Recently, over 30 directors of the Yabuli China Entrepreneurs Forum visited our Xiaomi headquarters. Chen Dongsheng, Chairman of the Yabuli Forum, moderated a CEO seminar themed 'Internet+ and Upgrading Chinese Manufacturing.' At the meeting, I shared Xiaomi's business model, values, the difficulties we encountered in the past, and how we successfully turned around this year. Around the Xiaomi model, directors including Chen Dongsheng, Zhang Weiying, Yan Yan, Wang Chaoyong, Yu Yu, Zhang Shuxin, and Wang Xing engaged in in-depth discussions with me. The discussions were very lively. After the meeting, I also gave them a tour of a Xiaomi Home store. Since my presentation was quite long, I'll share some excerpts with you below. There are some differences in perception about Xiaomi, mainly because Xiaomi is a new species with an unprecedented new business model structure, so it's easy to misunderstand when you don't know Xiaomi well. For example, when Xiaomi was very successful in its early days, people thought the Xiaomi model was the way to go and that internet thinking was powerful. Later, when Xiaomi encountered difficulties, people thought the Xiaomi model was flawed and internet thinking was a gimmick. In reality, internet thinking is derived from the spirit of the internet, but it's not only applicable to the internet; its essence is transparency and efficiency. The internet is 0, and the real economy is 1. If the real economy can't stand firm, no amount of internet thinking will help. In July, after our second-quarter performance turned around, we held a senior management strategy seminar to summarize our learnings. The core content was the four questions on the PPT. 1. In the early days of Xiaomi, why were we able to go from zero to number one in China in just two and a half years? Looking back, in 2010, a small startup with 30 million RMB entered the smartphone industry, the most competitive industry globally. How intense is the competition? In the international phone market, there are essentially only two major players: Apple and Samsung. Think about which other industry has only two major players. In the Chinese market, when we entered, there were 300 brands; now only about 20 remain. Among them, I believe the top few will survive, while the other ten-plus are still fighting for survival. This is the most competitive field globally. In such a fiercely competitive field, a startup starting from scratch reached number one in just two and a half years. Even today, I find it incredible. But the miracle happened. Why? I founded Xiaomi after selling Joyo, after Kingsoft's successful IPO, and after being retired for three or four years. I decided to do this when I was 40. What did Xiaomi want to do? I wanted to solve some practical problems for China. The practical problem was that domestic products were not good enough and were expensive, so many people went abroad to buy things. 2. What difficulties did Xiaomi encounter in the past two years? In the past two years, public opinion was almost one-sided in thinking we were failing. So what problems did we actually face? If we didn't understand our own problems clearly, it would be easy to make wrong decisions, especially when a company is under pressure. When I communicated with some entrepreneurs, I mentioned four words: '守正出奇' (stick to fundamentals and then surprise). When encountering problems, people hope to reverse the situation with clever tricks, but that's wrong. When you encounter difficulties, it must be that some basic skill has a problem. Sticking to fundamentals is more important than clever tricks. In fact, companies are defeated by themselves. Only when you stick to fundamentals and stand firm can you be at most a bit better or worse, and then you can think of clever tricks to win. Especially for large-scale enterprises like Xiaomi, with over 100 billion RMB in revenue and over 10,000 employees, sticking to fundamentals is very important. Our first-quarter shipments this year were 13.62 million units. The numbers for the past few quarters were not good; we fell out of the global top five in shipments, and there was a lot of negative press. Even at the beginning of this year, there was a comment saying, 'No phone company in the world has successfully turned around after a sales decline; Xiaomi's future is worrying.' Why is it hard to reverse a decline in phone sales? Because this industry has a highly integrated global supply chain, and the upstream is highly monopolized, with rapid technological iteration. Your success requires the joint efforts of many partners. If they don't have confidence in you, their support will decrease, and you'll slide step by step into the abyss. What difficulties did we encounter? The first difficulty was vicious competition in the online market. After our $45 billion valuation came out, everyone thought they could do it too, just by burning money. So in the past two years, some peers lost astronomical amounts of money in the phone market. The second difficulty was that we focused on online sales but missed the offline replacement wave in county and township markets. Xiaomi's entire business model is designed for high quality and high cost-performance. High cost-performance is an efficiency