“I believe for most people, the “MI” brand is quite familiar. But few of them know Xiaomi well.” Lei Jun said so in a public speech on August 31.
On August 31, at 2017 China Consumption Transformation and Upgrading Summit held by Shanghai International Business Conference, Lei Jun delivered a speech named Enhancing Efficiency is a Key for the New Retail Business”. He shared the MI model and introduced the transformation and upgrading of the traditional retail industry Xiaomi had done in past years in detail by taking the mobile as the starting point. He said,
The following is the main content of Lei Jun’s speech edited by TMTPOST reporters:
To be honest, I believe for most people, the “MI” brand is quite familiar. But few of them know Xiaomi well. Why? Because Xiaomi is a new brand that was born in the process of China’s economic transformation and upgrading. We started our business from e-commerce. What we are facing is the e-commerce crowd, the young people. It is understandable our audience today does not understand the Xiaomi. Naturally, as some people don’t know us well, they have some misunderstanding of Xiaomi. So today, I would like to give you a brief introduction to Xiaomi in your valuable time.
I mentioned that Xiaomi a new brand that was born in the process of China’s economic transformation and upgrading. We started the business in 2010 and it is a short time.
The problem we have to solve is that Chinese products have poor quality and unsatisfying design but their price is high so the sale is low. I ever worked in the Internet field. So I was thinking, what could we do to solve the problem of made in China when thinking from the perspective of the Internet rather than that of the traditional manufacturing?
The two most critical points of Internet thinking are user experience and efficiency. So I wondered what if internet staff worked in manufacturing industry and implemented these two points. We began to start the business. And how time flies. This year is the seventh years since our company was established. We joined the most competitive area with the “Internet +” model, the mobile phone industry.
Why is the competition for mobile phones so intense? Take a look at the world. The international brands now are only Apple and Samsung. And other brands are struggling for survival. Back to China, when I just entered the industry, there were three to four hundred manufacturers. But today, I am afraid the estimated number may decline to twenty to thirty, and only four to five manufacturers are able to survive while others struggle for survival.
So this industry is extremely competitive but also particularly difficult as there are so many large enterprises like Apple, Samsung, Huawei and Lenovo. But what happened? We entered the Chinese market by the end of 2011. At that time we were a small company with about 10 employees. Actually, only two and a half years later, we defeated all the opponents and became the No.1 in China. An unexpected result happened. It was a miracle!
Even today, whenever I think of what happened six years ago, I feel it incredible, which fully illustrates how powerful Internet thinking is. Thanks to that we armed ourselves with the Internet thinking, our annual revenue exceeds 10 billion US dollars in the fifth year after we entered the market, which in fact is a miracle in the entire business.
What innovation has Xiaomi made? As for what we have changed, I think first of all, for a brand company like Xiaomi, the product is the core of our business. Besides, as we are in high-tech field, the innovation of core technology is the most important basis for us to survive.
For a brand company, I think the product is always the most critical thing. I told my colleagues: user doesn’t pay for your advertisement, nor store, nor channel, nor promoters but the product!
For a high-tech company, the essence of the product is the innovation of core technology.
After the technological innovation, the second problem to solve is the efficiency. We have done very bold attempts in the business model, and what about our business model? It is a very complex combination, because only this combination could accomplish my vision of Xiaomi which I set seven years ago. More specifically, the vision is to make products touching, the price reasonable and company is able to earn money. In fact, these are contradictory so what did we do?
Let’s take a look at this picture. First of all, we determined the “triathlon” from the scratch, that is, we did a few modules together.
First, a large module is the manufacturing and hardware. We take mobile phone as the core, and then we expand it to mobile, TV, AI speakers, routers, and eco-chain products. As there are more and more products in our product line, Xiaomi incubated about 100 enterprises of Xiaomi ecological chain in way of investment. These companies’ research and development, design and manufacture are based on Xiaomi standards, so Xiaomi is supported by 100 enterprises.
Since we have good hardware, how can we make it more affordable?
The core is that Xiaomi is a retail business. We produce and sell, which can maximize the efficiency. So at the very beginning, we had MI mall, an e-commerce, and then we opened online shop on Tmall and JD. Later, we established the MI house, and now we are trying Youpin store and MI shop.
So Xiaomi is boldly attempting all commercial activities of the new retail business. The R&D and manufacturing of product as well as retail are all completed by Xiaomi, so Xiaomi could have the shortest channel, minimize the cost and then enhance the overall efficiency.
And in the whole hardware design and manufacturing process, just like Costco, we have very high demand. We demand the whole business has even cost and benefit and we pursue very low gross profit rate and net profit ratio, because only such a discipline can maintain a very competitive price.
The sale of Xiaomi mobile is good, which drives the retail, and good retail could drive the sale of more products. In this way, our entire product line becomes more and more abundant. Of course, no matter how abundant it may be, it could be at most two or three hundred categories or two or three hundred SKU. We are also crowd funding now in Youpin mall and the products may expand to 20,000, but our physical store only has two or three hundred products.
After we have good product and more affordable price, another problem appears: these two are in conflict and company doesn’t earn money. If company doesn’t earn money, shareholders are not happy and employees are not happy. How to cope with it? We have explored a large number of Internet services. The various value-added services could help enterprises to obtain the benefits. In such cases, that clients use Xiaomi Internet service is equivalent to pay a tip to Xiaomi, so that Xiaomi could maintain a good operating capacity and cash flow.
We combine these three together, which is good product, affordable price and profits for the company. This is the triathlon business model Xiaomi had from the beginning and it is also the most critical one of Internet thinking. Internet thinking divides how to attract users and how to make money into two steps. We attract users through the hardware architecture platform and build an Internet platform for profit and sustainable development.
