How China’s Apple Became Successful Overnight
In simple environments, people acquire new capabilities by acquiring new objects. In complex environments, people acquire new capabilities by using new services. And as anyone who’s busily added apps to their smartphone knows, the one problem apps are no good at solving is the problem of having too many apps. Environments with rising complexity always create business opportunities for third parties to step in and manage that complexity. One form of success in a complex environment is someone who consistently pays you to keep at bay the very complexity you cause. Achieving that state is Xiaomi’s long-term goal. As Xiaomi investor Richard Liu puts it, “We never care about number of phones sold. We care about number of users converted.” The company had effectively no profit in 2011, and an astonishingly low profit margin of 1.8 percent in 2013, plowing almost every yuan back into growth. (Having raised $1 billion at the end of 2014, the company is now set to start generating real profit.) This idea—head count matters more than revenues early on—is an old internet pattern, where business after business first scaled up and only then pursued revenues, a pattern followed by Yahoo, Google and Amazon.
Xiaomi has always been focused on maintaining that pattern even when it moved into hardware. Selling a Xiaomi phone generates some income, but more importantly, it becomes a way to distribute the MIUI interface. The user experiences MIUI as a way to operate her phone, but it is actually a bundle of potential new services. User engagement is Xiaomi’s founding logic. When they began, with a small group of employees and just enough cash to get them through early milestones, they began recruiting. This is the normal case, but for Xiaomi recruiting wasn’t just about new employees, they also began recruiting new users. This is one of many unusual things the company did—recruiting users of a product that doesn’t exist yet seems backwards. Yet those users, or at least potential users, were critical to the speed with which the company would be able to build MIUI, its core product.
Given that the firm was founded by some of the best technical minds in China, it’s easy to wonder what Xiaomi got out of these first users. What could they have access to that the people inside the firm didn’t know, given that they were building the software? The simplest answer is that the user had access to reality—every company builds a bubble around itself, where the products get built and tested in a more controlled environment than they get used in. This is especially true of complex software. What the early users enabled Xiaomi to see was how MIUI actually worked when real (albeit unusually technically proficient) people tried to install it on a wide variety of devices.
This pattern continues to this day. Xiaomi’s marketing chief Tony Wei says that new software sent to early testers will generate thousands of reports back overnight, and this openness in turn allows them to try out, test, and fix the critical source of their commercial advantage, a version of the operating system that lets them tie their own services to the user’s device. These are not mere bug reports, of the sort most software now generates automatically. These are user reviews, questions not just about the technical aspects of MIUI but about which features the user likes, dislikes, or wants to see in the future. (The fever users generate more technical feedback, the flood users more emotional feedback.) For a company dedicated to creating cheap products, it says quite a lot about their strategy that they run their own call centers; they consider that experience too important to outsource. The users generating these reports were essential to the company’s start, but unlike many internet firms, which build a product with early users and then displace them as the firm grows, Xiaomi has never forgotten the earliest users, in private or public. In March of 2015, when the company had 100 million users of MIUI, their understandably triumphal press release emphasized the work of the original hundred in the first paragraph.
They have managed to extend this sense of importance to their other users. As the number of MIUI users began to include non-geeks, Xiaomi began to behave in ways that would generate interest and loyalty in the general public. Their most famous technique is their flash sales, where a limited number of devices are sold at an announced time, and potential customers have to line up (online) for the right to try to purchase one of the devices. Flash sales generate the “sold out in minutes” figures so often associated with the company. In a recent move to sell phones in India, they sold 40,000 of their cheap RedMi 1S phones in four seconds. Here again, as with many of their later moves, the company understood that this was where they needed to be early on. Lei Jun had a great appreciation for the odd dynamics of e-commerce from his days at Joyo, where the peak number of transactions a site can be asked to perform is a significant multiple of the median load. When testing an early version of their e-commerce platform, the company opted to sell cans of Coke to the employees. The original plan was to sell the Coke for 1 yuan (about 15 cents), but Lei decided on a more radical strategy—sell a Coke for 1 mao (1.5 cents). Demand for 1 mao Cokes subjected the system to enormous load even with very few users, exactly the capabilities they’d need to build up to handle flash sales.
In one of the company’s Beijing offices, there is a case displaying fetish object versions of the company’s products. Users will draw the Xiaomi logo and draw or trace the outlines of the interface on cardboard or wood, and then send these to the company as tokens of appreciation. The most remarkable version I saw was a block made of thousands of individual millet grains glued together into a phone-sized brick. (Millet looks, well, it looks like little rice.) This particular Mi Fan had then painted the company’s logo and basic UI on the front in black, a task that had taken three nights.
Excerpted in Quartz. Little Rice: Smartphones, Xiaomi, and the Chinese Dream is out now.