NEW DELHI—When Xiaomi Corp. launched a new smartphone here in April, there was an air of chaos. Employees were still stuffing gift bags that morning, and a few staffers from Beijing headquarters, pressed for time, arrived on tourist rather than business visas.
After Xiaomi Chief Executive Officer Lei Jun stepped onstage, his first time speaking publicly in English, he veered off script. His odd phrasing went viral in online videos of him repeatedly asking the crowd, “Are you OK?”
No matter. The Chinese smartphone seller’s online offering of 40,000 phones sold out in 15 seconds. Hundreds lined up outside the launch venue, including 17-year-old Raghav Goyal, who drove seven hours to attend and said the Xiaomi phone was a much better value than its big-name rivals.
“Apple is gone!” he shouted after the unveiling. “Apple and Samsung are gone!”
That is the kind of zealotry Mr. Lei, 45, is counting on to replicate overseas his success in China, where he has used an unusual mix of social-network marketing, fan-appreciation festivals and his own tech-star status to become No. 2 in smartphone-market share afterApple Inc.
Little known in the West and just 5 years old, closely held Xiaomi (pronounced sh-YEOW-mee) is in ways still a disorganized startup. But it is also among the world’s fastest-growing smartphone companies and most valuable startups, with a valuation of $46 billion by some estimates.
Selling full-featured phones at near cost, it has come to battle Apple and Samsung Electronics Co. for the No. 1 spot in China. It dentedSamsung’s China market share badly in 2014, one factor forcing the South Korean company to post a sharp profit drop and to rethink its strategy.
Xiaomi’s high-end 64 GB Mi Note Pro smartphone costs 2,999 yuan ($489) in China, compared with 6,088 yuan for a 64GB Apple iPhone 6 and 5,288 yuan for a 32GB SamsungGalaxy S6.
But Mr. Lei has bigger, global ambitions, of which his push into India is part: to create the first Chinese consumer brand that is cool abroad. China, he says, is no longer about cheap manufacturing and copycats. “Xiaomi’s mission,” he says, “is to change the world’s view of Chinese products.”
Mr. Lei’s mission echoes that of South Korean concerns a generation earlier. Companies like Samsung used low-price me-too gadgets to build global brands and grab market share from Japanese electronics makers, who had done the same still earlier to American companies.
In seeking to turn his brand into one the world recognizes, Mr. Lei wants to build on the Xiaomi name’s remarkable rise in China. Xiaomi sold its first smartphone in mid-2011. In the 2015 first quarter it had 13.7% of the Chinese market, just behind Apple’s 14.7%, according to IDC. Xiaomi says its sales more than doubled last year to 61 million smartphones and it expects to sell up to 100 million this year.
A brand called ‘Mi’
Xiaomi’s phones, branded “Mi” for English versions, have yet to demonstrate that Mr. Lei’s business model in China—where Xiaomi doesn’t advertise much and sells mostly online—will translate abroad. It doesn’t disclose sales outside China; IDC estimates about 8.6% of its 2014 smartphone shipments were abroad.
Mr. Lei has had to alter his approach in India, where most consumers buy in physical stores, by striking a deal with brick-and-mortar retail channels. Xiaomi expects to enter Brazil this year, but Mr. Lei says it will be cautious about entering other countries after concluding it needs time to grow in markets it already sells in, including Singapore and several other Southeast Asian countries. Xiaomi says it doesn’t have immediate plans to sell phones in the U.S.
Xiaomi faces new low-cost competition at home, where it is also selling more phones through physical retailers that charge higher prices. And it lacks the patent portfolios that big rivals use to fend off lawsuits. Sweden’s Ericsson has sued Xiaomi in India, claiming Xiaomi’s phones infringe on its wireless patents. Xiaomi declines to comment on the case. Ericsson says it sued “as a last resort” when Xiaomi didn’t respond to attempts to discuss licensing.
Mr. Lei, at Xiaomi’s fifth-anniversary news conference this spring, spoke of the expectations on his company to perform. “Sometimes when I think about it,” he said, “I can’t breathe.”
