Xiaomi Case

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S C G -5 2 7
July 17, 2017
JEREMY B. DANN
KATHERINE BENNETT
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ANDREW OGDEN
Xiaomi: Designing an Ecosystem

For the “Internet of Things”
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early two dozen shoppers navigated the consumer electronics boutique, some looking for the
latest, top-performing gear and others searching for the perfect accessory to complement the
products they already owned. The store’s walls were a gleaming white and the floor a light
gray. The brightness of the environment definitely set it apart from several of the neighboring stores
in this trendy Beijing shopping mall.
Liu De walked amongst the displays of smartphones, each anchored with a cable to a base on the
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rectangular natural wood tables. But Liu was not checking out the smartphones’ latest features—
rather he was checking out the people checking out the smartphones’ latest features. Liu was one of
the cofounders and top executives at Xiaomi, the fast-growing maker of smartphones and other
consumer electronic devices which some industry observers had tabbed as “The Apple of China.”
Trained as a designer, he couldn’t help
but employ his keen powers of
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observation as he navigated the retail

location, the first-ever Xiaomi owned and
operated store.
Though Xiaomi’s rapid rise was

undeniably tied to savvy uses of social
network communities and e-commerce,
Liu and his fellow cofounders believed
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that the company’s future growth might

be more linked with brick and mortar
operations like the one he was touring.
They were pondering making some major
investments in retail operations for the
first time.
Accompanying Liu on this consumer observation mission were Li Ningning and Chen Lu, early
Xiaomi employees and, like Liu, also trained in design at Pasadena, California’s Art Center. While Liu
observed customers trying out mobile phones and tablets on counters near the front of the store, Li
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and Chen were watching shoppers’ reactions to very different sorts of products. A college student
tried out a desk lamp while a young mother examined a rice cooker. The two Xiaomi designers took
interest because these seemingly mundane items were designed to connect with their company’s
smartphones—new “Internet of Things” products that could be controlled by Xiaomi technology. Li
and Chen played important roles in managing the relationships with dozens of allied companies that
took part in this emerging “Ecosystem” of cobranded products.

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SCG-527 Xiaomi: Designing an Ecosystem for the “Internet of Things”
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Xiaomi’s choices about its future retail strategy took on greater urgency as more and more
connected Ecosystem products were released. The company’s top executives believed these offerings
would play a critical role in deepening the relevance of Xiaomi’s brand—but how much would they
have to alter their incredibly successful marketing strategy? And how much might they have to invest
to create venues capable of featuring this multitude of products?
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Planting the Seed: The Early Days of Xiaomi
In April, 2010, a group of eight men sat down for a dinner meeting in Beijing. High-technology
entrepreneur Lei Jun and six telecom and computer science engineers put together the dinner
meeting to ask industrial designer Liu De to join them in a risky venture—founding a new mobile
telephone company for China. Recalling the dinner, Liu, who had spent much of the previous decade
in the U.S., noted, “The conversation with the founders lasted seven hours. I had to think about it. It
would mean moving back to Beijing and undertaking a great risk.” Knowing the track record of each
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man at the table, Liu eventually signed on. “In your whole life, it’s not easy to find such a team. This
was a good opportunity. The time was right and the people were good.” Over the next few months the
team met regularly and developed a plan (see Exhibit 1 for Xiaomi cofounder biographies and
Exhibit 2 for 2015 organization chart).
Combining funds from their previous ventures, the founding team had $11 million in capital to
start. Their plan was to develop software and hardware designed specifically for the Chinese market.
While there were a number of mobile handset products manufactured and sold in China, the team
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believed that none of those offerings was designed specifically for that market. In addition, the
founders believed they were witnessing a decisive switch in the Chinese market from feature phones
to smartphones. “Before 2009, the Internet had been based on the computer. Now we were seeing
that the Internet would use mobile technology, based on the smartphone. China came to this
transition late, but was moving quickly. This revealed a new opportunity for us,” Liu recalled. The
founders wanted to form a company to design a high-quality, high-tech smartphone for the unique
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needs of a rapidly-growing market of young, upwardly-mobile Chinese.
The ROM—a custom operating system for Android phones—would come first. This would be
designed for the pinyin method of entering Chinese characters, capitalizing on the fact that none of
the products sold at that time in China offered an elegant user interface featuring this convenient data
entry method. The founding team also envisioned creating a social network to stay in close contact
with a fan club of customers—dubbed the “Mi Club”—using this ROM. The company intended to
provide weekly updates based on the fans’ feedback and suggestions.
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After the ROM and fan enthusiasm was well established, they planned to use this online network
to create demand for a handset as powerful as Apple’s iPhone, but at a much lower cost.
Prof. Jeremy B. Dann, Lecturer in Entrepreneurship and Director of the Case Program, Katherine Bennett, Professor in Art
Center’s Graduate Industrial Design Program, and Prof. Andrew Ogden, Chair of Art Center’s Graduate Industrial Design
Program, prepared this case. The authors would like to thank Case Fellow Laju Obasaju for her contributions to this case.
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The development of this case study was supported in part by a grant from USC Marshall’s International Business
Education and Research Program (IBEAR). Cases are developed solely as the basis for class discussion and are not
intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management.
Copyright © 2017 Lloyd Greif Center for Entrepreneurial Studies, Marshall School of Business, University of Southern
California. For information about Greif Center cases, please contact us at greifcases@marshall.usc.edu. This publication
may not be digitized, photocopied, or otherwise reproduced, posted or transmitted without the permission of The Lloyd
Greif Center for Entrepreneurial Studies.
Xiaomi: Designing an Ecosystem for the “Internet of Things” SCG-527
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Small Screen, Big Picture: Xiaomi’s Vision for Chinese Smartphones
Before he graduated from ArtCenter College of Design’s Graduate Industrial Design department,
Liu De studied industrial design and engineering at Beijing Institute of Technology and founded the
Industrial Design Department at the University of Science and Technology in Beijing. From his work
at ArtCenter he brought the idea of strategic innovation to the founding team’s early planning efforts.
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“We wanted to build a breakthrough business model that is superior on multiple levels, based on an
understanding of the market and current trends,” he recalled. “It wasn’t enough to have a great
product; we had to innovate in different areas of the company, and those innovations needed to be
rooted in our understanding of new generation of young Chinese.”
Conventional wisdom held that feature phones—traditional cell phones offering basic calling and
texting capabilities but not the advanced functions of smartphones—would remain longer in China
and India, with telecom companies innovating around the form factor’s limitations. In fact,
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smartphones were introduced to China shortly after 2008 when the country’s telecom industry was
reorganized to accommodate broadband mobile. Sales of the new devices quickly outpaced the
turnover of older-style phones, especially in the first- and second-tier cities. Though smartphones in
developed countries often worked in conjunction with Internet-enabled personal computers present
in most households, in China, the smartphone often proved to be the first device that could allow
lower-income individuals to access a new array of information and services. Opportunistic electronics
executives and entrepreneurs seized on this opportunity. According to Fortune, “For years Chinese
phone makers served in the shadows as manufacturers for Nokia and others. Everything changed
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after Google introduced Android in 2008. The inexpensive and customizable mobile operating
system, an answer to Apple’s status-quo-shattering iPhone, made it possible for any electronics
company with some savvy to develop a worthy alternative. In no time Chinese companies shifted their
strategies from churning out white-label devices for others to building brands for themselves.”1
The founders strongly believed they could capitalize on the opportunities presenting themselves in
this landscape, but thought they would face an imposing set of obstacles. They were starting small and
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faced some tough, well-established competitors who had been manufacturing mobile phones for
years. They believed they understood the Chinese customer and could design a better product for
them, but how would their unknown company attract an audience? They didn’t have the capability to
build stores or a distribution network; could they bypass traditional channels and sell exclusively
online? How could they sell an unproved product that way? They would have to build a model that
would answer these challenges.
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Connecting with the Customer

