiate itself from an average Android player and position itself more effectively in the minds of consumers,” Shah said. “But Xiaomi has its work cut out to develop the scale of applications, software and services to fight the big giants.”

Xiaomi’s rapid growth, with smartphone sales more than tripling to 61.1 million units last year, underpins a valuation that surged to $45 billion. The company in December raised $1.1 billion from investors, including Yuri Milner, who said Xiaomi’s valuation could reach $100 billion.

Startup Moves

After conquering its home market with smartphones and adding Web-connected TVs and set-top boxes, Xiaomi knows that to make its system stronger it can’t develop all the pieces itself. To further expand, the company is taking stakes in established companies and spending on 25 startups.

“Investing in startups will allow us to build other types of hardware without doing all of the design and development,” Xiaomi President Bin Lin said in a Dec. 9 interview. Xiaomi confirmed Jan. 7 this is still its strategy.

On Dec. 1, Xiaomi participated in a $296 million investment in Internet data center services provider 21Vianet Group Inc. Less than a week later, Xiaomi announced its first investment in the U.S. by participating in a $40 million funding of Misfit Wearables Corp., maker of products including the Shine activity-and-sleep tracker.

“Lei has figured out he can empower other entrepreneurs to build interesting products and services in Xiaomi’s ecosystem,” said Hans Tung, an early Xiaomi investor, former board member and now managing partner of GGV Capital, which also invested in Misfit.

Content Push

Some of Xiaomi’s other recent deals focused on content and Web services. In November, the company said it will invest in Youku Tudou Inc., China’s most popular video-streaming site, and about a week later teamed with Lei’s investment firm Shunwei Capital for a $300 million investment in Baidu Inc.’s IQiyi.com video website.

The company will spend $1 billion on digital entertainment to help boost sales of its TVs and set-top boxes, Lei said. It’s joining other companies in staking a claim to the future of connected devices, the so-called Internet of things.

Xiaomi will focus on three areas: phones and tablets; smart TVs and set-top boxes; and routers. By spreading investments across startups it can bring out new products without tying up resources on design and development, Lin said in the interview.

“Xiaomi is looking to dominate the next big technology cycle after smartphones: the Internet of things,” said Cyrus Mewawalla, managing director of London-based CM Research. “Xiaomi’s venture into Internet TVs could be a stab at entering this market for the smart hub for the automated home.”

— With assistance by Edmond Lococo

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