Lei Jun: How Xiaomi made a successful comeback

Recently, more than 30 directors of the Yabuli China Entrepreneurs Forum visited the headquarters of our Xiaomi company. Chen Dongsheng, chairman of the Yabuli Forum, hosted the CEO seminar with the theme of "Internet+ and China's Manufacturing Upgrade".

At the meeting, I shared Xiaomi's business model and values, the difficulties Xiaomi encountered in the past, and how it successfully turned around this year. Directors Chen Dongsheng, Zhang Weiying, Anthony Yan, Wang Chaoyong, Yu Yu, Zhang Shuxin, Wang Xing and others had in-depth exchanges with me about the Xiaomi model. The discussion was very lively. After the meeting, I also took everyone to visit the Xiaomi Home.

Since it took me quite a long time to introduce and interpret the content, I will share some excerpts with you below.

There are some differences in people's perception of Xiaomi, mainly because Xiaomi is a new species with an unprecedented new business model structure, so it is easy to misunderstand Xiaomi when you don't know it well enough. For example, Xiaomi was very successful in the early days of its entrepreneurship, so everyone thought that the Xiaomi model was the best and Internet thinking was powerful. Later, when Xiaomi encountered difficulties, everyone thought that the Xiaomi model was not good and Internet thinking was a scam. In fact, Internet thinking is a thinking derived from the spirit of the Internet, but it is not only applicable to the Internet. Its essence is transparency and efficiency. The Internet is 0, and industry is 1. If the industry cannot stand, no matter how much Internet thinking there is, it will be useless.

In July, when our second quarter performance turned around, we made a summary of the discussion at the executive strategy seminar, and the core content was the four questions on the PPT.

1. How did Xiaomi grow from zero to number one in China in just two and a half years after its founding?

Let's recall today that in 2010, a small startup company took 30 million RMB to make mobile phones and entered the most competitive industry in the world. How fierce is the competition in this industry? In the international mobile phone market, there are actually only two major players, one is Apple and the other is Samsung. Think about which industry has only two major players. In the Chinese market, there were 300 companies when we entered, but only more than 20 have survived so far. I think the first few of them can basically survive, and the remaining 10 or so are still fighting for the right to survive. This is the most competitive field in the world.

In such a fiercely competitive field, a startup company that started from scratch took only two and a half years to become the number one. To this day, I still find it incredible. But a miracle happened. Why?

I decided to start Xiaomi when I was 40, three or four years after I sold Joyo and successfully listed Kingsoft and retired. What did Xiaomi want to do? I wanted to solve some practical difficulties for China. The practical difficulty was that domestic products were not good enough and the prices were very high, so many people went abroad to buy them.

2. What difficulties has Xiaomi encountered in the past two years?

In the past two years, public opinion has been overwhelmingly that we are failing. So what exactly are the problems we are facing? If we don’t understand our own problems, it is easy to make random decisions, especially when the company is under pressure. When I communicated with some entrepreneurs, I mentioned four words: stick to the right path and be surprising. When encountering problems, everyone hopes to reverse them with surprising tactics, which is wrong. When encountering difficulties, there must be a problem with some basic skills. Sticking to the right path is more important than being surprising. In fact, companies are defeated by themselves. Only when you stick to the right path and stand firm, at most you are a little better or a little worse, and then you can think of how to win with surprising tactics. Especially for large-scale companies, like Xiaomi, which now has a turnover of more than 100 billion and more than 10,000 people, sticking to the right path is very important.

Our shipments in the first quarter of this year were 13.62 million units. The figures for the last few quarters were not good. Our global shipments fell out of the top five. There were a lot of negative reports. Even at the beginning of this year, there was a comment saying, "No mobile phone company in the world can successfully reverse its sales decline. Xiaomi's future is worrying." Why is it difficult to reverse the decline in mobile phone sales? Because this is an industry with a highly integrated global supply chain, and the upstream is also highly monopolized, and the technology iteration is very fast. Your success requires the joint efforts of many partners. If everyone is not optimistic about you, it means that the support you receive will decrease, and you will slide into the abyss step by step.

What difficulties did we encounter? The first difficulty was the vicious competition in the online market . When our valuation of 45 billion US dollars came out, everyone thought that they could do it, as long as they burned money. So in the past two years, some of our peers lost astronomical amounts of money in the mobile phone market.