Liu credited a project he completed during his studies at ArtCenter for giving him the insights on
Chinese Millennials—the generation reaching adulthood in the 21st Century—that became the
foundation for the new company’s “fan network” and marketing outreach program (see Exhibit 3 for
population statistics in Xiaomi’s target demographic). While at ArtCenter, Liu created a business plan
for a company that would make plush toys based on children’s drawings. Parents could upload their
child’s drawing and the toy would be sewn to match it. In his research for this project, Liu discovered
interesting attributes of the emerging generation of Chinese middle-class consumers. “Their parents
were farmers, but sent them to school to become engineers. The parents had high aspirations,” he
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said. Aged 17 to 35 in 2010, this generation had grown up to be savvy about and obsessed with new
technology and wanted to become members of the fast-growing new middle class. The younger
members of this cohort could be classified as China’s Millennial Generation. In 2010, Advertising Age
wrote of this group: “To be a millennial in China is to never have known what a recession looks like.
It's to have known only economic expansion and rapid, accelerating change. It's to have learned
English in school and accessed the world via the Internet.”2
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Like 60s-era US youths appropriating the American flag and using it for clothing and decoration,
this generation was adorning themselves with Maoist iconography. According to Liu, “This younger
generation was very different. They loved plush toys, they loved the Internet and games, and they
loved new technology. They thought being Chinese is cool and that Communism is cool. They wore
traditional Communist icons and symbols and put them on T-shirts in ways that their parents
couldn’t ever imagine.”
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“We thought we could connect with these customers through social media and create fan
enthusiasm for our products,” Liu remarked. Rather than remain in “stealth mode,” the nascent
venture connected with potential early adopters by speaking at universities and posting blog posts on
design and engineering websites about the different approach to the Chinese market for mobile
telecommunications products. The tactic proved particularly effective in reaching what Liu dubbed
“geek engineers,” a group that would form the core of a fan club that would expand wildly in coming
years.
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The new smartphone software and handset would be designed for this rising generation of
Millennials, a group infatuated with Apple’s products, but unable to afford them. The founders
intended to design a smartphone that was as powerful—or even more powerful—than the iPhone, at
half the price.
Competition and Communications

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The Chinese mobile handset market in 2010 was dominated by Nokia’s feature phones. Apple’s
3GS smartphone was introduced in late 2009 but had barely established a foothold. It was expensive
and hard to find—and unable to access Wi-Fi due to local regulations.3 Samsung had a strong
presence in both feature phones and smartphones. Huawei, the large domestic telecoms equipment
manufacturer founded in 1987, was at the time a distant third in the mobile market and offered no
inexpensive smartphone (see Exhibit 4 for mobile phone sales figures).
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At the time, Chinese telecom service providers offered no carrier price subsidy for smartphones.
People bought their phones outright, unlike in the US where customers procured discounted phones
via contracts with service providers. Apple’s iPhone was an expensive luxury. Xiaomi might be able to
make a name for itself offering an affordable, technically sophisticated phone to the new, young
Chinese consumer, the founding team posited. Of the smartphone landscape at the time, Liu
remembered other developments that boded well for the nascent company: “Nokia had just closed
their Shanghai office. Samsung was popular, but their software was very hard to use, so our different,
simpler approach to software could prove a huge advantage.”
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Hitting the Market

