Thursday, 2022 December 8

How did Xiaomi create a multibillion-dollar IoT consumer electronics empire?

To most people, Xiaomi is a smartphone manufacturer that also sells smart wristbands and small consumer electronics like portable chargers. The company also made a splash when it announced the formation of its own electric vehicle division last year.

Aside from its consumer products, Xiaomi is also a prolific investor. What sets it apart from conglomerates such as Tencent and Alibaba is that Xiaomi functions like an incubator. Its portfolio companies often work closely together to ensure their products fit into a larger catalog that has made Xiaomi one of the biggest IoT brands in the world.

Xiaomi’s founder, Lei Jun, has studied the way successful brands like Apple were built. In a speech he gave at an e-commerce event hosted by Alibaba in 2017, Lei offered a reference and said, “Xiaomi wants to be a technology-empowered Muji.”

At the center of this ecosystem of home appliances and other electronics is Xiaomi’s phones, which can be used to control devices commonly found in any home—headphones, computer mice, lamps, WiFi routers, rice cookers, and more. This gives customers an incentive to purchase multiple products that are built to connect with a Xiaomi phone.

Over the past eight years, this strategy, the cultivation of supply chain expertise, and the implementation of tough standards have shaped Xiaomi’s business as not only a smartphone brand, but also a consumer electronics conglomerate.

An independent start

When Lei was building Xiaomi from the ground up in the early 2010s, he didn’t rely on external sourcing agents to liaise with suppliers—his staff did this on their own. This allowed him to price Xiaomi’s phones at roughly RMB 2,000 (USD 310 based on exchange rates in 2011), even though they were of comparable quality to the flagship handsets of Motorola, Nokia, and Samsung that had price tags of around RMB 3,500 (USD 550).

At the time, Lei was already planning to diversify his company’s product line to include various consumer electronics. He believed that Xiaomi could be more than a company, that it could represent a lifestyle and cultivate die-hard fans.

By the end of 2013, the entrepreneur began to implement this plan. His goal was for Xiaomi to invest in 100 consumer electronics makers and develop an all-encompassing IoT network with Xiaomi phones at the center.

Based on statements made by Liu De during public appearances and internal training sessions, a veteran industrial designer and the first general director of Xiaomi’s ecosystem, the company pursued brands that operated in what he called “ant markets,” which Liu defined as consumer electronics sectors where any given brand doesn’t hold more than 10% of the market. Think of products like power banks, lamps, smartwatches, and small kitchen appliances.

In the early 2010s, these types of products were either costly or were of poor quality. This gave Xiaomi the opportunity to introduce its unique way of shaping consumer electronics product lines that would be recognized for being reliable and affordable.

Xiaomi’s executives scoured their personal networks to recruit a cohort of CEOs who could lead product development teams. Some of these individuals were already leading enterprises that were part of the supply chains for Xiaomi’s smartphones, while others were schoolmates of Lei Jun and other Xiaomi founders.

While speaking to 36Kr, some of these CEOs recalled Xiaomi’s product managers visiting suppliers alongside them, and taking part in negotiations to wrangle better deals for components.

Xiaomi’s product managers also helped allocate manufacturing resources for the product teams, and organized tours at each facility as learning opportunities. At the same time, Xiaomi sent trainers to each company to ensure the cultivation of skills like R&D and e-commerce marketing. All of these moves introduced unity in operational vision and corporate culture.

Concept image of a smart home that utilizes Xiaomi devices. Courtesy of Xiaomi.
Concept image of a smart home that utilizes Xiaomi devices. Courtesy of Xiaomi.

Xiaomi’s ecosystem in full bloom

Many of the “Mi products,” as the electronics cultivated by Xiaomi subsidiaries are called, were hits. The Mi Power Bank, the first product in Xiaomi’s ecosystem, set itself apart with a clean design, decent quality, and by being 75% cheaper than similar items sold by other brands in 2013. By the end of 2015, more than 46.9 million Mi Power Banks had been sold—roughly 64,000 units per day.