The second difficulty is that we focus on online, but we missed the offline replacement trend in the county and township markets. Xiaomi's entire business model is for high quality and high cost performance. High cost performance is an efficiency revolution. To improve efficiency, only e-commerce can achieve the efficiency that Xiaomi wants under the market conditions at that time. So we have focused on e-commerce in the past few years, but there is a huge flaw. E-commerce only accounts for 10% of the total retail sales of goods. To this day, 90% of people still buy things offline, which means that even if you own 100% of the online business, you only have 10% of the market. The biggest problem Xiaomi has faced in the past few years is how to upgrade its strategy and how to win, so our biggest pain is how to do offline business efficiently.

The general pricing in the mobile phone industry is 2-2.5 times the cost price, which means you need to spend a lot of money to move the offline market. In the past, we could do e-commerce with almost zero gross profit, but today, when we do offline business, the pricing structure is problematic. I have to do e-commerce at cost price, and I have to add 100% to the price for offline business. I started to compete with my left and right hands, and my personality was distorted. So in the past two years, we have been making strategic breakthroughs. Either we are content to be a fairly good mobile phone e-commerce company, or we find ways to improve the efficiency of the entire Chinese retail industry. We must have the same determination as when Walmart and Costco were founded to change China's business format.

The third difficulty is the management challenge brought by rapid growth. Think about it, a company grows from a dozen people to more than 10,000 people. My God, there are leaks everywhere. I have repeatedly said that our business is a "seafood" business. It takes half a day to get it done, otherwise it will stink in the afternoon. Last time, our Xiaomi CFO Zhou Shouzi said that a boss of a mobile phone company told him that we are in the "ice cube" business, which will disappear in the sun. Our business is very complicated and involves huge cash flow, inventory and very long cycles: orders need to be placed 4 months in advance, and inventory turnover requirements are very high. In this case, a fast-growing company will fall into an abyss if it is not careful.

In fact, these are the three questions mentioned above. I think the most critical one among these three is the second one: Can the business model be broken through?

3. Why was Xiaomi able to successfully turn around today?

How did we solve the three major difficulties mentioned above? In fact, at the beginning of last year, Xiaomi’s all-staff mobilization meeting mentioned two words: make up for the lessons.

I think we should realize that our first place is still empty, and we don't have the real strength to match it. We should put down our pride and start a business from scratch, make up for what we lack, benchmark against industry leaders, and maintain a humble attitude. We only mentioned making up for the lessons, and sales were not in our plan. If we insist on making up for the lessons and improving our basic abilities, how can we not win? The key is to practice basic skills well.

How to make up for this course?

First, benchmark the organizational structure. Every industry has its own rules. Leading companies in the industry have found the optimal solution through repeated organizational optimization. We must respect the rules of the industry and learn from our peers.

In terms of business management, the core is to realize the complexity of the mobile phone industry and the need for integrated production, supply and marketing. We set up special staff planning and coordination departments in the mobile phone department, supply chain, and Xiaomi.com sales team, and built a collaborative team of more than 100 people from scratch in one year. It is these 100 people who help me coordinate the joint operations of the entire huge production, supply and marketing system.

After several capabilities were acquired, I proposed three major propositions this year. We are facing 300 problems. I said that 300 problems cannot be solved . We should solve them with innovation, quality and delivery as the leading propositions. For the mobile phone business, quality is the lifeline. We became the number one in China by quality, and we also eliminated all the copycat phones by quality. However, the problem this year is that our opponents are not copycat phones, but the most powerful companies in Chinese enterprises. The question is how can we surpass them in terms of quality?

At the beginning of this year, I personally led the Quality Committee. After more than ten special meetings, we formulated a detailed quality action plan and set up a quality office to supervise it. Our goal is to win the market with the iron fist of quality.

Of course, I said at the beginning of this year that the worst was over, and the results were immediate in the second quarter. We shipped 23.16 million units in the second quarter, a 70% increase from the previous quarter, and returned to the top five in the world. Now it seems that the performance has recovered much faster than we expected. I think it is the inevitable result of our solid foundation and hard work in the past year and a half. So we have created another miracle and basically achieved a turnaround . I think the core of the turnaround is to distinguish between advantages and disadvantages, focus on disadvantages, give up KPIs and sales, and make every effort to consolidate the foundation to ensure the healthy operation of the company.