In April 2010 the startup released two software products: MIUI, a ROM interface overlay for the
Android operating system, and MI Talk, a mobile chat application. Both caught on quickly with “cell
geeks,” according to Liu. CNN described Xiaomi’s early efforts to connect with customers: “Its first
order of business was to go on Chinese sites looking for passionate and knowledgeable Android users
to test its products. Its first 100 users became a kind of external brain trust and auxiliary marketing
arm, offering both detailed feedback and public praise for MIUI, the Mi User Interface.”4 Though the
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early users found a lot to like in Xiaomi’s early offerings, they were still demanding, which actually
ended up being a competitive advantage for the company. Liu noted:
These new customers were loyal to the products they liked, and they were picky.
They told Xiaomi what they liked and didn’t like right away, enabling our
engineers to refine the software based on the feedback and release a new update
each Friday. This fed the customers’ need to refresh their system often, and gave
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them a feeling of ‘shared ownership’ of the product. Xiaomi had an advantage in
optimizing the software and it was hard for competitors to catch up.
Since all of Xiaomi’s software was being installed on smartphones manufactured by other
companies at the time, the leadership team felt they might be chipping away at previous brand
loyalties and setting themselves up well for their foray into hardware.
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Liu remembered the days building up to the launch of the first hardware product being very
stressful for the founders as well as the early employees. “I lost a lot of weight then. I spent all of my
time negotiating with suppliers, trying to find ones who would agree to work with a startup,” he
stated. “In the cell phone world, even if you have the money, suppliers wouldn’t give you the
components. They wanted to supply only the big players like Samsung and Apple. They didn’t want to
work with unknowns.” Growing desperate, Liu and fellow cofounders Lei Jun and Zhou Guangping
flew to Japan just two days after the devastating 2011 earthquake to convince one of the biggest
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screen suppliers to work with the upstart firm. “Nobody was flying to Japan at that time. We were the
only passengers on the plane. Our willingness to fly into Japan after that disaster impressed the
vendor, and they agreed to a contract,” Liu said.
Xiaomi entered the handset market in August 2011 with the M1 smartphone, priced at around
$300. As the founders had hoped, the fan base (by this time over half a million registered users)
created an intense demand for the products early on. Before the commercial release of the M1, 600
engineering prototypes sold out online in three seconds. As Xiaomi began to announce the availability
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of new product lots in the months after the market launch, the phones would sell out quickly online.
In September 2011, 300,000 M1 units were pre-ordered in 34 hours. Just weeks later, Xiaomi sold
100,000 phones in three hours. Liu recalled that the pace of sales came as a surprise: “Our original
sales goal was just 2,000 handsets. In January 2012, 500,000 phones sold in 36 hours.” 5
The company’s unexpected grassroots success caused tech industry investors to take notice. In
June of 2011 Xiaomi was valued at $250 million. Six months later, the value was $1 billion. Over the
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next three years, the founders watched the valuation ascribed to their company increase to $45
billion.6 Liu described the founders’ emotions in the face of this rapid growth: “At the beginning, we
thought the eventual valuation would be $10 billion. After one year, we saw it could be $100 billion.
In planning our call center, we thought that building one for 2,000 people would be a joke—much too
big for our needs. Today, our call center has 3,000 people.”
Crafting the Company: Xiaomi’s Culture and Brand