Xiaomi, like many tech companies, pays contract manufacturers to build its products. Its lineup includes television sets, routers and smart wristbands that it designs itself, and it has invested in startups that make everything from air purifiers and smart light bulbs to aGoPro-like action camera and Segway-brand scooters.
Attendees line up at a Xiaomi smartphone launch event in April in India, Xiaomi’s biggest export market.PHOTO: KUNI TAKAHASHI/BLOOMBERG NEWS
Phones are its biggest sellers. It designs them with specifications similar to those of Apple’s iPhones, Samsung’s Galaxy line and other models. In product launches, it compares features of its new smartphone with the iPhone’s, then announces the price—half the iPhone’s or less. Its latest model, the Mi Note Pro, is encased in glossy white glass and is about a millimeter thinner than an iPhone 6 Plus.
Xiaomi keeps marketing costs low by spending largely on cultivating a fan base instead of on ads. It holds fan parties every few weeks in a different city, where executives meet enthusiasts and give gifts. It has an army of employees to interact with consumers on social media.
It sells the majority of its phones online, where prices don’t need to include a profit margin for retailers. It sells them at near cost, Xiaomi executives say.
Mr. Lei’s goal is to get customers eventually to buy Internet services that are more profitable than Xiaomi’s smartphones, such as games, apps, videos, financial services and advertisements in its content.
“In the smartphone world, there is no one comparable” with its business model, says Aditya Awasthi, research head at LexInnova, a Houston tech-consulting firm. “It’s a new-age smartphone company.”
Born a schoolteachers’s son in central China’s Hubei province, Mr. Lei found inspiration to be an entrepreneur after reading about Apple co-founder Steve Jobs. At Hubei’s Wuhan University, which gave students only four hours a week on computers, he says he sneaked extra time and carried a paper dummy keyboard to practice. After college, he founded a software startup with classmates.
“We did very average,” he says, “and that was a big blow to me.”
In 1992, he joined a software firm, Kingsoft Corp., becoming chief executive in five years. Kingsoft missed the early rise of China’s Internet industry, he says, and he resigned in 2007 after its initial public offering. He rejoined Kingsoft as chairman in 2011; he is still chairman and its largest shareholder.
“He reflected a lot on himself, on Kingsoft, and why we missed the big trends in Internet,” says Hongjiang Zhang, Kingsoft’s CEO. “He’s someone who really wants to do something that has huge impact.”
‘A pig can fly’
Mr. Lei says he learned that seizing the right opportunity was as important as hard work. “Even a pig can fly if it stands at the center of a whirlwind,” he says.
After several years in semiretirement, “one day I woke up and thought, ‘I’m already 40 and I’ve achieved nothing,” he says. “I had a dream when I was young to found a global, first-rate company.”
In April 2010, he founded Xiaomi with Bin Lin, a former Google Inc. and Microsoft Corp.executive. The name means “millet,” a Chinese staple that is nutritious but inexpensive. While consumers in China at the time could buy expensive foreign smartphones or cheap Chinese knockoffs, there was a void between that Mr. Lei decided to target.
“He told me he’d sell over the Internet, engage users actively,” says Hans Tung, an early Xiaomi investor and GGV Capital managing partner, of Mr. Lei’s January 2010 pitch. “We both believed e-commerce and mobile Internet would be the big trend.”
Mr. Lei offered stock to woo veteran engineers and executives from Silicon Valley companies, early investors say. He invested his own money and attracted funds from concerns such as Qualcomm Inc.’s venture-capital arm. “It all added up to something very different from the scores of other OEMs I had met in China,” says Jeff Lorbeck, senior vice president of Qualcomm China, referring to gadget makers.
At first, Xiaomi made software, its own smartphone user interface that ran on Google’s Android operating system, tapping “crowdsourcing” to get online enthusiasts to help develop it. Xiaomi’s engineers then designed phone hardware, and it signed up some of the same contract manufacturers Apple used.
Xiaomi introduced its phone in August 2011, with Mr. Lei trumpeting that it had a faster processor than Apple’s iPhone 4 and Samsung’s Galaxy S2. Its price was 1,999 yuan, under half that of a 16GB iPhone 4 in China. Apple and Samsung declined to comment for this article.
Xiaomi had a ready customer base: It had attracted more than half a million users to its online forum, it says, and marketed directly to them.
