Transcripts For BLOOMBERG Bloomberg West 20140606 : vimarsan

BLOOMBERG Bloomberg West June 6, 2014

Already sells more smart phones in china than apple. We will take an indepth look at its meteoric rise, its charismatic leader and his ambitious global plans. Lets start by bringing in cory johnson and brad stone who will be with us for the hour. Brad interviewed the company executives. Bloomberg businessweek takes an indepth look at Technology Companies outside of silicon valley. You spent 10 days there, that is a long time. This company is called the apple of china. Is it really . In a lot of ways, it is. It is a relatively new company that has built a brand that consumers love. The remarkable thing is it has grown really fast. It has left a lot of customers disappointed. Their primary challenge is building and growing the supply chain. At these events, customers are hanging out outside. They are drawn to the company and the star power of the executives. The founder has a long career in Chinese Technology. He was a prolific Angel Investor and is really a star in the Chinese Technology scene. They brought together seven tech titans to found the company together. They have been called the avengers, the dream team. Four years ago, starting a mobile phone company was very expensive and difficult to do. A lot of people thought, how can you compete in the era of apple and samsung . One thing he did was bring in all these other founders and each of them has a piece of the company. One handles design and another is in charge of manufacturing the phones. Cory, when you look from the outside at the numbers, does it show the promise of becoming a Global Player like apple . Not yet, but the growth is very intriguing. The Business Model is very interesting. The way they have done things that other Android Phone makers have not been able to do, which is create a brand that is customized enough to offer a different User Experience and a very different Business Model. Selling products only online, having support that customers can get to. The company had some big hiccups with inventory problems. They have been selling routers and sitting on inventory that went stale. Thats one of the secrets about running a Successful Technology business. They never really got stuck sitting on product that wasnt hot. Look at microsoft, hundreds of millions of dollars of inventory. This is a company that should know how to do it and couldnt manage it. This is a very different Business Model. Regardless of how successful the company is we will take a deeper dive into the Business Model later in the show. I want to bring in a former executive at google in china. He is joining us from london. As someone who has worked in china and help build a technology company, how impressive is the rise of xiaomi . It is not a lowcost copycat. It is easy for us in the west to think of them as that. They have gotten this far because it is a great product at an affordable price. As brad mentioned in his wellwritten article, the Business Model is very disruptive. They are not a global power but the product could be disruptive to someone like apple or samsung. They cut out the middleman. They saved a lot of money. They really dont advertise. Its one of the first Technology Companies to grow up relying almost solely on social media. The big question is, can they port it over to other countries . The google dna that runs through this company is very interesting. From your standpoint, what do you see about this company that has taken notes from google . Thats a great question. There definitely is a flavor of commoditizing the layer and giving it away. They are not giving away the hardware, but they cannot be making much margin on this, and they are ok with that. It is very much dependent on the android ecosystem and being able to be compatible with it. Android is a popular o. S. Its very important for xiaomi to stay in sync with google and android. If it had not reorganized its organization, you can have fewer android in china with apps like google maps, do you think it would be as successful as it is . I do think so. I certainly think that if you think about the way they developed, that is the other thing, the innovation there. It is very much based on user feedback. They push out software on a weekly basis. That is also a very google thing. You can imagine they will call it a beta phone. One of the early cofounders was a long time google executive. All of the founders came with their different backgrounds and brought their own superpower to help give xiaomi what it used today to get to the top. There is a historical irony here. Google back in 2010 did reorganize its operations. A lot of those based in beijing felt like a lot of their work was being lost by the google reorganization in china. Google in some way set him and some of the other founders and early employers free to work with this company. He told me that was basically the spark. They also have a tablet. You went to the tablet launch. Lets listen to him talking about that launch and the potential of this thing. We want to make the best android tablet out there. I hope that our efforts will put some effort on apple and prove that not all tablets are being hidden away in drawers. This is a guy whos often been compared to steve jobs, thee he wasnt wearing the black tshirt and jeans there. Do you see echoes of jobs in him . Actually, hes much more humble. Who isnt . He actually sort of apologized in some ways, particularly for the lowmemory version of the pad. That he hadnt been as disruptive as prices as they were accustomed to being and also that the ipod is a great product. Steve jobs never would have done that. Well talk much more with brad stone and cory johnson, our editor at large and craig. Stay with us. It may be huge in china but the company has global ambitions with plans to enter 10 new markets this year alone. Well look at what it has to succeed abroad. Welcome back to a special edition of bloomberg west, xiaomi rising. The Chinese Tech Company that was