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Xiaomi’s rapid expansion led to growing pains and the need to recruit top talent quickly. Xiaomi
differentiated itself by placing an emphasis on attracting talented and experienced designers—in
addition to engineers—early on. According to Liu, “There were not many ArtCenter graduates in
China at the time, and Xiaomi had three. This was a big thing.” Other firms’ losses became Xiaomi’s
gains when it came to building the engineering department. Motorola and Google had recently shut
down their Chinese operations (largely due to censorship and other state controls) and a highly
talented base of engineers became available to the fast-growing startup.
Xiaomi set out to form a company culture that was different from those of other Chinese firms—
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even different from the working environments in the growing array of startups in the country’s tech
sector. “New employees got a nice welcome package with a special code containing a hidden message.
This was fun, and attracted creative and curious people,” stated Liu. “They were joining a family,
where even the founders were people like them, but they were also recognized as individuals. This was
unique in China. The young generation here was similar to Americans—they wanted respect for
personal effort and for individual personalities and differences.”
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Most of the founders had studied and worked in the U.S., so the company’s culture appeared very
similar to that of a Silicon Valley startup, Liu believed. ”We created a flat hierarchy and a fun and
creative office culture and this helped us hire the best people.” In addition, Xiaomi offered benefits
like an employee stock ownership plan, an almost non-existent practice in China at the time. This
convinced some expatriate Chinese engineers to return to China since they had an opportunity to earn
a stock payday comparable to what they might receive in a U.S.-based startup.
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Defining the Brand
The founders drew the name “Xiaomi” from the Chinese word for millet—a simple, ancient grain.
The founders aimed to define the brand as humble and honest and wanted to extend this sentiment
into the way they presented themselves, both inside and outside the company. They created a short
video where they posed as struggling college students sharing the same dorm room.7 For the fan
network and employees who already knew them well, this humorous look at the management team
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lent a sense of approachability.
In addition to connected the branding to the simple foodstuff, the founders also linked the term
“MI” to “Mobile Internet” and the notion of taking on a “Mission Impossible.”
The company’s stated goal was to put a smartphone in the hands of every Chinese. Xiaomi’s rise
prompted some comparisons to another tech company that took its name from one of the simplest
foods: America’s Apple. “The Chinese were very proud of their growing economy, and wanted to be
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proud of Chinese companies,” said Liu. “Everything—from the brand name to the interface and the
production of the product—is Chinese. Even President Hu Jintao [President of the PRC from 2003-
13] said, ‘In China we need our own Steve Jobs.’” The resemblance to Apple and its founder Steve
Jobs and had proven problematic at times for CEO Lei Jun. Indeed, some critics asserted Xiaomi was
consciously mimicking Apple’s i-Phone and that Jun was intentionally taking cues from the legendary
Apple founder. Though Lei at times protested the comparisons to the American innovation giant,
according to one New York Times article, “Lei nonetheless is carefully cultivating a Jobsian image
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here, right down to his jeans and dark shirts. He is also selling millions of mobile phones that look a
lot like iPhones.”8
Lei was more likely to cite another American marketing and tech giant as a guide for the strategy
Xiaomi was pursuing:
…[I]f people really want to compare Xiaomi to a foreign company, you can say it
looks a bit like Apple but it's really more like Amazon with some elements of
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Google. So take these three companies together, then it's easier to clearly
understand what kind of company Xiaomi is. Xiaomi selling mobile phones is like
Amazon selling Kindles. So you can understand why we sell them for so cheap.9
An emphasis on design—including having a designer among the founding team—was also a part of
Xiaomi’s differentiation from its earliest days. “Most Chinese startups are not founded by designers
or artists, but by engineers who don’t have the creativity to think of new ideas or designs,” noted one
prominent Chinese angel investor.10 Xiaomi was at the vanguard of companies looking to build core
capabilities in creativity and innovation instead of solely relying on low-cost manufacturing
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capabilities. “The first few years years were strategy-led, driven by our vision that the best tech
products could come to the mass market at a low price. After that, we changed into more of a design-
driven company,” noted Liu.
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Communicating the Brand through Packaging
One of Xiaomi’s first design hires was Chen Lu, a graduate of ArtCenter’s Graphics and Packaging
Department. After receiving her degree from Chengdu University of Technology, Chen came to
ArtCenter wanting to get experience outside of China and gain exposure to multiple cultures.
“America was a much more open culture, and we were exposed to projects that would not be possible
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in China, like collaborating on government projects for the Jet Propulsion Lab. My Chinese
instructors, while educated in traditional art, were self-taught in their knowledge of product and
packaging design. I wanted to learn from faculty who drew from their experience as practicing
designers.” She joined Xiaomi, then an unknown company, in January of 2011 after working for six
years’ in graphic and packaging design as well as concept development for a number of design studios
including a stint a stint at Disney Consumer Products.
Her first project was designing the Xiaomi logo. Chen noted that the move to select bright orange
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as the color was a contrarian move from the beginning: “All the Chinese tech companies had blue
logos. We thought that orange was more active and would stand out.” Following that project, she
moved on to the package for Xiaomi’s first smartphone. Working on a tight budget, she departed from
the industry standard of glossy photo-covered packages. “My challenge was to prepare an effective
package this online-only sales environment,” Chen remarked. “There was no need for information
about the product; you would get that already on the web site. The most important factor was to
balance the budget and create packaging for this new experience of online shopping.”
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The box was made of simple, uncoated corrugated kraft paper-covered, with one-color printing
(see Exhibit 5 for examples of Xiaomi’s early packaging). “We reduced the packaging cost as much as
17% by doing this,” Chen stated. “At the time, people were influenced by the high-quality iPhone
package. The smartphone was perceived as a luxury item. We competed with that. A kraft paper box
looks like a low-level product in comparison, so we needed to be creative to make it look like a quality
product. It took six months and I changed the design thirty-five times to get it right.” She was also
very proud of the strength and sustainability of the package: “Every part of the package was
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recyclable.”
Xiaomi’s second-generation phone packaging took the unpretentious kraft paper idea even further.
“We deleted the image completely from the package. Everyone else was following iPhone, putting
glossy images on the box. Our second package gave us the appearance of being humble,” Chen stated.
An Emerging Ecosystem in the “Internet of Things”

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As the founders saw Xiaomi’s valuation climb, they also encountered increasing challenges.
Apple’s iPhone, though expensive, produced a “halo effect” for Apple’s other offerings in the eyes of
Chinese consumers. In addition, some reliability issues—coupled with Chinese consumer habits—may
have contributed to an erosion in loyalty to Xiaomi’s brand.
By 2013, Xiaomi’s senior executives also saw the beginnings of what they thought would be a
significant evolution in the use of the Internet, what Liu called the “third phase” of the Internet era.
“The first phase was PC-based, the second phase was mobile based, and in 2013 we saw an “Internet
of Things” (IoT)-based phase. With everything—refrigerators, TVs, fitness bands—connected and the
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smartphone as a hub, we saw a lot of opportunity. The question was: ‘How should we address this?’,”
Liu recalled. “We decided to use investments in small, emerging companies to help us build our IoT
presence.”
The first investment was in Inventec, which produced Xiaomi’s Power Bank line of external
charging packs. Observing at the time was Peter Sun, a top engineer and very early hire at Xiaomi.
Sun noted that personal familiarity with the portfolio company’s management team led to the cash
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infusion: “A friend of Lei Jun was CEO, and he asked Xiaomi to invest in his company.” Xiaomi soon
made an investment in a second venture, a company that produced headphones and music devices
that had been launched by a high-level manager at Foxconn, the multibillion outsourced electronics
manufacturer servicing global companies such as Apple. Sun joined the emerging startup investment
effort with the third opportunity, Huami, which was tapped to create Xiaomi’s Mi Band fitness
tracker.
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Many in Xiaomi’s leadership team began to believe these three successful investments might form
a model for a new initiative that could increase the attractiveness of the company’s brand and
products. They began to formulate a plan to support other early stage ventures developing products
complementary to Xiaomi’s mobile phones. Sun remarked, “We did not start the Ecosystem model
before we had those companies; we had the companies first and then we built the formal plan for the
Ecosystem.”
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Soon, the Ecosystem of connected smart products began to emerge. Xiaomi’s smartphone became
a remote control for a variety of products, many of them for the home. With a Xiaomi phone linked to
products from this limited number of Ecosystem vendors, a user could:
• turn on or off a variety of LED lamps for ambient or task lighting