revolution. To improve efficiency, in the market conditions at that time, only e-commerce could achieve the efficiency Xiaomi needed. So in the past few years, we focused on e-commerce, but there was a huge flaw: e-commerce only accounts for 10% of total retail sales. To this day, 90% of people still buy things offline. That means even if you have 100% of online sales, you only have 10% of the market. In the past few years, the biggest problem Xiaomi faced was how to upgrade its strategy and how to win. So our most painful issue was how to do offline retail efficiently. The typical pricing in the phone industry is 2 to 2.5 times the cost, because you need to spend a lot of money to make the offline market work. Originally, we could do e-commerce with near-zero gross margin. But when we went offline, the pricing structure had problems. I had to do e-commerce at cost while adding 100% markup for offline, which led to internal conflict and distorted behavior. So for the past two years, we've been trying to break through strategically. Either we settle for being a decent phone e-commerce company, or we find a way to improve the efficiency of China's entire retail industry, which requires the same determination as when Walmart and Costco were founded to change China's business landscape. The third difficulty was the management challenges brought by rapid growth. Think about it: a company growing from a dozen people to over 10,000 people—oh my, there are leaks everywhere. I've always said our business is a 'seafood' business; you have to sell it within half a day, or it goes bad by the afternoon. Last time, our CFO Zhou Shouzi said a phone company boss told him we're in the 'ice cube' business; once you take it out in the sun, it melts. Our business is very complex, involving huge cash flow, inventory, and very long cycles: orders need to be placed four months in advance, and inventory turnover requirements are high. In such a situation, a rapidly growing company can easily fall into the abyss with the slightest misstep. In fact, it's these three problems. I think the most critical one is the second: can the business model break through? 3. Why can Xiaomi successfully turn around today? How did we solve the three major difficulties just mentioned? Actually, at the beginning of last year, Xiaomi's all-hands meeting proposed two words: '补课' (make up for missed lessons). I think we needed to recognize that our previous number one position was still fragile; we didn't yet have the strength to match it. We had to put down our pride and start from scratch, fill in what we lacked, benchmark against industry leaders, and maintain a humble attitude. We only mentioned '补课'; sales were not in our plan. If we persist in making up for lessons and improve our basic capabilities, how could we not win? The key is to practice basic skills. Making Up for Lessons How exactly do we make up for lessons? First, align our organizational structure. Every industry has its rules. Leading companies in the industry have found optimal solutions through repeated organizational optimization. We must respect industry rules and learn from peers. In business management, the core is to recognize the complexity of the phone industry, which requires integrated production, supply, and sales. We set up specialized planning, coordination, and coordination departments in the phone division, supply chain, and Xiaomi.com sales team, and built a coordination team of over 100 people from scratch in one year. These 100 people help me coordinate the entire huge production-supply-sales system for joint operations. After we had these capabilities, this year I proposed three major propositions. We face 300 problems, but I said we can't solve 300. We need to solve problems with innovation, quality, and delivery as the leading propositions. For the phone business, quality is the lifeline. We became number one in China because of quality, and we eliminated all counterfeit phones because of quality. But this year, the problem is that our competitors are no longer counterfeit phones; our competitors are the best companies among Chinese enterprises. The question is how to comprehensively surpass them in quality. At the beginning of this year, I personally led the Quality Committee. After more than ten special meetings, we formulated a detailed quality action plan and set up a Quality Office to supervise. Our goal is to win the market with the iron fist of quality. Of course, I said at the beginning of this year that the worst was over, and soon the second quarter showed immediate results. We shipped 23.16 million units in the second quarter, a 70% quarter-over-quarter increase, returning to the world's top five. Now it seems the performance came back faster than we imagined. I think it's the inevitable result of our efforts over the past year and a half to consolidate the foundation and practice internal skills. So we created another miracle and basically achieved a turnaround. I believe the core of the turnaround is distinguishing advantages and disadvantages, focusing on disadvantages, abandoning KPI and sales targets, and fully consolidating the foundation to ensure the company's healthy operation. I think another key reason for Xiaomi's turnaround