BEIJING -- Beijing Xiaomi Technology continues its meteoric rise in the Chinese smartphone market, propelled by the success of its Internet-based marketing.
The Nikkei recently discussed with Lin Bin, Xiaomi's president, the state of the company and its future goals. Excerpts from the interview follow.
Q: How are Xiaomi's smartphones selling?
A: We announced in early July sales of 26.11 million smartphones and revenue of 33 billion yuan ($5.37 billion) in the January-June half. We will probably sell at least 60 million units in 2014 at this pace. The way it appears now, I think we can achieve that number relatively easily.
Q: Samsung Electronics and Apple have released new products since September. Are you seeing an impact on your sales?
A: We see no fundamental impact. Our sales are still growing strongly. Our monthly shipments have been hitting the 6 million mark lately. In the October-December period, the number will probably reach more than 6 million units, because demand increases every year during that period. As long as economic conditions remain stable during the three-month period, we see no problem meeting our goal.
Q: Is there a chance your sales this year will reach 70 million units?
A: It is a target we strive toward realizing, but we may not reach it.
Q: What are your projections for 2015?
A: We had shortages in many of our smartphones before, but now most of our products are available all the time. Demand is really strong, so our sales may jump 50-100% from this year's figure.
Q: Xiaomi markets heavily on the Internet. What is the thinking behind this approach?
A: Marketing methods that have been used by traditional industries are a thing of the past in the Internet age. Even if you spend tens of millions of yuan on television advertising, you cannot know how many customers bought your products because of the advertising.
We think we should invest in creating innovations and research and development to improve our products further, rather than spending that kind of money on advertising. If your products are good, customers will naturally tell their friends and family about them, effectively helping us with word-of-mouth advertising. But your products have to be good for this to work.
Before the Internet, word of mouth spread very slowly. But today, word of mouth spreads a million times faster, thanks to social media. At Xiaomi, we put our full energy into improving our products, and count on our customers to spread [word of] their satisfaction through Weibo (a Chinese microblogging site) and other social networking platforms.
Q: A lot of Chinese companies are copying Xiaomi's business model. How will you respond?
A: Our business model consists of four elements. It is not so easy to copy. The four elements are: first, hardware; second, software; third, network services; and fourth, online sales.
Regarding hardware, we use the best parts in the smartphone supply chain. For example, we procure liquid crystal display panels from Sharp and Japan Display, image sensors from Sony and system chips from Qualcomm. Some parts were developed jointly by our engineers and parts makers.
Q: Why do you focus so much on hardware?
A: Xiaomi sells most of its products online. Customers demand quality more when they are shopping online than at physical stores. Online customers have strong fears that they may end up buying a lemon. If a product has even the slightest problem, they will vent their frustrations through Weibo and other channels.
We sold 26.11 million smartphones in the January-June period. Say 0.5% of them had a problem. That's 130,000 units. Imagine what would happen if 130,000 people posted messages on Weibo, complaining their Xiaomi products have problems. That's why we demand higher quality of our suppliers than Samsung and Apple ask of theirs.
Q: What are you doing in the area of software?
A: Xiaomi's smartphones use a firmware called MIUI. We encourage users of our smartphones to request improvements and new functions. We distribute the latest MIUI updates over the Net every Friday.
In the early days of our company, Chairman and CEO Lei Jun, seven or eight engineers and I all agreed that we were not geniuses who could suddenly come up with world-changing ideas. That's why we ask our users to give us ideas. A third of MIUI's current functions were added based on users' suggestions.
Q: Xiaomi has been called the "Apple of China", but the company itself says its business model is closer to Amazon.com's. Can you elaborate on that?
A: It is related to the third factor: network services. Our business model is similar to the Amazon's Kindle e-book store. The difference is that Amazon sells e-books, but we provide services to MIUI users. These include online ads and fee-charging games.
We also sell earphones and peripherals, as well as Mitu, our official character. We have sold more than 2 million Mitu dolls. They have higher profit margins than smartphones, which we sell at prices that are barely above their costs.
MIUI users exceeded 70 million in August. This is not to say Xiaomi's ecosystem is now complete, but it is a sufficient number for us to generate stable revenue. And the number of users is going to increase in lockstep with our smartphone sales.
Q: Why do you focus on online sales?
A: Retailers in China demand 30-40% profit margins. We can cut this by selling online. If our users can get their smartphones cheaper, our network service revenue will increase. This is the same line of thinking that Google, Yahoo and Amazon employ.
Q: There are rumors that Xiaomi will move into home appliances. Is this true?
A: No, that's not true. We handle our own products in three areas -- smartphones and tablets, TVs and set-top boxes, and wireless LAN routers. Other products, including wearable devices, are procured from our partners.
Q: You announced plans to expand the market for your smartphones to 10 countries by the end of the year. Can you talk some more about that?
A: Our business model is more effective in countries where populations are large, online sales are still in the development stage and telecommunications carriers are not too powerful. Of the countries that meet these criteria, we have already set up shop in India and Indonesia. Our next candidates are Brazil and Russia.
In the U.S. and Japan, consumers can easily go to shops because the transportation infrastructure is well developed. In countries where telecom carriers control the market by offering sales incentives to shops, the price difference between iPhones and Xiaomi's smartphones becomes small.
Q: But your marketing method of utilizing Weibo won't work in India and other countries where the Chinese population is small, will it?
A: In India, we are selling via the country's top online store, called Flipkart. We have found that marketing via Facebook and Twitter are effective in India. We launched a low-priced smartphone, called the Redmi 1S, in India on Sept. 23. We released 60,000 units. They sold out in 5.2 seconds.
But our overseas business has only just begun. Overseas sales will probably account for only around 5% of our overall sales, as of the end of 2014.
Q: What about the Japanese market?
A: Maybe you should tell me about the Japanese market. I know well about SoftBank, NTT Docomo and KDDI. They control the market very tightly. We have our hands full cultivating the India market right now, so we are not thinking about Japan yet.
Q: Xiaomi has not revealed its profit and loss figures. Most of your revenue must come from hardware sales right now. Are you making a profit?
A: Fortunately, our overall business results for the year (ended December) showed a profit. We also posted a small profit in the hardware business.
Q: Do you have plans for an initial public offering?
A: We are not in a hurry. There is no timetable. It took Alibaba Group 15 years to list its shares. Xiaomi is just four years old. We must gain experience for at least 10 more years. Xiaomi still lacks the capabilities needed when it comes to internal controls and risk management to become a business that can last 100 years, like some Japanese companies.
Q: It is a concern that your internal control system may not be able to keep up with your rapid growth?
A: CEO Lei and I swore to each other to aim to become a world-class business, including in the field of social responsibility, when we were preparing for Xiaomi's launch in 2009. Our books have been audited by PricewaterhouseCoopers since the first year.
We are probably the only Chinese company that has asked PwC or any other Big 4 accounting firm to audit our accounts from the first year of doing business, because their fees are very high. We have many things to improve in the area of internal controls. But many of our executives cut their teeth working at Google, Microsoft and Motorola. They have very high ethical standards.
Interviewed by Nikkei staff writer Shuhei Yamada