• navigate the interface on a TV
• learn when her connected air purifier needed a new filter
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• set and follow fitness goals with a fitness tracker wrist band and smart weight scale
• prepare perfect rice in an automatic rice cooker, using preset information gained from
scanning the bar code on the rice package
Investment Decisions
Sun ended up leading a team of engineers that targeted new investments in categories that
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management viewed as key for a connected Ecosystem. “My team members focused on different
directions. My area was smartphones and wearables. Other members focused on home appliances, or
electronic devices. Each engineer was in charge of their own categories,” Sun commented. He and his
team had the responsibility for finding investment opportunities, assessing the core technology, sizing
up the management team and making the decision to invest.
Xiaomi’s investment team composition was very unusual in tech firms, according to Liu De. “Other
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companies had investment teams of finance people, senior managers, who made decisions based on
numbers. Our structure supported investments based on technology championed mostly by
engineers,” he maintained.
Liu Xinyin was another engineer and very early Xiaomi employee who joined the Ecosystem
investment group. He noted that speed was a priority for him and his colleagues. “When we start to
pursue a possibility, we usually make decisions very quickly, normally in about a month.”
Sun noted that his team didn’t have hard and fast rules or metrics that determined where they
made their investments. “It’s hard to answer. It’s a feeling we get,” stated Sun. “We mainly look for a
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good team. A good team may have different factors, like a strong CEO or strong partners.” By 2015,
after nearly two years of working on Ecosystem investments, Sun possessed a notion of what kinds of
startups teams he didn’t want to support. “I have learned what kind of teams I don’t like - one that is
too small, that has no successful experience with products that have already been launched. We tried
this a few times and it failed,” Sun remarked. “We learned not to work with companies of less than
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five people. When a team has grown to twenty to fifty people, we know they’ve been successful at least
once, and they have learned from mistakes.”
In addition to considering the skills and experiences of a target company team, Xiaomi’s
Ecosystem group looked for companies that could bring large numbers of regular users to Xiaomi’s
online assets. “As we think of ourselves more and more as an Internet company, active users become
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the most valuable thing for us,” noted Liu Xinyin. “If an Ecosystem company can provide 1 million
new Internet users, that’s a great indicator of success.”
According to Liu De, the first round of investment used Xiaomi internal financing. For the second
and third round, Xiaomi would often help Ecosystem companies attract venture capital and other
types of funding. The smartphone maker usually attempted to acquire a non-controlling share of the
target companies, likely in the range 20-40% of equity. Xiaomi would usually take a seat on the board
of directors of Ecosystem ventures and encourage their management teams to adopt a stock option
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plan for their employees.
In addition to owning a significant equity stake in ecosystem companies, Xiaomi earned a

percentage of the sales—essentially splitting the profit margin with the smaller companies for the
products designed to work with Xiaomi’s mobile hardware.
Sun calculated most investments at between 10-20 million RMB (approximately $1.6-$3.2 million
at 2015 exchange rates). “This is not a big number for our company, so the investment decisions are
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not made at the board level or the C-level. The Ecosystem investment team can decide on
investments of that size,” Sun remarked (Liu Xinyin noted that he had made investment valued at
over $4 million on his own). “Sometimes we find companies we want to invest as much as 100 million
RMB ($16 million). That kind of situation is different. We have a simple organizational structure with
very few levels, so for approval of these decisions, we go directly to the CEO, Lei Jun.” Since Lei and
the founding team members convened nearly every week for an executive meeting, even these larger
deals usually had fairly quick turnaround times for approvals.
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Given the size of its investments, Xiaomi aimed to control about 20% of shares in the event of an
initial public offering. However, as of 2015, none of the ecosystem companies had gone public.
Relationship Management within Xiaomi’s Ecosystem

