“We should launch the air purifier in India,” Hugo Barra quips absentmindedly as we sit in the eighth floor suite of the Sheraton hotel in New Delhi, overlooking the Qutub Minar. The 12th century monument is barely visible through Delhi’s infamous haze on this Friday afternoon. Delhi has some of the worst air quality in the world, often scoring worse than Beijing.

As we order coffee, I stare at the Xiaomi Mi 5 lying on the table, or whatever’s left of it after undergoing a trademark Barra teardown session. However, Xiaomi’s flagship device is not what we are talking about today.

 

Even as Barra and Xiaomi put their muscle behind ensuring the Mi 5’s success, there are nearly 200 employees working on the 11th floor of Xiaomi’s Beijing headquarters — and none of them are working on the post-launch dynamics of the Mi 5 or developing the next Mi Note or Mi 6. In fact, none of these employees work on any product made by Xiaomi.

This exclusive group, Marshalled by Liu De, one of Xiaomi’s eight co-founders, includes specialists across product management, industrial design, supply chain management, marketing and other functions. Their job is to assist those companies — more than 50 currently — that make what Barra calls the the “Mi Ecosystem.”

Xiaomi is known for its cheap smartphones whose specs and features rival Apple’s iPhones, its ridiculous flash sales that run out in seconds and its massive product launch events that are attended by thousands of fans. But these 200 employees are leading a transformation from within, one that could change the world’s perception of the company.

Giving ‘Made in China’ a good name

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Xiaomi vice president of global operations Hugo Barra points toward the Mi TV 2 after a presentation in San Francisco.

IMAGE: JEFF CHIU/ASSOCIATED PRESS

“China’s manufacturing bays are often viewed as low-quality and copycat,” Barra tells me. “This is not very different from how Japan was considered in the ’60s. How Sony, Toshiba, Panasonic and others helped turn around the image for Japan, we think we would be able to do that for China.”

“It is almost a noble cause — the notion of building a consumer electronics company out of China with products that are designed in China but are world class and very very innovative.”

Over the last two years,

Xiaomi has quietly and steadily built a constellation of companies around its core business

Xiaomi has quietly and steadily built a constellation of companies around its core business in order to leap into the consumer electronics space. However, what many don’t know is that wasn’t always the plan.

“The initial goal was to populate our e-commerce store with interesting products that people will love and that will cause them to keep coming back,” Barra says. “If all we sold were phones, we probably won’t have much traffic because people only buy phones once in a while. So the idea was to have a family of products that will allow us to have a full on e-commerce store. The first thought was, ‘Let’s focus on mobile accessories,’ and that’s how the first product in which we invested, the Mi power bank, came into being.”

Shenzhen is a bustling metropolis just north of Hong Kong and China’s first Special Economic Zone. What was once a sleepy fishing village, is now home to 18 million people, mostly migrants, who work in the hundreds of factories that build pretty much everything in the world of electronics — from the iPhone’s SIM ejector pin to the iPhones themselves. Xiaomi had hoped that, being from China, it would be an easy task to get a manufacturer in Shenzhen to custom-build power banks and put the Mi branding on top of it. But it wasn’t.

Quickly enough, Xiaomi understood most of these manufacturers were there to make a quick killing and move on. Many were cutting corners to make higher margins, while others weren’t interested in a long-term partnership. Quality was the least of their concerns — most of their customers were interested simply making cheap accessories. Xiaomi, however, didn’t want to compromise on quality as it would impact the perception of its smartphones.

The other option: Xiaomi could build the power bank and other accessories itself. But that would have meant dedicating valuable resources away from its core smartphone team to build an ecosystem of accessories and dilute the company’s focus.

So instead, Xiaomi’s enterprising founder Lei Jun had the novel idea of backing and even incubating startups that would build innovative accessories that Xiaomi could sell on its online store.

