Xiaomi’s IPhone Fight May Mean 3 Years of Losses
By Bloomberg News - Feb 16, 2012 2:00 AM GMT+0800
http://www.bloomberg.com/news/2012-02-15/xiaomi-s-amazon-tack-to-iphone-fight-may-mean-3-years-of-losses.html
Xiaomi Corp. M1 smart phones running the MIUI operating system are displayed at the company's headquarters.
Feb. 16 (Bloomberg) -- Chinese smartphone vendor Xiaomi Corp. says it's prepared to post losses for several years as it battles Apple Inc. in China to attract high-end users to its handsets and software. Bloomberg's Stephen
Bin Lin, president and co-founder of Xiaomi Corp., works at his office at the company's headquarters. Photographer: Nelson Ching/Bloomberg
Xiaomi Corp., a Chinese smartphonevendor that counts Singapore’s Temasek Holdings Pte as aninvestor, is ready to post losses for years as it battles AppleInc. (AAPL) to attract high-end users to its software.
“We are not looking to make any money, or to make Xiaomiprofitable, for the next two or three years,” President Bin Linsaid in a Feb. 7 interview in Beijing. “We will be able to lookat profitability from software and services after we have theuser base.”
Xiaomi, whose founder Lei Jun compares his hardwareapproach with Amazon.com Inc.’s subsidies on the Kindle e-bookreader to boost digital book sales, is racing to fill gaps inChina not met by Apple’s iPhone. Xiaomi will today startoffering a phone for China Telecom Corp. (728)’s network, which Applehas yet to do. Since releasing its first handset in September,Xiaomi has sold 1 million phones online, and won an order fromChina Unicom (Hong Kong) Ltd. for another 1 million, Lin said.
“Besides Apple, no one else has been able to do that insuch a short span of time,” said Hans Tung, who helps manage $1billion at Qiming Venture Partners, one of the six initialinvestors in closely held Xiaomi. “It’s a very auspiciousstart. We believe this team is innovative and fast-moving enoughto continue to turn out interesting things.”
Single Carrier Apple’s iPhone, which has been available through ChinaUnicom since October 2009, is yet to be offered by the nation’sother two carriers. Apple sold 5.6 million iPhones in Chinaduring the first nine months of last year, ranking it fourthamong smartphone vendors in the country in the third quarterbehind Nokia (NOK1V) Oyj, Samsung Electronics Co., and HuaweiTechnologies Co., according to Stamford, Connecticut-basedresearch company Gartner Inc.
Apple last month moved a step closer to supplying ChinaTelecom when it won regulatory approval for a device compatiblewith the carrier’s network. Still, neither Apple nor ChinaTelecom has announced a date for sales. Carolyn Wu, a Beijing-based spokeswoman for Apple, declined to comment on when thedevice will be available, or to respond to Lin’s remarks.
Xiaomi, which means “Little Rice” was founded in April2010 by Lin, who had previously spent 15 years working forGoogle Inc. (GOOG) and Microsoft Corp., and Lei. Lei, the chairman ofsoftware developer Kingsoft Corp. (3888), also founded the onlineretailer Joyo.com that Amazon (AMZN) acquired in 2004.
Android Customization Xiaomi offers a software customization of Google Inc.’sAndroid operating system called MIUI to allow users to alter theappearance of their phone with fonts, themes, and wallpaper.MIUI has been translated into 23 languages in 16 countries, andhas 1 million users globally, one-third of which are outside ofChina, Lin said. The company also offers the Mi Talk messagingand group chatting application that runs on Android as well asApple and Nokia devices, Lin said.
All that software is currently free. The company willdecide how to make money from its software and Internet serviceslater, possibly involving advertising, Lin said.
The company’s name derives from Xiaomi’s focus on softwareand applications for the mobile Internet, the English-languageabbreviation for which is the same as the Chinese word for rice,mi. The company is pursuing a strategy of integrating itssoftware with a high-performance handset, Lin said.
‘Audi Engines’ The Beijing-based vendor is drawing customers to itssmartphones by offering a device with specifications comparableto products offered by Apple, Samsung and HTC Corp. (2498) at afraction of the cost. Xiaomi’s phone with a dual-core 1.5gigahertz Qualcomm Inc. (QCOM) Snapdragon processor is priced at 1,999yuan ($317) on its website, less than half the 4,988 yuan pricefor the iPhone 4S at Apple’s online store in China.
“Those phones are stuffed with hardware usually found inmid high-end models, but they’re offered at mid-tier handsetprices,” said Teck Zhung Wong, a Beijing-based analyst at IDC.“It’s like these phones come with Audi engines but are sold atToyota prices. And that’s where their value proposition lies.”
A Chinese-language biography of Apple co-founder Steve Jobsis one of the first things a visitor sees on the coffee table ofLin’s office at Xiaomi. Lin said that before founding Xiaomi hewas an early adopter of Apple products and bought two iPads, twoiPhones and two iPad 2s as each product was released.
Angry customers pelted Apple’s oldest China store with eggson Jan. 13 when the shop failed to open for the first day ofsales of the iPhone 4S, proving there is pent-up demand Apple isfailing to meet, said Lin. “I’d probably have been one of themthrowing eggs and saying I want a 4S” if he wasn’t busybuilding Xiaomi, he said.
“See how high the demand is for great products, reallytop-quality, beautiful handsets,” he said. “There is still ahuge market for that. That’s an opportunity for many companies,and Xiaomi as well.”
Foxconn, Inventec In less than two years, Xiaomi has grown to more than 500employees, Lin said.
Two months ago, the phone vendor, which has nomanufacturing capability of its own, added Foxconn InternationalHoldings Ltd. (2038) as a supplier to help it ramp up output. Foxconn,a unit of the world’s largest contract electronics maker Hon HaiPrecision Industry Co., joins Xiaomi’s initial supplier InventecCorp. (2356) in assembling the devices, Lin said.
Lin said the company is not looking to sell shares to thepublic “any time soon” and will continue to fund its expansionwith venture capital. The company to date has raised $131million from investors including Tung’s Qiming, IDG Capital,Morningside, Temasek, and Qualcomm Ventures.
Limited Range To expand its handset business and win share from companieslike Apple or Samsung, Xiaomi will have to overcome the currentweakness of its limited range of products, said analystsincluding Wang Ying at Analysys International and Gartner’sSandy Shen.
“The problem with them is that they are relying on asingle model, which wouldn’t help them to get more market shareor mind share of the user,” said Shen. “When a new brand orproduct comes in, they will have a hard time to defend theirmarket share.”
Xiaomi’s Lin said the company is working on a “next-generation handset” to follow the success of its first device.He didn’t offer details on specifications or when it would beavailable for sale.
“Building just one product is certainly not where westop,” Lin said. “We have to continue to innovate.”
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