Liu De likened the structure Xiaomi was trying to build through its Ecosystem program to a
bamboo forest.
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A pine tree can grow for 100 years, but also can die quickly. Nokia and Motorola
were like pine trees. The Xiaomi Ecosystem is like bamboo. It can grow fast, and
the bottoms of the plants are connected to one another. We looked for “baby
bamboo” to invest in to help them become “big bamboo,” so we could create a
bamboo forest. Bamboo grows fast and never dies, and though connected, each
plant is individual. Our bamboo forest is made of separate companies that are
connected, and have a shared culture.
To build this shared culture, the investment team looked for companies that shared Xiaomi’s
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values like the belief in making low-cost mass-market tech products with premium quality. To
reinforce this connection, Xiaomi created an Ecosystem Management team to pass on Xiaomi culture
and key practices to portfolio companies.
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Another early Xiaomi hire, Li Ningning, a graduate of ArtCenter’s Graduate Industrial Design
Department, took on an important role in this effort, working with the Ecosystem companies’
industrial designers to help them create products to the Xiaomi standard.
Li was hired early in 2011 and rose to the position of Director of Industrial Design, Xiaomi
Ecosystem, overseeing industrial design and strategy for intelligent hardware products. She earned a
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degree in industrial design at Shanghai Jiao Tong University before coming to ArtCenter, and worked
as a product designer in boutique firms for two years before Liu asked her to join Xiaomi.
Li described how her team tried to tap into the expertise the Ecosystem while letting the external
companies learn from Xiaomi. “When we invest in ‘small bamboo’ Ecosystem companies outside of
Xiaomi, each has a specific expertise in their industry—hardware, software, human needs, or design—
and we think about how to take the best advantage of this capability. Then we work together with the
Ecosystem company for one or two projects so that they learn our design language,” she remarked.
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According to Sun, the extended team supporting the Ecosystem team was comprised of several
different groups. Sun’s direct reports—a team of six engineers—functioned as “product owners” “We
essentially coordinate and act as the ‘CEO’ of the product throughout its development,” he
commented. Alongside this group, Xiaomi developed other large support teams, some approaching 30
employees. All told, approximately 100 Xiaomi employees supported the Ecosystem program on a
full-time or nearly full-time basis. The slate of teams, which all reported to Liu, also included:
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• Product Management
• Supply Chain
• Industrial Design
• Engineering
• User Interface Design
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• Quality Assurance
Not all of the offerings produced by Ecosystem companies were Xiaomi co-branded products. For
instance, Huami, the manufacturer of Xiaomi’s Mi Band fitness tracker also marketed its own line of
fashion-forward fitness trackers, Amazfit.
Li’s Industrial Design team worked with product designers from the Ecosystem companies to
consider the parameters for each new product. “We define the product in terms of universal needs. A
Xiaomi product needs to fit with 80% of the demographics—mass market—we do not want to consider
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niche products,” Li noted.
Xiaomi had a difference of opinion with some Ecosystem companies about this mass market
mission. The smartphone maker described itself as selling, as its slogan stated, “technology for
everyone.” Sun stressed the need to find companies they could work with “like brothers” with the
same vision, but there were times this fit was tested. For example, the designers rejected an early air
purifier concept proposed by an Ecosystem company that wanted to develop a niche offering
specifically for pregnant women.
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“The industrial design proposal is the first third of the process,” Li remarked. “The other two-
thirds of the coordination process is spent arguing about the realization of the design execution—how
the design would be configured to meet the criteria set for it. Xiaomi exployees skilled in mechanical
design and quality assurance were intensively involved in this process.”
At the later stages of hardware or software development, Xiaomi conducted internal beta trials for
every product, for two weeks to two months, to test ease of use and identify features that needed work.
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Trial offerings often faced tests with within a large group of Xiaomi employees that would utilize the
products in their daily lives. Some products didn’t make the cut, either because the features did not
address people’s needs, or the product was difficult to use.
Overhead for the Xiaomi Ecosystem staff was borne by Xiaomi, but the direct development costs
for a potential co-branded product were covered by Ecosystem companies. “They invested in the R&D
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process. If we wanted to make a major change we needed to negotiate with the company to support
the change. We needed to work as brothers. The benefits to both Xiaomi and the ecosystem company
were the same, and we needed to have the same attitude and approach about the product,” Li
maintained.
The Ecosystem in Action: Huami and the Mi Band

Chinese manufacturer Huahung released one of the first budget smart watches, the Z Watch, in
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2013. This caught the eye of Xiaomi, and, together with Huahung, they launched a new company,
Huami, headquartered in Beijing with a software engineering and design outpost in Mountain View,
California. Xiaomi invested in them (in this case, a 30% share of the equity), but Huami remained an
independent company. Their first product with Xiaomi was the Mi Band fitness tracker. Huami
followed the fitness bands’ success with the Mi Smart Scale and Yi Action Cam and later launched
their own line, the Amazfit high-fashion fitness trackers, in the U.S.
Yu Pengtao, also an ArtCenter Graduate Industrial Design alumnus, joined Huami after two years’
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working in the Bay Area for a number of design consultancies. Huami was one year old and had just
launched the Mi Band. Yu had previously designed a smartwatch and his first project upon joining
Huami was to design the second-generation fitness band. Yu needed to bring not only a design
sensibility to his new role, but also a holistic approach to strategic innovation. He remarked, “Huami
is a small startup. My job is not only traditional industrial design, but also defining the next product—
the features, the market, to look at the ‘whole picture’”
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The first Mi Band had been designed by Li Ningning at Xiaomi. Yu designed the Mi Band 2, based
on directives worked out by Liu De and Huami CEO Wang Huang. Though the first generation of
bands only utilized lights to give visual feedback to users, the upgraded version incorporated a small
screen to provide much more data. When Huami realized the core electronics module had a tendency
to fall out, Yu understood he needed to improve containment. He accomplished this by surrounding
the electronics with a rigid material inside the softer material of the band.
Models and prototypes were made and revised with Xiaomi’s feedback. Yu noted that the design
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process was relatively straightforward, citing the relative simplicity of the product and the fact that
Xiaomi came to early agreement on the project definition. Yu was inspired by customer feedback from
Xiaomi’s social network resources. Yu remarked, “Both Xiaomi and Huami wanted to make
something the user would like, but we might have had different understandings of what that would
be.” These issues were resolved in Beijing between Liu, Li, and Huami’s CEO Wang.
Rather than focusing on wearable technology, Yu characterized Huami as focusing on collecting