Twitter marketing
Mr. Lei built a following on Weibo, China’s Twitter equivalent. He and staff interacted with customers on message boards. In 2012, with its second model, sales exceeded seven million smartphones.
Xiaomi introduced just a few models a year, keeping down engineering expenses. It upgraded its flagship phone’s quality each year, combating initial complaints that its devices felt cheap, sometimes touting that key components matched those in the iPhone and came from the same suppliers.
Big market-share gains came after it introduced a lower-cost smartphone line, the Redmi, in 2013. The phones cost less than comparable devices from Samsung and helped Xiaomi become China’s top smartphone vendor in the second quarter of 2014, surpassing Samsung, according to IDC. Dong Han, 29, a Beijing resident, bought a Redmi Note last year because he says it was a good bargain compared with other brands. “Xiaomi provides value for money,” he says.
Xiaomi expanded to selling TV sets in 2013 and a tablet in 2014, while adding other peripheral products. It invested in dozens of Chinese startups, including one that bought the Segway brand in April. It says it has over 8,000 employees.
Xiaomi doesn’t disclose financial details but says it is profitable. People familiar with its operations say it makes healthy profit margins on peripheral products such as batteries and headphones that help make up for thin phone margins.
Mr. Lei fosters a startup style. He appears at launches in a black T-shirt and jeans. Headquarters has an open floor plan and an office dog. Some desks are covered in stuffed animals, often rabbits in Chinese army hats—Xiaomi’s mascot.
“We do a lot of things opposite from Kingsoft,” says Wang Chuan, Xiaomi’s TV head. “Kingsoft had lots of structure. We have no structure.”
Employees frequently cite Xiaomi’s egalitarian management structure, in which even junior employees meet with vice presidents and each department has high autonomy. “The flat management is one of the great things about Xiaomi,” says one former employee. “Everything operates on trust.”
Xiaomi hopes to use its smartphones, like the new Mi 4i pictured here, to expand market share abroad. PHOTO: PICHI CHUANG/REUTERS
“But,” this person adds, “as Xiaomi gets bigger, you can’t just manage based on trust.”
Some analysts predict Xiaomi’s China sales will level off this year, with competition from others imitating its model. The giant Lenovo Group Ltd. and Huawei Technologies Co. have started units to make smartphones aimed at young savvy users, selling and marketing online as Xiaomi does.
Lenovo CEO Yang Yuanqing says Xiaomi’s business model is no longer unique. “It’s just an online model,” he says. “Now everyone knows how to do that.” A Huawei spokesman says it doesn’t comment on competitors.
Mr. Lei also must show Internet services can be a major profit driver. He says he expects Internet-services revenue to triple to $1 billion this year—about 6% of Xiaomi’s projected $16 billion total revenue.
“They’ve created this image of themselves as an Internet company,” says Chris DeAngelis, a Beijing-based consultant at Alliance Development Group, a tech advisory firm. “And they’re not. They’re a hardware company.”
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Xiaomi’s big test will come abroad. It entered Hong Kong and Taiwan in April 2013, beginning its foray into Southeast Asia laterafter hiring former Google executive Hugo Barra as global vice president.
Outside China, Xiaomi depends more on retailers and logistics companies than at home. And Mr. Lei has less star power to help build a fan base.
In India, where Xiaomi started selling phones in mid-2014 and which the company says is its largest foreign market, it faces large, established local competitors such as Micromax Informatics Ltd. Xiaomi distributes in the country to an online retailer, to a telecom operator that sells the phones in its stores, and to a brick-and-mortar retailer. But its products aren’t in most phone stores.
Still, Xiaomi became the fifth largest smartphone seller in India in the 2014 fourth quarter. The April launch—Xiaomi promoted it on Facebook and its India fan forum—showed it already has fans.
One was Gaurav Anand, 31, a New Delhi businessman who said Xiaomi’s phone was a much better value than Samsung’s or Apple’s. The Xiaomi Mi 4i costs 12,999 rupees (about $200) versus 53,400 rupees for a 16 GB iPhone 6 in India. “I’ll never buy another brand,” he said.
Write to Eva Dou at eva.dou@wsj.com
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