is innovation, because without innovation, a turnaround is impossible. What have we done in innovation? First, let me mention a result: when we were in the most difficult time, at the beginning of this year, Boston Consulting Group released its list of the world's top 50 innovative companies, and two Chinese companies were selected, with Xiaomi at 35. In FAST COMPANY's ranking of the world's most innovative companies, six Chinese companies were selected, with Xiaomi at 13. Core Technology Innovation What is core technology innovation? For example, last year we launched the full-screen phone Xiaomi MIX globally, which amazed the world. This phone with a full ceramic body had a screen-to-body ratio of 91.3%. We named this new phone design 'full screen.' Now, including this year's Samsung Galaxy S8 and the upcoming iPhone 8 in September, everyone has followed this design, and the entire industry has accepted the definition of 'full-screen phone.' We stood at the world's peak and led the entire technology trend. Next, let's talk about our investment in cameras. The Xiaomi 6 is highly recognized by users for its 'dual cameras with optical zoom, making portraits more beautiful.' Our dual-camera zoom is much better than that of competing flagship phones. We found a notary office and conducted a blind test between the Xiaomi 6 and two other flagship phones from competitors. 63% of people thought Xiaomi's phone was better. In fact, it's not just the screen; we've also recruited talent and built top-tier teams in a series of core components, including chips, invested heavily, and worked hard to achieve a large number of core technology innovations. As of now, Xiaomi has obtained 4,806 authorized patents, half of which are international patents. Last year, we applied for 7,071 patents and obtained 2,895 patents. While supporting the continuous emergence of product technology innovations, these patent reserves also lay a good foundation for our future expansion into European and American markets. Business Model Innovation The key to understanding business model innovation is the question: 'What kind of company is Xiaomi?' Many people have asked me about Xiaomi's business model before, and it was hard to explain in one sentence. Later, I finally figured it out: because we are a new species, you can't define what this company is. I recently summarized it in one sentence: Xiaomi is a phone company, also a mobile internet company, and even more a new retail company. We've done a lot in the mobile internet field and reached a large scale, with revenue exceeding 10 billion RMB this year. Many people haven't realized Xiaomi's other value: we've evolved from an e-commerce platform company to a new retail platform. Looking at this diagram, you can better understand all of Xiaomi's strategies. Xiaomi's phones are well-made, which drives sales on Xiaomi.com. Once Xiaomi.com is established, it sells more phones to users. Then, by pre-installing the Xiaomi Mall app on Xiaomi phones, we further boost sales. In simple terms, it's a model where hit products drive the platform, and the platform drives hit products, creating a virtuous cycle. Then our bigger strategic breakthrough was the Xiaomi Home stores. Xiaomi Home is an offline retail store with e-commerce efficiency, achieving sales of 270,000 RMB per square meter, currently ranking second in the world. I think this is a huge innovation by Xiaomi in the past two years: being able to run offline retail stores at e-commerce costs! Buying a phone is a low-frequency behavior. Manufacturers spend a lot on advertising to convince users to buy once every two years, and then they need to advertise again after two years. How to solve this problem? It requires a product portfolio. For this, we invented the hardware ecosystem chain approach, enriching and perfecting the product portfolio, using one or two hundred products to keep users engaged. Our philosophy is different from all other companies. My goal is to make the best products and sell them cheaper and cheaper. This is the great dream that excited me when I founded Xiaomi seven years ago. What's the downside of this model? It's too complex. The person needs to understand hardware, software, IoT, retail, etc. It's almost an 'all-around' model, which places very high demands on the entire team and makes execution very difficult. Which company in the world can do platforms, hardware products, and the internet? Very few. The Xiaomi model itself has great difficulty, with world-class competitors in every dimension, and you must win. This is our summary of the Xiaomi model diagram, which we call the 'whirlwind diagram.' From the diagram, you can clearly see that Xiaomi's various businesses are interlocking, progressing step by step, and continuously upgrading. We first built the Xiaomi community, gathering a group of phone enthusiasts. Then we made the MIUI operating system. After MIUI was released, we made phones, and then the Xiaomi.com e-commerce platform. After e-commerce succeeded, we immediately made a huge determination to do cloud services and big data, and then quickly expanded to TVs and routers. Actually, TVs were also something we planned to do early on, but we were too strict about product requirements, so