launched just four years ago but has already grabbed a bigger share of the market than apple. Heres a look by the numbers. They may be a new kid on the block, but the scrappy chinese cell maker known as little rice is no longer little. It was formed in april 2010. Four months later it officially launched its first firmware. In 2011 they took on apple with its first smart phone and just like apple, theyve introduced new products every year with great fanfare. How did the company rise so far so fast . First, theres the price. At 270, the flagship mi3 costs less than half of the cheapest iphone in china. And it sells directly to consumers online with limited quantity available. When its flagship product, the me 3 launched last year, they sold 190,000 phones in under 90 seconds. They plan to expand outside of china to 10 new markets and triple phones by the end of this year and they just dropped the little from its do main name, proving this startup is starting to think a lot bigger. Xiaomi has been a smashing success in china but can it become a major player in the rest of the world . They certainly hope so. Our guests are back with us. Theyre trying to expand to 10 International Markets. Do they have a chance . One of their advances is fox is proximity. They sell the phones as soon as they get them. When you extend into other countries you extend the supply chain. You add costs. You will also dont have the same star power and in other places people sell phones through carriers. Its not clear how well that transports to other markets. Longtime google executive, the eco system that xiaomi poached from google. Can he be the one that makes this Company Successful abroad as they have been in china . I would think that of anybody on the planet hes a great hire and the one thing, something we talked about before, xiaomi, the core i. P. Is the end of android. It needs to be harmonious with the rest of the android system. Hugo is a software guy. And weve talked about handsets and the price but the meat of the company is to make money oven software and services. Most people think its making small margins on the handsets just to get adoption. When they really kick up the services, i think were in for a show. Will xiaomi try to expand in the United States and can they do it . We asked him about this. Take a listen. The u. S. Is not in our plans this year. Its an insanely competitive market. Well work up to that. We dont know when thats going to be yet but certainly thats the goal. Its the goal. Can you do it . Its a long way off. They have a lot to prove and this market is controlled by a couple of major carriers. Verizon and at t. I dont see a place for the xiaomi model now but i imagine they will evolve it. Theres a fundamental change in the u. S. Phones led by tmobile. Taking the subsidies away from these phones and letting the consumer pay for them over time through their monthly bill. Its a really big change and it could be accelerated by the iphone which is expected this fault. The phone wont be subsidized and the carriers love this. The phone makers kind of like this. If that were to change the u. S. Business model, it could start to open thank you markets for Companies Like xiaomi. Steve, the cofounder of apple thinks theyre good enough for the United States. He said they have excellent products and are good now break the american market. One of the interesting points you spoke with hugo about is the cheaper Bargain Basement price like a 50 phone. I think a lot of companies are pursuing that. Craig mailed a good point which is they need to evolve their software and services and get their margin there. We havent seen a lot of that yet from xiaomi. If they find they can make money on services, then they can work on the phone and dont need to make any more money on the hand set. After this break, how can their phones show cheaply next on this special edition of bloomberg west. Welcome back to this bloomberg west special, xiaomi rising. When lei jun and cofounders started xiaomi they priced their phones barely above cost, sold their phones online and released them in batches of around 100,000 phones. If results, surging sales, hoping them over come apple in the surging china market. Joining me, brad stone and former google executive in china. In china, xiaomi phones are half the cost of an iphone and pretty much the same when it comes to samsung galaxy. Lets listen to ben len, the cofounder of xiaomi. The way we price our handsets and almost like any other handsets. We do not incur other costs, including touring costs, r. And d. Costs and shipping costs. We price this right at the rock bottom price material of the handset itself. How do they make money . [laughter] they dont know what the market is. They dont. They dont call tooling, r. And d. , marketing. Those are expenses. If thats not in the phone, someone else is paying for it. They bring the cost curve down. They start selling the mi3 basically at break even. The phone has a yearlong life cycle so by the end of it theyre making a 10 to 15 margin. As the component costs fall, margins start to appear. They also try to make money on Certain Services and use Software Updates. That is one of the most unique things about xiaomi. They release a Software Update every friday. It is to a Smaller Group of baby users that love to try out new things that look for bugs and look for the company to develop new features. Maybe thats the microsoft inspiration, which is our first version will stink and we know it. Create scarcity around that have a sellout, have the line around the block but then fill the supply chain later when you have the potential for profit because in those first weeks, months, you dont. As the component costs fall, the phone is still hot then theyve built up that demand. Craig, what do you think is the smartest thing that xiaomi does and what could lead to some challenges down the line . None of the overhead that brad mentioned is paid for and each phone is barely covering its own cost. We need to look at the broader