In my previous article about the technology companies I own, I mentioned that one of the companies I’m closely watching is Xiaomi (HKSE:01810, Financial). For those who live outside of China and India, Xiaomi might not sound familiar even though the company’s market cap has just risen to over $60 billion, more than some of the best-known companies such as Tesla (TSLA, Financial) and JD.com (JD, Financial). This is a company that’s only been around since 2010.
The people who have heard of Xiaomi often compare it to Apple (AAPL, Financial) and its founder Lei Jun to Apple’s founder Steve Jobs. Yes, the majority of Xiaomi’s business is smartphones and yes, it has copied some aspects of Apple’s huge success. But Xiaomi’s business model is entirely different from that of Apple (AAPL).
First of all, unlike Apple (AAPL, Financial), Xiaomi encourages its users to fully participate in the design and upgrade of both the MIUI operating system and the MI smartphones. For instance, every week the MIUI operating system would take feedback from the MIUI users and incorporate their best feedback into the system upgrade. Xiaomi fans can also suggest what functionalities they would like to have on their MI phones and Xiaomi’s team would take them into consideration when designing for the nest-generation of MI phones.
Secondly, Xiaomi’s pricing strategy is vastly different from Apple. Xiaomi’s trying to give its customers the best bang for the buck whereas Apple’s trying to charge the most they could to maintain high profitability. In this regards, Xiaomi is actually more like Costco (COST, Financial) and TJ Maxx (TJX, Financial).
Nobody explains Xiaomi’s business model better than its founder Lei Jun. The following is from a speech Lei Jun gave a while ago, in which he addressed Xiaomi’s business model. I’ve taken the liberty to translate his words into English:
“The essence of Xiaomi can be summarized into one word: efficiency. I am always talking about Internet thinking. The essence of Internet thinking is actually to improve efficiency. I think the core issue of China's manufacturing is that there is a problem with the efficiency of the entire society. All of the manufacturers do not think about how to improve R&D. They all want to make money in the supply chain by taking profits in each additional layer of the distribution system. And each layer adds additional inefficiency.
Xiaomi uses Internet thinking to improve efficiency. For example, Xiaomi sells on its own e-commerce platform. This is to cut off the intermediaries to the maximum extent, so that the distance from the factory to the consumer is the shortest. We chose the focused products strategy instead of the diversified products strategy because we want to improve the efficiency.
This leads the Xiaomi model from the perspective of consumers - high quality and cost-effective products. Throughout the history of business, the brands that consistently sell well are the most cost-effective ones such as Costco, MUJI, and Uniqlo. Why is that? Because the gross profit margin is low, it forces those companies to pursue efficiency and continuously improve to maintain their competitiveness. Once the gross profit margin is high, the company will lose the momentum of continuous innovation and will become mediocre step by step. Adhering to a cost-effective model is a route that must be adhered to in order to have long-term competitiveness.
I don't expect everyone to understand the model of Xiaomi now. I only hope that after 10 years and 20 years, when you mention China's retail efficiency and manufacturing changes, remember that there is such a name as Xiaomi.”
If Lei Jun actually does what he says, Xiaomi can be thought of as the Costco of new retail and manufacturing. Xiaomi combines the internet thinking and cost-effective but high-quality manufacturing. Amazon’s taking a similar approach with its AmazonBasics product lines. Xiaomi’s already manufacturing some great products such as Robot vacuum cleaners, portable chargers, electric scooters and even a toothbrush. I can imagine in a few years, Xiaomi will be the “Everything Manufacturer,” just like Amazon is the “Everything Store.”
It takes seeing, internet thinking, imagination and belief to understand Xiaomi. As Lei Jun said, “I don't expect everyone to understand the model of Xiaomi now. I only hope that after 10 years and 20 years, when you mention China's retail efficiency and manufacturing changes, remember that there is such a name as Xiaomi.”
I would echo Lei Jun.
Disclosure: No positionin in Xiaomi.