the release was delayed by a few months. We made routers to be the center of smart homes. Then we did whole-network e-commerce, entertainment, ecosystem chain, Xiaomi Home, internet finance, and the Youpin Mall (formerly 'Mijia Youpin'). Youpin Mall is a whole-network premium e-commerce platform focused on crowdfunding and selection, and its scale is already quite large. We define Youpin Mall to have 20,000 SKUs, Xiaomi Mall to have 2,000 SKUs, and Xiaomi Home to have 200 SKUs. 4. What is Xiaomi's core competitiveness? I often say a few things internally at Xiaomi: First, the Mi Fan culture, which is about making friends with users. Actually, making friends with users is quite difficult. Many people always think of marketing methods as how to sell things to consumers at higher prices. Such users are enemies, not friends. Taking money from their pockets and putting it into yours is 'robbery.' So how to make friends with users is the foundation of all our business. Second, make good products that touch people's hearts and are reasonably priced. Third, the 'triathlon' of three basic skills: hardware + new retail + internet. Fourth, industry + investment, using the ecosystem chain to improve the product portfolio. Xiaomi's ecosystem chain department, together with Xiaomi's own investment department, has invested in over 200 companies, covering far more areas than people might imagine. My view is that if we don't have to do something ourselves, we don't do it, because our business is extremely complex, and we must always emphasize focus and simplicity. The development of our ecosystem chain business can be compared to 'from a big ship to a fleet.' At the beginning of 2014, co-founder Liu De led a dozen people to establish the ecosystem chain department and successively made various products. Now, the wristband is number one in the world, the air purifier was number one in China last year, and actually number one in the world. The balance scooter is number one in the world, the power bank is number one in the world, and the robot vacuum is also number one in the world. The entire company has won over 145 industrial design awards, including for Xiaomi phones, TVs, set-top boxes, and speakers. I believe good products also need good design. Among our eight founders, Liu De graduated from Art Center College of Design and previously served as the head of the Industrial Design Department at Beijing University of Science and Technology. When I was building Xiaomi, I thought Chinese products needed to change in design. Previously, people thought quality was about functionality, but the quality of experience is also very important. When you visit Xiaomi Home, you'll know that what China's manufacturing designs today is world-class. Every day, many foreigners come to our Xiaomi Home stores to 'buy goods overseas.' Xiaomi Home opened its first store in February last year, and by August this year, it had opened 156 stores. Currently, every store that opens is a hit, with amazing sales per square meter, second only to Apple, ranking second in the world. We use the concept of making friends with users to continuously think about how to improve efficiency and how to give users a better shopping experience. On weekends, every Xiaomi Home store is packed. People think the retail industry is not doing well, but it's actually traditional retail that's not doing well. To succeed in retail, the key is to achieve e-commerce efficiency and combine it with the advantages of traditional retail in display and experience. Our goal for Xiaomi Home is to open 1,000 stores in three years, and strive for revenue of over 70 billion RMB within five years. Currently, each store averages 200 square meters, with average revenue between 65 million and 70 million RMB. How did we achieve such performance in just over a year? I think the key is Xiaomi's values. First, make friends with users. If you treat users as friends, you think about what price and service you should offer to friends. Second, have the right product portfolio. Third, insist on high quality and high cost-performance. Once high quality and high cost-performance are ingrained in consumers' minds, users feel that buying anything at Xiaomi doesn't require thinking about money. Now, Xiaomi Home stores have baskets like supermarkets, and many people shop with baskets. The core of the Xiaomi model is to gain users' trust. My concept is to make products good and cheap, so users don't have to think and don't look at prices when buying. This way, sales efficiency can be maximized. If users say some products have high gross margins and some have low, and they need to pick and choose, that's the practice of ordinary shopping malls. At our stores, you don't need to pick anything; everything is of great value. If Xiaomi achieves this, Xiaomi's business model is number one, with top-notch credibility! In fact, Costco in the U.S. has achieved this. Many of our friends buy things at Costco without looking at prices. Think about it: if you do business and users don't look at prices, what does that mean? I think it's the highest level of business. You have to do business so that users don't need to look at prices; that's their trust in you, and that's the greatest success in business.