I think another key reason why Xiaomi was able to turn around is innovation , because without innovation, there is no way to turn around. What have we done in terms of innovation? First of all, let me talk about a result. When we were in the most difficult time, at the beginning of this year, Boston Consulting Group released a report on the world's top 50 innovative companies. Two Chinese companies were selected, and Xiaomi was ranked 35th. In the FAST COMPANY (Fast Magazine) ranking of the world's most innovative companies, there were 6 Chinese companies selected, and Xiaomi ranked 13th.

What is core end innovation?

For example, last year we launched the Xiaomi MIX, a full-screen mobile phone, which amazed the world. The screen-to-body ratio of this all-ceramic phone reached 91.3%. We named this new mobile phone design "full screen". Now, including this year's Samsung Galaxy S8 and the iPhone 8 to be released in September, everyone has followed this design, and the entire industry has accepted the definition of "full-screen mobile phone". We stand at the top of the world and lead the trend of the entire technology.

Next, let's talk about the investment in the camera. Xiaomi Mi 6 is highly recognized by users for its zoom dual-camera and more beautiful photos of people. We are much better than other flagship phones in the same industry in terms of zoom dual-camera. We found a notary office and conducted a blind test of Xiaomi Mi 6 and two other flagship phones in the same industry. 63% of people think Xiaomi's phone is better. In fact, it's not just the screen. We have recruited talents in a series of core components including chips to form a top team in the industry. We have made huge investments, worked hard, and achieved a lot of core technology innovations.

So far, Xiaomi has obtained 4,806 authorized patents, half of which are international patents. Last year, we applied for 7,071 patents and obtained 2,895 patents. While supporting the continuous emergence of product technology innovation, these patent reserves also lay a good foundation for our future entry into the European and American markets.

The key to understanding the essence of business model innovation is "What kind of company is Xiaomi?" Many people have asked me what Xiaomi's business model is before, and it was difficult for me to explain it clearly in one sentence. Later, I finally figured it out. Because we are a new species, you can't define what this company is. I recently summarized it in one sentence : Xiaomi is a mobile phone company, a mobile Internet company, and a new retail company.

We have done a lot in the field of mobile Internet and have achieved a large scale. This year's revenue has exceeded 10 billion. However, many people have not yet realized the other value of Xiaomi: we have evolved from an e-commerce platform company to a new retail platform.

After looking at this picture, you can better understand all of Xiaomi's strategies. The success of Xiaomi mobile phones boosted the sales of Xiaomi.com. After Xiaomi.com became popular, it sold more mobile phones to users. Then, the Xiaomi Mall APP was pre-installed in Xiaomi mobile phones, which boosted sales again. In short, hot products drive the platform, and the platform drives hot products. It is a virtuous interactive model.

Then our bigger strategic breakthrough was to open Mi Home. Mi Home is an offline retail store with e-commerce efficiency, with an efficiency of RMB 270,000 per square meter, currently ranking second in the world. I think it is a huge innovation of Xiaomi in the past two years, that is, we can open offline retail stores with e-commerce costs!

Buying a mobile phone is a low-frequency behavior. Manufacturers run a lot of advertisements to convince users to buy a phone every two years. Two years later, they need to run a lot of advertisements again. So how to solve this problem? It requires a product portfolio. For this purpose, we invented the hardware ecosystem chain strategy, enriching and improving the product portfolio, and using one or two hundred products to attract users.

Our philosophy is different from that of other companies . My goal is to make the best quality products and sell them at lower and lower prices. This was my great dream when I started Xiaomi seven years ago, and it made me excited.

What are the shortcomings of this model? It is too complicated. This person needs to understand hardware, software, IOT, retail, etc. It is almost an "all-round" model. This places very high demands on the entire team and is very difficult to implement. Which company in the world can build a platform, make hardware products, and do the Internet? There are very few. The Xiaomi model itself is very difficult. There are world-class competitors in every dimension, and you must win.

This is the Xiaomi model diagram we summarized, which we call a whirlwind diagram. From the diagram, we can clearly see that each of Xiaomi's businesses is interconnected, progressing step by step and continuously upgrading.

