Lei Jun, the 49-year-old founder of Xiaomi, the Chinese mobile phone and electronics giant that has raced to $26 billion in turnover in less than a decade of existence, believes that growing trade tensions between China and the US could see Chinese investment flow being increasingly directed towards India. Jun, who is called by some as the ‘Steve Jobs of China’, describes India — where the company leads in smartphone sales — as Xiaomi’s most important market outside China, and says the company is getting set to launch a range of new products in India to complement the existing line-up of phones and televisions that it already sells. These could include refrigerators, washing machines, ACs, water purifiers and possibly even electric vehicles. The company is also looking at getting into the payments business. Excerpts from an exclusive interview with TOI:
Xiaomi has had a strong run on the back of record smartphone sales in China and India, and you have given a tough time to established players such as Samsung. What has made this possible in such a short span of time?
We are a young brand, and we need to learn from companies such as Samsung and Apple. When we entered the business around nine years ago, our goal was to not only make good phones, but also to make them affordable. This is how we are different from other smartphone makers. We sell in large numbers to make the devices affordable, while leveraging e-commerce and internet for driving in operational efficiencies. Other manufacturers are not as efficient as us on operational matters.
It is said you keep a very small margin per device sold, while banking on internet and services-driven revenues for profitability?
Before we went public last year (with an IPO), we had said after a board meeting that hardware margins for us will never be more than 5%. If anyone was charged more than this, the excess money would be returned to the customer. However, last year, the net income for hardware (devices) was less than 1% for us. This is very strenuous, it is very difficult to operate a company like this. On the other hand, the net income from internet services was at $2.5 billion last year, it did very well.
Will the market reward you for such a strategy? You are going against the conventional norm that says higher the margins the better value the company would have, the greater the staying power.
There are still a few very, very outstanding companies in the world that intentionally control how much margin they make. For example, Costco. Because of probably inspiration from Costco, Amazon actually has a very similar strategy. We want to be a great company, not just a profitable company. What I care about is that revenue grew by 52%. There is a significant chance that we maybe a Fortune 500 company this year. If we are, it will be the fastest in the world, in barely nine years.
India has seen waves of Chinese brands. They have a shelf life of a few years and then the next brand comes. How confident are you that somebody else will not come and occupy this market?
We wanted to go global right from the time we began operations. Today, we are present in 90 countries with 40% of our revenues coming from international markets. We are one of the most globalised Chinese companies. As we get stronger globally, we need to localise in every market to become strong. For example, in India we have seven factories (through manufacturing partners) and 99% of the products that we sell here are made locally. Also, we are invested in 20 startups and plan to follow the success in online sales with a big push in offline, where we will be reaching 10,000 stores by year-end. We are focused on long-term plans. Xiaomi is my third startup and I am a 30-year veteran in business.
How critical is the India market for Xiaomi as you target to break into the Fortune 500 global list?
The Indian market is the most important market for us, outside China, and we have also been making a profit here for the last two-tothree years. In our early days in India, I used to spend at least a week here every quarter. We have an outstanding team in India, and today employ nearly 1,000 people on direct rolls. As we move forward, we plan to have more factories here along with our partners, while increasing our investments in the ecosystem and startups. We already have investments in companies and startups such as Hungama, ShareChat, Krazybee, and ZestMoney. We are also doing a pilot for payments.
You raised nearly $4.7 billion through an IPO at Hong Kong last year, which gave you a valuation of around $54 billion, though below the original target of $100 billion-plus. Going by your strength in India, can you ever raise money here through a public offering?
We are open to looking at all capital markets around the world, including India.
How do you find the startup culture in India, and by when do you think India will have its own global internet companies?
India has a very good spirit of entrepreneurship, culture and environment. There is outstanding talent here, and it is a fast-growing market. There is support for entrepreneurship from the society and the government, and I would rate India in the league of Silicon Valley and China. The challenge is that you need more time to make profits locally. For example, Flipkart is still trying to do that. The healthy cycle is not here yet. There are a few big markets on the mobile phone, first is advertising, second is gaming and entertainment in general, and third is e-commerce. Unlike China, mobile advertisement is not huge here at this point in time. In China, it became so in the last three-to-four years. Indian e-commerce is still in its early days. Chinese e-commerce companies, like Alibaba, are now very profitable. E-commerce today in India is what China’s was many years ago. With time, India will get bigger. It’s a matter of time before we have world-class global companies coming out of India. Internet companies need time.
Chinese e-commerce companies got a lot of support from government policies, right?
Not e-commerce. Amazon was allowed to come. Amazon bought my company (Joyo, in 2004). I was number one then.
What are the challenges in India when you compare it to China?
There are a few challenges. There is room to improve when you look at the manufacturing efficiencies here. While labour cost is cheaper in India, the ‘Make in India’ programme is yet to emerge as a competitor to China. It rather faces more challenge from countries such as Indonesia, Vietnam and Thailand. We need more policies to encourage the ‘Make in India’ initiative.
Also, unlike China and the US, the funding system of angel investors, venture capitalists, public markets and private equity —the last one in particular —is not strong here. It was the same in China 20 years ago. I feel it is just a matter of time. Having robust investment vehicles is a good solution to create employment, and give a booster to the economy.
Do you think India and China can synergise for a stronger voice globally?
And do you feel that the rising trade tensions between US and China will help India have better economic relations with its neighbour?
If there are better relations between China and India, then both will benefit. India has a lot of what China needs — global talent, a big market, and strong segments such as pharmaceuticals. China leads in certain categories of technology, in manufacturing and capital markets. There are a lot of synergies if we work together. If you remove smartphones, there are currently not many Chinese companies doing business in India, and we have a lot of room to improve. We are bullish. Regarding US-China tensions, it is getting difficult for Chinese companies to invest in US. We are most active in investing in India, and it will also be good for this country. Yes, investments will grow in India due to what is happening between the US and China.―India Finance News