How could we accomplish such complicated product line? We start a new business every two quarters. Take users as the center, we make it step by step. Our demand is that when operating a business, we must stick to the company’s values, and the new business must be an extra point for Xiaomi. After the seven-year cycle, a dozen business segments have been completed.
Here I think you may understand Xiaomi now. Xiaomi is mobile phone company, mobile Internet company and is also new retail company. And in the strict sense, I am a peer of audience today. Xiaomi is a retail company.
Xiaomi is a new species. It has ability in three directions and strives for balanced development in these three directions.
Let’s take a look at our initial business. Why we put forward new retailers at the beginning of last year is that e-commerce has strong advantages and shortcomings. For example, it can hardly display products that need to be experienced and secondly, users can not get it directly after payment. Besides, 90% of consumers do not buy things online, so it confuses us a lot.
For example, few of you may buy things online, how to deal with it? We have been thinking of ways to cope with it. And I said we could use the Internet thinking. Can we have a new retail interconnecting online and offline by using e-commerce technology? And why our retail can only be done online rather than offline?
Since February last year, we have been piloting the MI house. We opened it at the risk of closing down. People talk about rent is very expensive, labor is very expensive, and in short, the cost is very expensive. You cannot earn unless you sell at 200% of the cost. What does this mean? All products are not cost-effective and Xiaomi products at least double their price.
Our goal is to open 1000 stores in three years and the sales could exceed 70 billion RMB within five years. That is to say, we have to maintain the same operating efficiency when we expand the number of stores, which is also a huge challenge for MI house in the future.
I think we do the core of the retail is popular products, that is, whether you have products people want. The sale of Xiaomi band ranks the first in the world just in last few years. We have very large sale of it.
In other words, in addition to mobile phones, Xiaomi has made a series of very attractive products. You could go to our store to have a look at it.
In addition to the dazzling array of products, we do we think is the most urgent one to be changed in the manufacturing industry? The outlook! Sometimes young people joke with me that “beauty is justice”. It may sound terrifying to say that justice equals beauty. But I think it really is what needs to be changed urgently to improve Chinese products. In fact, our hard quality is quite good, but the soft quality and user experience is still relatively poor.
And the most important one is the design, in which we have made a great effort.
As for cost-effective, what is the essence of cost-effective? That is, when your product has rather good quality, the price is much cheaper than others. Our quality can be as good as any international brand, but our price can basically be their 1/3 or less.
Why? The main reason I want to establish Xiaomi is to change an old Chinese saying that cheap goods are not good goods. In fact, I think the core of China’s supply sided structural reform is how to do something well and how to do things cheap. Because when products are cheaper, consumers will be more willing to buy it. Of course, first is to do it well followed by make it cheap.
Let’s take a look at its cost structure, which is raw materials + manufacturing costs, R&D cost, market, channel and corporate profits. Traditional products are very expensive because of layers of channels but almost every business does not have profits. I invested in a shirt business, and production cost is 15 RMB to 120 RMB. While in the store, consumers couldn’t buy the shirt lower than 1000 RMB. And cosmetics are basically 20 to 40 times of the cost. But it does not mean that companies can earn money. Why? Because a high price will contain demand, your product couldn’t sell well.
And what does cheap goods are not good goods mean? It refers to how much money a business spends in the raw materials and manufacturing and R&D rather than in marketing, advertising, channels, and price increases in channels. In our cost, the last three links are zero and as for the first two, I joke with that we use the same suppliers with Apple and Samsung, and it is their flagship project suppliers.
We are facing the problem of new retail. The goal is that we should not say that offline cost is high and online cost is low. Online costs are very low, but what is the problem we face? How could we sell products offline for the same price as online?
In other words, I think the goal of the new retail is a revolution of efficiency, that is, to use high efficiency to achieve the traditional retail industry goals. After a year and a half practice, I think we can make it. MI house is sell products at online price. So up to now, have you understood what Xiaomi goal is? We are to be the MUJI in science and technology sector with high quality, high value, cost-effectiveness, and a variety of products. We do offline retail with the Internet technology and methodology.
Speaking of consumption upgrading, I think it doesn’t mean the price should be higher and higher. The consumption upgrading should be the same as that in the United States. The same price can buy more quality products, which is the core of our consumption upgrading today.
So it is why the MI house is full of consumers. Because the same price like 1000 RMB could only buy a copycatting mobile before but now it could afford a very high quality Hongmi mobile. This is what I would like to say. We have been talking about cost-effectiveness. Our goal is to have high-performance, and then cheaper than the peer, half or even 1/3 of their price.
I think offline retail could have the same efficiency the same product and the same quality as e-commerce and can be trusted by consumers. I think in the process of operation, Xiaomi always puts the user’s trust as a top priority.
Why I make such a great effort to do a good product with high quality and low price is that I want to be trusted by consumers. That is, consumers do not need to see the price nor worry about the product quality, they could just buy what they need and pay for it. I want to have the same reputation as Cisco, which is the core of Xiaomi’s business. We ensure product quality and free consumers from worrying about the quality. For products of the same quality, our price is half of others’ so consumers do not worry about the price.
What is the purpose of Xiaomi? We hope that everyone in the world can enjoy the fun of science and technology and science and technology will no longer be a luxury but what ordinary people can afford. In the past few years, we have entered 48 countries and ranked as top five in a dozen countries. What does it mean? It tells us products of high quality and reasonable prices are popular among people all over the world and this is the vision of Xiaomi!
Thank you for your attention!
This article originally appeared in TMTPOST and was translated by Pandaily.
Click here to read the original Chinese article.