The Mi Band smart wristband was launched in the summer of 2014. By the end of 2015, 18.5 million units had been sold, again with a price that was more than 75% cheaper than comparable products by competitors.

This positive reception was a vote of confidence from consumers. Xiaomi then applied this strategy to its new product lines, like home appliances.

Soon enough, Xiaomi’s imprint spread even more. It had smart wristbands (Huami), smart power plugs (Chuangmi), and air purifiers (Zhimi). Competitors like Haier, Midea, and Huawei attempted to emulate the way Xiaomi formed its product verticals, but none have managed to duplicate its strategy so far.

This assistance comes with demands from the brands that become part of Xiaomi’s envelopment of consumer electronics. When Ninebot founder Wang Ye first approached the company in 2015, Segways weren’t available in China yet. The general director of the Xiaomi ecosystem, Liu De, asked Wang to set the price of each Segway at RMB 2,000, or USD 315 in 2015. That was roughly 20% of its price overseas.

At the time, Wang wasn’t sure if he could price Segways so low, but he was dead set on collaborating with Xiaomi. By utilizing Xiaomi’s supply chain connections and optimizing its production line, Ninebot managed to give their Segways a price tag of RMB 1,999.

The Segway was a new product in China, and its introduction became an instant hit. On October 15, 2015, Lei Jun mounted the two-wheeled, self-balancing transportation unit on stage at Xiaomi’s annual launch event, wowing the audience. On that day alone, Ninebot sold 20,000 Segways. Sales volume for the next 12 months was double Wang’s expectations. Other companies made similar products. Suppliers said demand for components grew by 2,000% compared to before the launch of Ninebot Segway.

The Xiaomi standard

The initial success of Xiaomi’s ecosystem depended on the vision and decisiveness of the company’s product managers. Wang Ye described them as “a group of idealistic industry designers and engineers.”

From the beginning, Xiaomi set three rules for the IoT consumer electronics brands that operate under its umbrella: to place technology at the core of design, to offer products built for consumers who are budget-conscious, and to make the most appealing electronics.

A handful of product managers ensured every company within this network maintained high standards. Liu De was the general director, and he made strategic decisions about which products to include in the ecosystem. Li Ningning elevated the industrial design process by applying extreme care to evaluate every detail about each product. Two executives, Liu Xingyu and Sun Peng, evaluated every product through the lens of connectivity with Xiaomi’s phones. Each one of them could shut down the development of a product if it contained shortcomings that could not be remedied. In turn, this shaped the way Xiaomi made investment decisions.

In particular, Li Ningning was known to demand exacting standards. She would scrutinize every element of a prototype, offering harsh and direct critique, at times demanding hundreds of rounds of modifications that might have required millions of renminbi.

These products would sometimes land on the desk of Lei Jun, who would also demand redesigns. He would go further to examine the business operations of each company incubated by Xiaomi. Lei’s staff would then shape these brands’ usage of color in designs and even their invoice templates.

There are valid reasons behind this level of micromanagement—to ensure all of the consumer electronics had uniform style and branding, even though they were made and designed by different teams. Wang Ye recalled that when he first sent Segway prototypes to Xiaomi, the product managers hopped on and promptly tumbled over. Wang had neglected to include a user tutorial. He then had to create a detailed guide in the Segway mobile app that users had to read fully before they could use the transportation device.

The pursuit of perfectionism has driven Xiaomi since its early days. For every product that now exists under its banner, many more have been shelved. Because of the company’s strict adherence to elevating the quality of every product it incubates, the company has garnered a loyal fan base that is happy to start with a Xiaomi phone and add more Mi products to their homes.

This article first appeared on 36Kr. KrEurope is authorized to translate, adapt, and publish its contents. The original text was translated by Vicky Huang and Julianna Wu.

KrASIA Connection
KrASIA Connection
KrASIA Connection features translated and adapted content published by 36Kr.com, the largest and most influential tech portal in Chinese language.
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