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Lei Jun, Chairman and CEO of Xiaomi Technology, delivers a speech at a launch event for Xiaomi’s new digital products in Beijing, China.

The 46-year-old founder of Xiaomi is a serial investor. Lei Jun started off as an engineer at Kingsoft and went on to become the software company’s president. He also founded Joyo.com, which was eventually acquired by Amazon for $75 million. He invested in mobile browser maker UCWeb, which became the largest third-party smartphone browser with over 500 million users and was bought by Alibaba in 2014. He also invested in the Chinese video streaming platform YY and became the founding member of Shunwei Capital, an investment firm that funded many companies closer to Xiaomi’s interests.

Making incubation and industry

Under Lei Jun’s guidance, Xiaomi started investing in startups in the mobile accessory space. The initial candidates were those in the power bank and personal audio devices, which would pair well on Xiaomi’s online store along with its smartphones.

The first company Xiaomi invested in was Zimi, the maker of the Mi Power Bank. Xiaomi helped the startup with the design of the product, introduced it to Xiaomi’s supply chain and manufacturing partners, and placed the power bank in its online store, mi.com, which had become among the biggest e-commerce destinations in China, thanks to the success of the company’s smartphones.

Mi Power Bank

The “Mi Power Bank” was an instant hit. It had an appealing design, the aggressive pricing one would expect from Xiaomi (it starts at $9.99), and the trust it had built with its users. Xiaomi says it’s sold more than 47 million power banks to date. There’s still so much demand for them that they’re almost never in stock. Fake Mi Power Banks flood markets in both China and India, while Xiaomi’s rivals have launched their own power banks that don’t look much different from the one that started the trend.

With the success of the Mi Power Bank, Xiaomi started to aggressively look for more products it could build and sell right when the Internet of Things, or IoT, became the talk of the office. One of the first IoT startups in Xiaomi’s portfolio, which also brought Xiaomi’s accessory business under global spotlight, was Huami. The $11 “Mi Band” it built for Xiaomi ended up being so successful that it was second only to Fitbit in in worldwide wearable sales in 2015, according to IDC. Xiaomi claims it’s sold over 18.5 million Mi Bands so far.

“As a company, we underestimated the potential of the product,” says Barra.

“As a company, we underestimated the potential of the product,” says Barra. “We knew we had a killer product insight — let’s make a wearable device with a 30-day battery. We didn’t really realize the impact it would have. Of course, the price helps but if you look at all the people here in India and also in China, who could easily spend $200 on a wearable or even more on an Apple Watch, wearing the Mi Band. You ask them why and they invariably say because of the battery life and they don’t have to charge it. That insight and the price made it such a runaway product.”

Xiaomi kept investing in startups and also sought out entrepreneurs whom it could incubate to work on new products. However, it started taking a toll on Xiaomi’s internal teams that were helping these “portfolio” companies. Lei Jun decided to give the arrangement more structure and called upon Xiaomi’s co-founder and head of industrial design, Liu De, to see if he would lead the newly created division.

Soon Liu De’s Mi Ecosystem team had over 200 full-time employees in an office on the 11th floor of Xiaomi’s headquarters in Beijing. The division didn’t just do portfolio management but also decided which product category to go for next and sought out entrepreneurs and partners who could help them build those products. One common theme of majority of startups is that they have “mi” in their name, which means rice in Chinese (Xiaomi means “little rice”).

Xiaomi usually invests in startups either in the Seed or Series A round. The amount varies from a little under a million dollars to a couple of million dollars. Xiaomi doesn’t always look at a controlling stake but just enough to ensure the startup is aligned with its vision.

The ecosystem takes shape

The startups were chugging along nicely when Xiaomi’s ambitions had a sort of an epiphany. The “mi” startups were belting out products like Wi-Fi routers (like a much cheaper version of Apple’s AirPort), wireless weighing scales, selfie sticks, a pen to test water quality, a Segway-like Ninebot Mini hoverboard, in-ear and over-the-ear headphones, smart TVs, movement and occupancy sensors for homes, surveillance and web cameras, and much more.

