Little Rice from the Land of Dragons — The story of Xiaomi

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In his new book, ‘Little Rice: Smartphones, Xiaomi and the Chinese Dream’, author Clay Shirky narrates the story of Xiaomi, the world’s third largest mobile phone manufacturer many people in the West seem to know very little about. However, a company which in just over 5 years has seen its valuation rise to $45 billion is definitely worth a healthy dose of attention.

Founded by tech entrepreneur Lei Jung whose product launches sometimes bear an uncanny resemblance to the charismatic shows pulled off by Steve Jobs, his company is making its foray into the world of design and innovation in a way that isn’t usually associated with Chinese companies. Does Xiaomi or ‘Little Rice’ signal a new wave of innovation out of China, a wave that builds on the already established manufacturing strength of the Middle Kingdom?

The beginning of Little Rice

Xiaomi’s charismatic founder and chairman Lei Jun began his career at the Chinese software firm Kingsoft in 1991 and rose to the rank of president within a short period of just seven years. A few start-ups successes and learnings later, Jun founded Xiaomi in 2010 along with a number of other experienced engineers who had previously worked for Google and Microsoft, thus bringing together years of knowledge and experience. This vastly contrasts with the story of a college dropout founding a tech startup, a core mythology of American counterparts like Apple, Microsoft and Facebook.

As matured business people, Lei Jun and his colleagues were able to leverage local market conditions to their advantage and develop a lean business strategy that helped them to build fast while minimising risk.

Several domestic market conditions favoured the rise of a leading Chinese mobile manufacturer

  1. The inherent strength of China in the area of electronic manufacturing. Over the last three decades, ever since the economy opened up for business with the West in the late 1970s, the Chinese have steadily become the factory of the world with ‘Made in China’ becoming a ubiquitous presence across all categories of consumer and electronic goods. Until now, this has largely followed the ‘design elsewhere, make in China’ model. Xiaomi exploits this great home-ground advantage by designing software that can be housed within a phone that is designed in China too!
  2. Increasing aspirations of the world’s middle market. Xiaomi has benefited immensely from the rising middle class of China whose dream is to make their lives more comfortable by gaining access to necessities that Westerners take for granted. Clay writes that a few years ago, smartphones were somewhat of a distant dream for most Chinese citizens. However, once local manufacturers started making copies of Apple and Samsung, the market shifted almost overnight.
  3. Great Firewall of China: The internet censorship laws of China have been widely criticised in the Western press. However, an interesting byproduct of this strict regime is that local companies have access to a vast untapped market where the likes of Xiaomi, Wechat, Sina Weibo, Huawei can thrive without competition from their giant and well established Western counterparts.

This unique set of growth conditions hard to find else where and have spearheaded the growth of Xiaomi.

Xiaomi’s trajectory

Clay writes how Xiaomi at its heart is a software company that also designs and manufacturers phones. Its first product was MIUI, a version of the Android operating system that improved upon the drawbacks of existing software used in phones such as the Samsung. The improved user experience for the early adopters could be spread across Sina Weibo (China’s version of Twitter) and helped generate marketing for the company in its early days. Even after its significant growth, it spends very little on traditional marketing, instead relying on social media and press coverage to spread the word.

The first Xiaomi phone Mi1 with pre-installed MIUI was released in 2011. Today the Mi phones are up to Mi4 and have been joined by Mi4i, Mi Note and the Redmi and Redme Note series of phones. As often commented, Xiaomi phones are very similar in design to iPhones and Samsungs without losing a whole lot of functionality. In a smartphone market that has been booming in China since 2012, Xiaomi is also providing a slew of software offerings including apps, music downloads and cloud backup in the way Apple and Samsung were doing, but at price points that enabled a much bigger segment of the market could afford. In addition to mobile phones, the company also produces and markets tablets, headphones, fitness bands and even an air purifier (a must have in the polluted cities of the developing world).

Xiaomi’s Lean business strategies in action

Xiaomi’s meteoric rise has been partly aided by the interesting lean strategies centred around the ‘build measure and learn’ feedback loop with a dedicated consumer community being at the heart of its growth model.

