Economic Times: March 28, 2017
Xiaomi’s growth in India has been beyond expectations and will form the base of international expansion for the Chinese smartphone maker and internet company. Speaking to ET’s Gulveen Aulakh and Karan Bajaj, founder and CEO Lei Jun said growth in India and markets such as Indonesia, besides China, will drive XIAOMI’s overall revenue to $15 billion by the year end. Focussed on replicating online efficiencies in the offline retail channel will be key to the next phase of growth. Edited excerpts:
Q: How has been India journey so far for Xiaomi?
Xiaomi’s India journey has been way beyond our wildest expectations. According to IDC, we are number one in online. In the last two quarters, out of three phones sold online, one is a Xiaomi phone. We have created a lot of new records in the online space – our new product Redmi Note 4 has sold more than a million phones in the past 45 days.
Q: What has been the biggest challenge so far for Xiaomi in India?
Supply and manufacturing. In our latest Redmi 4A sale, we sold 2,50,000 phones in just 4 minutes. This also means a lot of users who want to buy our products could not get it and had a bad experience. So, we have already opened our second factory to ramp up manufacturing and solve supply issues so users can buy our products easily.
Q: Despite outperforming, Xiaomi has been facing challenges to its overall growth in India. Are these similar to your experience in China?
If we actually compare India growth with China growth, the success is very similar to what we have seen in China during the first two years of business. The business model that we innovated and invented is very effective when ecommerce is growing very rapidly. Maybe, in a couple of years we might face similar challenges in India that we face in China today.
The biggest challenge we face is that the online market share compared to overall market share is actually rather limited. For e.g., in China, ecommerce is very established, but unfortunately the whole ecommerce market share is just 10% of goods sold in China. Of course, smartphone’s share as a category is slightly higher at 20% share. Our business model is all about efficiency, so it’s rather dependent on how many people adopt the internet. In China, after we have achieved such scale, the challenge is how to achieve the same in offline with efficiency. In India, after we achieve more than 50% market-share in online space, the question is how to do the same in offline.
Q: Is this a global realisation that online has peaked, underlining offline’s growing importance?
I don’t look at it that way. I believe in past 20 years, ecommerce is a great invention. But, it cannot completely replace offline. Online has its own advantage and offline has its own advantages. The challenge is how we use the Internet way of thinking and technology to improve offline efficiency. Last year, we invented a new term called new retail. Basically, it is using the internet way to do offline. We can move a lot of value for money items from online and let people buy them offline at same price. We experimented with a new model called Mi Home in China last year and achieved great success. We will try the same model in India and think about how to do new retail here. A lot of people complain that cost of doing business offline is high and hence the cost of buying those products is also high. In China, we name this method as Internet Plus.
Q: Can you explain the Internet Plus model? How do you get efficiencies?
When I think about Internet, it really emphasises on a great user experience. A lot of services on Internet are free, but if the user is not satisfied with the service, it’s meaningless. We are pricing our products at cost, so if we do not have user loyalty and the user is not happy with the products, what do we have? For e.g., traditional handset manufacturer and consumer electronic companies – they can easily make 100 categories. We only have about 10 categories and hope that each SKU will sell great volumes. This way, manufacturing, repair and warehousing cost is low. Then we use ecommerce, so the overall cost is low. We can easily price our products at half the price of what our competitors are selling. We use the same way of thinking and apply it to offline – our retails store in China called Mi Home is 100% operated by us at almost the ecommerce efficiency.
Q: When can we expect to see the first of Mi Home stores in India?
We are experimenting and thinking about how we should do this in India. One key concept about the internet way of thinking is you actually need to experiment, get feedback and then iterate on the model. It’s all about experimentation. If we actually test and if it works well, then Mi come can be an inspiration to India’s retail economy.
Q: What are your global plans for expansion? When do you plan to get into the US market full-fledged?
Xiaomi is a still a start-up and we are growing at a rapid pace. In 2017, we expect to surpass 15 billion dollars of revenue. This phase is all about focus and moving step by step. In India, we have already achieved success. The second country we want to focus is Indonesia, then Russia, Ukraine and Vietnam. In Indonesia, we are already number 4, in Russia we are in the top 5, Ukraine we are number 2. We want to make sure we achieve some success in these countries before we consider North America.
Q: Over the last year, valuations of Xiaomi, which had reached a peak of 45 billion dollars, have dropped. Is that something you’re concerned about and monitoring?
A: Our valuation coming down is only speculation. In the past two years we have had no further fund raising round - we have a lot of cash flow. In the past two years, we have actually slowed down and want to bring a stronger foundation. Even in the toughest years, last year, we still achieved some growth.
On core technologies and innovation, we have a lot of breakthroughs. Only last year, we applied for over 7,100 patents worldwide and were granted 3,500 patents- half in China and half of them global. Last year, in our ecosystem business we crossed 15 billion RMB. We have over 50 million IOT products.
Q: What is the split of revenue and volumes of offline and online sales in China? Going forward, what will the balance be?
Back in the days we were 100% online, nowadays, offline is about 20% of our business. Perhaps in the next few years, it’ll probably 50-50. This is the goal. The challenge is how we reach the same efficiency offline.
Q: Is the 50-50 online/offline channel a goal for India as well?
In India, we need to first focus on how to get 50% market share in online. Currently the share in India is more than 30%.
Q: As you ramp up manufacturing capacity in India, will you also look at exporting from here?
It is a possibility but even today we are running out of stock very quickly in India. We need to fulfil the demand from Indian consumers before we consider exporting.
Q: What is the next level of manufacturing ramp up to resolve supply issue? Are you looking at a third manufacturing plant?
We have to first make sure that the second factory is running very smoothly and properly before we consider the third plant. Because of cost of production line, things need to run smoothly, quality control needs to be in place and after that we can consider a third plant.
Q: Can you talk us through the competitive landscape in India? You face similar rivals in China. Will you be able to hold onto your No. 2 position in the smartphone segment in India?
In India’s competitive landscape, the key players are also China’s key players. So we know them very well. We have been in the phone business for the past five years and we have been competing with them all this while. We are very confident because we know our business model is unique. We are an Internet company with focus on user experience. We don’t rely on hardware to make profits.
Q: Do you see the 4G feature phones with VoLTE a threat to smartphone growth?
The trend of smartphones is unstoppable. The trend of feature phones still selling in India is a temporary one. Right now, it’s still about the price. As technology evolves and manufacturing cost decreases, one day, if mid-range smartphones start selling at Rs 4,999, then feature phones will face a lot of pressure.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.