We first built the Xiaomi community, gathering a group of mobile phone enthusiasts. Then we developed the MIUI operating system. After the release of MIUI, we developed mobile phones and then Xiaomi.com e-commerce. After the success of e-commerce, we immediately developed cloud services and big data with great determination, and then immediately penetrated into televisions and routers. In fact, television was also the first thing we planned to do, but we were too strict with the product requirements and released it a few months later. We made routers to make it the center of smart homes, and then we developed full-network e-commerce, interactive entertainment, ecological chain, Xiaomi Home, Internet finance and Youpin Mall (formerly known as "Mijia Youpin"). Youpin Mall is a full-network boutique e-commerce platform based on crowdfunding screening, and its current scale is already very large. We define that Youpin Mall should have 20,000 SKUs, Xiaomi Mall should have 2,000 SKUs, and Xiaomi Home should have 200 SKUs.

4. What is Xiaomi’s core competitiveness?

There are a few things I have repeatedly said within Xiaomi: First, Mi Fan Culture, which is to make friends with users. In fact, it is quite difficult to make friends with users. Many people always think about how to sell things to consumers at a higher price. Such users are enemies, how can they be friends? Putting the money in his pocket into your pocket is "robbing". So how to make friends with users is the basis for all our business development . Second, make good products that touch people's hearts and are reasonably priced. The third is triathlon, which is three basic skills: hardware + new retail + Internet, and the fourth is industry + investment, using the ecological chain to improve the product portfolio.

Xiaomi's ecological chain department and Xiaomi's own investment department have invested in more than 200 companies, and the coverage may be far beyond everyone's imagination. My point of view is that we should not do anything that we can avoid, because our business is extremely complex, and we must always emphasize focus and simplicity.

The development of our ecological chain business can be likened to "from a large ship to a fleet". In early 2014, co-founder Liu De established the ecological chain department with more than a dozen people and successively made various products. Now the bracelet is the world's number one, and the air purifier was the number one in China last year, and in fact it is also the world's number one. The balance car is the world's number one, the power bank is the world's number one, and the sweeping robot is also the world's number one.

The entire company has won more than 145 industrial design awards, including Xiaomi mobile phones, TVs, boxes, and speakers. I believe that good products also have to be well designed. Among our eight founders, Liu De graduated from Art Center college of Design and previously served as the director of the Industrial Design Department of Beijing University of Science and Technology. When I founded Xiaomi, I believed that Chinese products should change their design. In the past, people thought that quality was only about function, but in fact, quality in feeling is also very important.

If you have been to Xiaomi Home, you will know that the products designed by China's manufacturing industry today are all world-class. Every day, many foreigners come to our Xiaomi Home to "shop overseas".

Xiaomi opened its first store in February last year, and has opened 156 stores by August this year. Every store is a hit, and the sales per square meter is amazing, second only to Apple in the world. We use the concept of making friends with users to continuously think about how to improve efficiency and how to give users a better shopping experience.

Every Xiaomi store is packed with people on weekends. People think that the retail industry is not doing well, but in fact it is the traditional retail industry that is not doing well. If you want to make great achievements in the retail industry, the key is to achieve e-commerce efficiency and combine it with the advantages of traditional retail in display and experience.

Our goal is to open 1,000 Mi Home stores in three years and to generate revenue of RMB 70 billion in five years. Currently, the average size of a store is 200 square meters, with an average turnover of RMB 65 million to 70 million.

How can such performance be achieved in just over a year ? I think the key lies in Xiaomi's values. The first is to make friends with users. If you treat users as friends, you should give them the price and service you want to give them. The second is to have a suitable product portfolio. The third is to insist on high quality and high cost performance. After high quality and high cost performance are implanted in consumers' impression, users feel that buying anything in Xiaomi does not cost money. Now Xiaomi stores are like supermarkets with baskets, and many people buy things with baskets.

The core of Xiaomi's model is to gain the trust of users. My idea is to make the product good and cheap, so that users don't have to think and don't look at the price when buying things. Only in this way can the sales efficiency be the highest. If users say that you have high gross profit and low gross profit, you have to choose, this is the practice of ordinary shopping malls. You don't need to choose anything when buying anything here, everything is worth it. If Xiaomi can do this, Xiaomi's business model will be the first, and it will be top-notch credibility! In fact, Costco in the United States has achieved this. We have many friends who don't look at the price when they buy things at Costco. Let's think about what it means if users don't look at the price when doing business? I think this is the highest level of doing business. You have to do business so that users don't need to look at the price. This is the trust of users in you, and this is the greatest success in business .