  1. Starting small with MIUI: Interestingly enough, Xiaomi did not start off as a hardware company manufacturing phones for China’s vast consumer market. Instead, they started off with building and shipping operating systems for Android phones that fixed the existing inadequacies of the Google-made software.
  2. Minimal advertising spend: Much of Xiaomi’s marketing is user dependent such as tweets being sent out whenever a user installs MIUI into their smartphones. This company has very wisely harnessed the power of social media to spread the word instead of paying for expensive television, newspaper and billboard advertising.
  3. Early adopters: Xiaomi then proceeded to recruit early adopters by scouring the Chinese tech blogosphere on whom they trialled their new operating system and continuously improved their product based on user feedback.
  4. Listening to the customer: Unlike traditional product development strategies, Xiaomi made it one of their prime objectives to collect, analyse and act on user feedback. Its dedicated legion of Mi-fans have been attributed to coming up with as much as a third of the features on MI phones. This kind of ‘lead user innovation’ is what gives this company a competitive edge over other mobile manufacturers.
  5. Continuous Improvement: The Friday of each week, what the company calls Orange Friday after its signature colour, a new version of the software is shipped that makes slight improvements on the older version and incorporates some of the features that customers have suggested. This continuous process ensures that the software always remains relevant and is never stale for a fast changing digital space!!

Having grown successfully within the Chinese native market, firms such as Xiaomi are increasingly focussing their strategy towards the outside world. As of 2013, they have hired Hugo Barra, an ex-VP of product development at Google. This is a strategy to spearhead the company’s move into regions with huge middle income populations such as India, China, Mexico and Brazil.

What are the main challenges ahead for Xiaomi?

  1. Copycat Tactics: Although beautifully designed and highly affordable, Xiaomi phones are famous for being ‘copycats’ of iPhones and Samsungs. Copying existing phones might help to keep design and development costs low in the short-term, however the company stands to lose in a highly competitive market if it doesn’t develop its own distinctive design identity.
  2. Censorship: As Chinese citizens become increasingly more connected and social media becomes even more powerful in the country; Xiaomi, one of the chief facilitators of this social change comes under increasing pressure to conform to the nation’s censorship regime while continuing to provide value to its consumer base. Balancing the aspirations of a billion strong market with high hopes for better and richer lives while operating within a heavily regulated nation is a tough ask. So far the company seems to be managing surprisingly well although future uncertainties certainly remain!
  3. Economic downturn in China: With the downturn in China in recent times, some commentators have said that the $45 billion valuation is unfeasible because of the drop in sales in China and also the prospects of the global economy looking not very optimistic in 2016.
  4. Competition: The middle market is exciting, but it is also very crowded. lists over 120 manufacturers of mobile phones, most of whom apart from Apple and Samsung are aiming for the bulging middle market. This has created an intensely competitive marketplace in which Xiaomi needs to lead with innovation, affordability and better value in order to survive.
  5. Cultural adaptation: Although well established in China, Xiaomi’s foray into the international market is relatively recent and that has brought home new challenges for the company. On its debut in India, Xiaomi faced a lawsuit from Erricson over patent infringement. Moreover, questions have been raised over privacy and security threats arising due to customer data being stored at servers in Beijing. The company has responded by deciding to store international data in its regional hub of Singapore. As a company run out of nation with highly opaque cyber security laws, Xiaomi needs to address the legitimate safety concerns of other nations if it wants the kind of international growth that it aspires for and this is much easier said than done.

What’s next for Little Rice……

The future for Xiaomi is both exciting as well as unpredictable. It is a company which has innovative products, a vast market to sell and strong leadership. As Clay Shirky writes in his book, the company will either become a leading mobile goods and services provider in the emerging markets and see its valuation leap for the Milky Way or other companies will follow its model and achieve the same. In any case, this innovative company will always be known for helping to disrupt the digital divide and making phones affordable for millions around the planet.

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