meanwhile landscape and where is the value being created . Interesting enough, messaging is the hot thing of the moment. Some big players, including facebook and what they pay for messaging service. When you think about blackberry, one of their most valuable things their messaging platform. That is something i have to believe is in the works. The other things that xiaomi should look at and probably will launch in some ways is content direction like music or streaming and video. Again, those things, were seeing much more video consumption on the rise on mobile and thats absolutely a trend xiaomi can build on. Interesting content. Well talk about that later in the show. Former china google executive and coming up, he is a cultlike following in china. Were going to talk about china jobs. Welcome back to a special edition of bloomberg west xiaomi rising. Were taking an indepth look at the rapid rise of xiaomi, launched four years ago. The cofounder is known as the steve jobs of china, complete are with a wardrobe of black shirts and a cult following but who is he and how has his personality helped drive the companys success . Take a look. Xiaomis cofounder may not like for his company to be compared to apple but one look at him on stage and you cant help but think of steve jocks. Its not an accident. As an engineering student at university, he read a book about jobs and decided to emulate him in style and sub stance. Hes hahn entrepreneur who has his hand in many things in technology. He understands what consumers want. Before starting xiaomi he spent six years at a Chinese Software Company Working his way up to c. E. O. While founding an Ecommerce Company and investing in a social site. In 2010 he teamed up with a former Google Engineer and a few other accomplished founders and xiaomi was born. But while apple may have inspired him to start the company, hes quick to point out the differences. A lot of people think were chinas apple. I feel this only captures part of it. I feel were very different from apple and probably more like amazon with kindle. And growing fast enough to be a big threat to both. For more on the man behind xiaomi i want to bring back brad stone with us. Brads article is the centerpiece of Bloomberg Business week, which looks at companies outside of silicon valley. Also an early xiaomi board member robin chan, c. E. O. Operator. Thank you for joining us. I have to talk about the tshirt because he used to wear the black tshirt all the time and now hes not. Is that on purpose . Its definitely on purpose. I think a lot of positive and Interesting Press have come out and the comparison of steve jobs was too much. He didnt like the comparisons . He revered steve jobs very much and he didnt want people to think he is the next steve jobs. Who is lei jun . He could have retired 10 times over. He was already wealthy but he decided to start a smart phone maker. Why . When i first got to know him and learn the scale of his ambitions most entrepreneurs think about going to war with one weapon. He said ill have an entire ecosystem of taking advantage of the millennium revolution. Thats how he looked at it. What really drove him was impact at the global level and thats what got him going. He had some scars from his earlier ecommerce forays. He was a coinvestor in a retailer in china. Before that he founded joyo, now amazon china. What did he learn from those experiences and put it into play in xiaomi . Thats a great question. He had king soft and then like you said, joyo and every one of them he felt he didnt capture the right trend the right way. When he was doing a startup. Bob and jack and pony were just started out. They were all giants and he started striking hard with his company. He thought how come its a lot smaller . He nailed it in the next company. You said he worked six days a week 10 00 to 10 00 . Maybe seven days a week. I emailed him at midnight. He responded me at 1 00 in the morning and talked to me at 2 00 in the morning. Would you say he is on the scale of robin lee, is he that big . He certainly has that scale. The real question is how much bigger does he go . Xiaomi is a very unique company where it has capabilities to go global. You see an opportunity for him to go into other markets that historical Internet Companies havent gone before. You guys invested early on. Why . Why a company that was trying to crack a mature smart phone market, why did you think lei jun had what it takes . When he first spoke to me back in late 2009, he had an idea that he would start a company that would do o. S. App and hardware. A crazy idea. He had a different way to do it than in china. He had done some of the same business before in different setups. I thought if anybody could pull it off it would be him but they were lack the hardware pieces. There was no hardware guy at all on the team at first. For the first six months, his job 70 of the time was recruiting and thats why you see an amazing cofounding team. And he gave a lot of options. It was dr. Joe who created the ming phone series for motorola. Right. But he couldnt get all the supplies so they couldnt go with dr. Joe. They went to see every supplier on earth asking for inventory. On the day of the earthquake in japan, they went out the next day to talk to sharp to ask for l. E. D. Screens. People were afraid of japan. These guys went and got it done. Lei jun doesnt speak english. Ma is an international executive. Can lei get to that level . Almost all of the cofounders are bilingual. The long term trend is you will start to see more and more Global Talent coming onto this platform and scaling up the company. You brought the earliest models of the xiaomi phone. You said early on the first phone was like a brick. [laughter] its got an lot better. Thats mi 1. But there have been comparisons made to apple, that it looks lue a lot like a iphone. Some of it has been copied. We didnt say that. Some have said that. Is there nil truth to it . They have come

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