The accessories business was doing well for Xiaomi and worked in tandem with its plans to become an Internet services company. All of these products were sold on Xiaomi’s online store as well as its Mi Home app, where you could not only control your connected Mi devices but also buy new stuff. The success of these products emboldened Xiaomi to double down on them and at the same time extend their scope. It felt it was time it could go beyond the common accessories and appliances like smart TVs.

“It dawned on us that there is so much opportunity in a wide area of products simply because there hasn’t been much innovation here,” says Barra. “You know, they have kind of remained the same, the design hasn’t been rethought, they haven’t evolved, connected to the Internet… There was just a lot of opportunity.”

Thus came the big a-ha moment: Xiaomi decided to make an air purifier. So far the company had made accessories that would be companion products to its smartphones or tiny gadgets that would appeal to its young, tech-savvy customers. But could it sell a home appliance without a natural connection to a smartphone? And could it create the same kind of hype for such a traditionally “boring” product?

Turns out it could.

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Xiaomi incubated a company called Zhimi and tasked it with making an air purifier worthy of carrying the Mi brand. It had to look good, offer better air purification than existing models, and it had to be connected to the Internet so users could control it with their Mi phones.

It took Xiaomi and Zhimi less than a year to achieve that. Not only did the Mi Air Purifier look like a work of art — something you wouldn’t mind placing in the center of your room rather than tucking it away in a corner — it was also smart. Users could get real-time indoor air quality reports on their smartphones, they could control the air purifier remotely, and it could even automatically order new filters from Mi.com! No other air purifier in the market offered all this.

The Mi Air Purifier accounted for 20% of all new air-purifier sales in China within seven months of launch, Xiaomi claims

The Mi Air Purifier accounted for 20% of all new air-purifier sales in China within seven months of launch, Xiaomi claims, and it has sold over a million units so far. It has already launched a smaller, better version of the first-generation Mi Air Purifier.

“All these are simple ideas if you think from a Silicon Valley point of view, but they were being thought about in an old industry point of view — selling them through old distribution channel with huge margins,” Barra says almost matter-of-factly.

Xiaomi is not just rethinking how to make existing appliances smart, connected and beautiful — it’s also looking at how to make expensive appliances more affordable and bring them within the reach of many more. Its latest bet, a RMB 1,000 (approximately $150) Mi Rice Cooker, could have the potential to get the Mi brand even in households that don’t have a Xiaomi smartphone.

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Like all other devices in the Mi Ecosystem, even the Rice Cooker is connected to the Internet and comes with its own app that let users control it with their smartphones. All the user needs to do is scan the barcode of the rice packet and the cooker would do all the cooking. Xiaomi claims its rice cooker can compete with expensive, top-of-the-line rice cookers from Japanese brands, which not only cost a lot to manufacture but have high margins, too.

“Making a good rice cooker is not that easy,” says Barra. “We set out thinking how can we redesign a rice cooker to deliver a similar quality and to simplify the manufacturing process. That’s what we do — we rethink and redesign products rather than do it the same way the industry has been doing for a decade.”

Rice is serious business in China and a lot of Xiaomi’s success in becoming a major home appliance company could ride on the success of the Mi Rice Cooker. Lei Jun has set an ambitious goal of RMB 10.5 billion ($1.62 billion) in revenues from the Mi Ecosystem in 2016. The Mi Rice Cooker better does well, else that’s a lot of Mi Power Banks and Mi Bands to sell.

Xiaomi’s story has barely begun. It’s still known as the cheap-smartphone upstart that’s challenging the likes of Samsung and Apple in various markets, but that description is rapidly becoming inadequate to encapsulate the company’s large product catalog and even-larger ambition. In the end, its impact on China and the world may have less to do with mobile than anyone ever thought.

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