data. In contrast to Xiaomi’s designers who viewed the smart phone as the hub of their IoT
Ecosystem, Yu saw the fitness band as the more logical hub: “We sell 20 million wearables, and can
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see from the data how many people are interested in fitness. Because our band is closest to the
human, 24/7, we have more data compared to the smartphone,” Yu asserted. “The band works
together with other smart objects - telling the Xiaomi light to turn on and off when you are awake or
asleep, or communicating with a smart thermostat.”
Yu contrasted Huami and its top global competitor, Fitbit. “Fitbit is a company selling hardware.
Huami wants to be a service and software company.” In China, the Mi Band held the number one
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market position and had a higher percentage of purchasers remain as active users, according to Yu.
This engaged user base was key to the financial viability of the fitness band product line. “We work
with other third party service providers to create extra value and engage in extra transactions—that’s
how we get our revenue.” Huami had integrated a number of novel services into its Chinese products,
including the ability to for users to purchase injury insurance for a nominal sum directly from the app
before going for a run.
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A Move to Retail?
At its start, Xiaomi broke new ground by selling smartphones online exclusively. Being an
unknown made this difficult, but a robust fan club proved to be an excellent source for its first batch
of customers. The online-only sales strategy eliminated the often exorbitant cost of retail sales. “Half
the cost of the phone is the cost of the channel,” Liu maintained. Leveraging the connection to the
fans paid off, and for four years sales skyrocketed without brick-and-mortar sales or traditional
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marketing expenses.
By 2014, Xiaomi had reached the status of the top smartphone company in China, but handset
sales began to fall the next year. “We predicted we would sell 80-100 million handsets in 2015, but
sold only 62 million,” recalled Liu. This prompted to rethink its strategy, according to Liu. “Twenty
percent of sales revenue across China is on-line. Eighty percent is offline. Xiaomi was maxing out the
online channel. To grow, we believed we might need to sell offline, so we started investigating the
possibility of creating retail stores.”
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Xiaomi had already experimented with showrooms attached to Mi Club meeting spaces located
within office buildings. These functioned as social centers for meetings and events for fans, as well as
service centers and showcases for their other products. However, the products were there for display
and trial purposes only; customers still had to complete purchases online.
The company opened its first true retail store in January 2015, in a shopping mall adjacent to
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Xiaomi’s headquarters in Beijing. A mere 250 square feet, it had a per-square-foot revenue higher
than a Tiffany store (but not as high as an Apple store). Closest to the door, one third of the space was
devoted to cell phones, the highest-revenue products, but the rest of the store was devoted to a
growing array of Ecosystem products (see Exhibit 6 for pictures of Xiaomi’s initial store).
Now that the products would be on display in more retail spaces, the packaging would need to
evolve from the kraft paper-covered boxes of the early days to high-quality packages sporting glossy,
full-color photography (see Exhibit 7 for examples of products and packaging).
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Dialing Up Solutions
By mid-2015, Xiaomi’s management had noticed that it had become more difficult to convert its
original base of devotees into repeat customers. Fortune noted: “[A recent survey of] phone owners in
China revealed that only 37% of Xiaomi owners said they would buy another Xiaomi phone, while
74% of Apple users said they would get another iPhone.”11 As more and more Ecosystem products
came to market, Xiaomi’s executives hoped that the assortment of connected offerings would increase
brand loyalty, build “stickiness” within the family of products and drive significant revenues outside
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of the handset market. With the first store launched and the Ecosystem exceeding 50 companies, a
number of questions confronted Xiaomi.
Would they open more stores, and if so, how many? Would these be a few “flagship” stores in the
tier-one cities, designed in part to showcase products rather than be a prime driver of consumer
sales? Or should they address the mass market and create a full network of retail locations in both
first- and second-tier cities? Large stores might be needed now in order to showcase all of the
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products emerging from the Ecosystem companies. While smartphones and tablets could be easily
displayed, trialed and stored in a few hundred square feet, a store featuring more offerings and larger
products like rice cookers and air purifiers would likely be three to five times as large.
A flagship store strategy might require Xiaomi to invest the equivalent of tens of millions of dollars
over the next five years to build out and operate. However, a full, multi-city retail strategy would
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likely require hundreds of company-owned stores and might entail an investment of hundreds of
millions of dollars. If Xiaomi chose to pursue this path, it would represent their largest investment to
date and would require taking on entirely new forms of risk.
Xiaomi was very proud that they rocketed to the number one position in the Chinese smartphone
marketplace over five years selling phones online only and without substantial marketing
expenditures. The move to an emphasis on brick and mortar would represent an about face, and they
would be operating on the same playing field as their competition: with retail stores, expensive glossy
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packaging, and potentially even marketing campaigns with celebrity spokespeople. Would the
Ecosystem of compatible products be enough to differentiate Xiaomi from other companies if it chose
to alter these other key elements of their early strategy?
Sun and Li pondered if their company had reached a plateau in rolling out its Ecosystem strategy.
Promising Ecosystem partners, easy to find a few years earlier, were, by 2015, becoming harder to
discover. Should Xiaomi embrace smaller “niche” products that might eventually attract a bigger
market, or remain true to their “mass market” identity? Xiaomi positioned itself as a maker of mass
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market, not niche, products. More mature consumer markets like the U.S. had embraced strategies
that involved targeting niches—though some of those niches ended up evolving into substantial
markets in and of themselves. Should Xiaomi be more open to investing in Ecosystem partners whose
products might be considered as niche offerings?
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No
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Exhibit 1: Xiaomi Founding Team

Lei Jun: Founder, Chairman and CEO
After graduating from Wuhan University with a B.A. in Computer Science, Mr. Lei joined Kingsoft in
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1992 as a member of its founding team, becoming its CEO in 1998. In 1999, he founded Joyo.com, an
online retailer later acquired by Amazon China. After Kingsoft successfully completed its IPO in 2007,
Mr. Lei stepped down from his position to become its Vice Chairman. Over the next few years, he
invested in many successful start-up companies, such as YY, UCWeb and Vancl, as an angel investor.
In July 2011, he returned to Kingsoft as Chairman of the Board. On April 6, 2010, Mr. Lei decided to
rekindle his entrepreneurial spark and founded Xiaomi.
Liu De: Co-founder, Vice President
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Liu De received an M.S. in Industrial Design from ArtCenter College of Design, California in 2010, and
had previously established the Industrial Design Department at University of Science and Technology
Beijing, where he served as Department Head, 2001. He founded and served as Chief Designer of New
Edge, an industrial design company in 2003, and was also a partner at Rethink Concept, Los Angeles.
He currently leads Xiaomi’s Industrial Design and Ecosystem Development teams.
Lin Bin: Co-founder, President

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Lin Bin had a background in electrical engineering and computer science and came to Xiaomi from
Microsoft, developing Windows Vista and Internet Explorer 8, and Google, managing Google China’s
Mobile Search and the Android App Localization teams.
Li Wanqiang: Co-founder, Senior Vice President

Li Wanqiang was co-founder of Kingsoft’s UIUX Design Center. He played a key role in developing
numerous well-known software projects and is considered one of the earliest UI and HCI experts in
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China. In 2010, Mr. Li co-founded Xiaomi where he led both the MIUI and Mi.com teams.
Dr. Zhou Guangping: Co-founder, Senior Vice President

Zhou Guangping, PhD, joined Motorola in 1995 and in 1999 established the R&D Center for Motorola
China. His responsibilities included the Personal Communication Department, Mobile Patent
Committee in the Motorola China Research Academy, and Cellphone Quality Control for Motorola
Asia-Pacific. Dr. Zhou currently leads Xiaomi’s Hardware and BSP teams.
No
Hong Feng: Co-founder, Vice President

Hong Feng was Lead Software Engineer at Siebel Systems and joined Google as Senior Software
Engineer in 2006. In his career at Google he oversaw development of Google Calendar, Google Maps
and Google 3D Street View, and at Google China led development of various localized products
including Google Music and Google Pinyin Input. Mr. Hong currently leads the MIUI division at
Xiaomi.

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Exhibit 1: Xiaomi Founding Team, continued
Wong Kong-Kat: Co-founder, Vice President
Wong Kong-Kat was at Microsoft from 1997 to 2010, eventually serving as Principal Development
Manager. He oversaw product development for Microsoft’s business server BizTalk’s data analytics
and business process automation features, as well as multimedia, browser and instant messaging
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feature for Windows Mobile (China) and Windows Phone 7. Mr. Wong currently leads the Mi Wi-Fi
and Mi Cloud teams.
Wang Chuan: Co-founder, Vice President

Wang Chuan founded Thunderstone Technology in 1997, growing it to be the largest VOD system
provider in China. In 2010, Mr. Wang founded Beijing Duokan Technology, a digital book company
where he currently serves as CEO. He joined Xiaomi as a Co-founder and Vice President in 2012. Mr.
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Wang currently leads the Mi TV and Mi Box teams.
Source: xiaomi.com
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No
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Exhibit 2: Xiaomi Organization Chart

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op

Source: Xiaomi
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No
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16
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Exhibit 3: China Population Distribution
In Thousands
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Source: United Nations, Passport

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op

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No
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17
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Exhibit 4: Smartphone Sales in China
In Thousand Units
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yo
op
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No
Source: Euromonitor from trade sources/national statistics

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Exhibit 5: Xiaomi First Generation Packaging
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op

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No
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Source: Xiaomi
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Exhibit 6: Beijing Xiaomi Store
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op

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No
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Exhibit 6: Beijing Xiaomi Store, continued
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op

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No
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Source: Xiaomi

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Exhibit 7: Ecosystem Products and Packaging
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Source: Xiaomi
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1 Cendrowski, Scott. 2016. “Can Xiaomi live up to its $45 billion hype?” Fortune. http://fortune.com/xiaomi-
business-china/ (accessed September 5, 2016).
2 Klaassen, Abbey. 2010. “Oh, to be a Millennial in China: Ad age editor Abbey Klaassen reports from Shanghai.”
Advertising Age. http://adage.com/article/global-news/ad-age-editor-abbey-klaassen-reports-shanghai/146594/
(accessed May 5, 2014)
3 Newman, Jared. 2013. “Apple in China: by the numbers.” Macworld.
http://www.macworld.com/article/2056896/apple-in-china-by-the-numbers.html (accessed December 3, 2016)
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4 Shirky, Clay. 2015. “Xiaomi's Lei Jun is changing the U.S., As well as China.” CNN.com.
http://www.cnn.com/2015/10/14/opinions/shirky-xiaomi-chinas-apple/ (accessed January 12, 2017).
5 Xiaomi company documents
6 In December 2014, CEO Lei Jun announced the closing of a $1.1B round of funding at a valuation of $45B. Osawa,
Juro. 2014. “China’s Xiaomi valued at more than $45 Billion.” Wall Street Journal, December 20.
http://www.wsj.com/articles/chinas-xiaomi-raises-over-1-billion-in-investment-round-1419093589. (accessed
December 3, 2016).
7 https://www.youtube.com/watch?v=esJ0U-47Ob0
8 Barboza, David. 2013. “Lei Jun builds his Xiaomi empire by aping Apple and Steve Jobs.” The New York Times.
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http://www.nytimes.com/2013/06/05/business/global/in-china-an-empire-built-by-aping-apple.html (accessed
January 12, 2017).
9 http://www.businessinsider.com/ceo-of-chinas-apple-xiaomi-lei-jun-2013-8
10 Lim, Jason. 2012. “Why China won't be innovative for at least 20 more years.” VentureBeat.com.
http://venturebeat.com/2012/03/26/why-china-doesnt-innovate/ (accessed November 21, 2016).
11 Cendrowski 2016
22

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Xiaomi Case

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t

Xiaomi: Designing an Ecosystem

observation as he navigated the retail

Though Xiaomi’s rapid rise was

that the company’s future growth might

needs of a rapidly-growing market of young, upwardly-mobile Chinese.

Connecting with the Customer

Competition and Communications

Hitting the Market

Crafting the Company: Xiaomi’s Culture and Brand

An Emerging Ecosystem in the “Internet of Things”

• turn on or off a variety of LED lamps for ambient or task lighting

In addition to owning a significant equity stake in ecosystem companies, Xiaomi earned a

Relationship Management within Xiaomi’s Ecosystem

niche products,” Li noted.

The Ecosystem in Action: Huami and the Mi Band

Rather than focusing on wearable technology, Yu characterized Huami as focusing on collecting

Liu De: Co-founder, Vice President

Lin Bin: Co-founder, President

Li Wanqiang: Co-founder, Senior Vice President

Dr. Zhou Guangping: Co-founder, Senior Vice President

Hong Feng: Co-founder, Vice President

Wang Chuan: Co-founder, Vice President

Source: United Nations, Passport

Source: Euromonitor from trade sources/national statistics

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