[DELF 2015] Designing Disruptive Products, KK Wong

Hello everyone. My name is KK. It's such a great opportunity for me to be here today to talk to you about Xiaomi. Today is all about entrepreneurship, and in my mind, startups. I figured I would begin by talking about the beginning of Xiaomi. So last year, there was a famous quote which was coined by my partner and the CEO of Xiaomi, Lei Jun. He said that if you stand at the entrance at the center of a typhoon, even a pig can fly. That's exactly what we were trying to look for five years ago. So five years ago, we not only saw one typhoon, we actually saw some very interesting movement trends coming together. The first one is we saw that the mobile internet trend was definitely trending up really fast in China at that point. The second is we saw that China's manufacturing capability has become the manufacturer of the world, which makes it an ideal center for what I would call the second wave of hardware renaissance. The third is, of course, we're talking about the 1.3 billion population in China, which was actually trending to become the biggest consumer market in the world. So five years ago, when all these three things were actually trending in the same direction, we were not only seeing a typhoon, it was actually a perfect storm. So five years ago, the seven of us got together and created Xiaomi. At that time, we believed, because we see ourselves as an internet company, I believe we were the oldest average age startup company. The average starting age was 20, 21 for some of the startups in the Valley, but our average age at that time was 43. We felt very experienced, let's put it that way. So April 6, 2010, this is a picture of the earliest employees. What you see in the middle is, in Chinese, Xiaomi means little rice. That was our ceremony. We actually had some bowl of rice and then we got right to work. But if you look at the picture, you can tell how busy we were actually seeing that day. The picture was taken against the light, there was no professional photographer involved at all, but this picture is very memorable. Shortly after, one and a half years since we started, we announced the first Xiaomi phone. If you look at the picture, in my opinion, it's pretty outdated looking in today's standard, but this launch actually had three spectacular things. During the launch, the first is when we launched this, this was the highest performance hardware spec phone, an Android phone in the world at that point. We went through all the third-party performance tests and we basically smoked the test clean. We were using the latest cutting-edge process from Qualcomm where everything was top-notch. That was the first significant thing. The second is people were surprised that this phone was actually selling for close to one-third the price of any other high-end competitive phones in the market, including Samsung, HTC, and all the high-end smartphones. And the third, this was actually being done by a little startup in China that nobody had heard of at that time. So these three things actually got us a lot of press coverage at that time. So that's how we entered the market. Four years after that, this is our sales number from last year. We have come a long way. We have actually finished 12 billion in sales last year alone, and we have sold more than 61 million smart handsets last year alone. As you can see, that curve was very fantastic. Just because we're not a public company and we do online sales, many people would actually challenge, hey, you said you sold that many phones online every day, every month, how do we know if you're telling the truth? People talk about the hunger sales tactics we do all the time, how do we know you're actually selling that many? So starting two years ago, we actually participated in what they call the Singles' Day, the 11.11 sales day in China. For those of you familiar with the e-commerce industry in China, this is actually being done by Taobao of Alibaba, so a third-party channel. Last year, we basically closed that day on a daily sales of 1.56 billion RMB. And in that day, we basically crushed seven categories as number one. Number one sales in phone, number one sales in TV, number one sales in all the other things, router, seven categories basically. So this was a good way to actually convince people that the numbers are for real. And just this past four months, actually April was our fifth year anniversary, so we did an equivalent of 11.11 on Xiaomi, just on our website. We actually sold in that day alone 2.13 million handsets, and the sales were slightly over 2 billion RMB. And of course, just for the fun of it, we also read a Guinness World Record in that we actually sold the maximum number of phone sets in one day online. And why is that significant? Because it was audited by PwC. So you have no idea how people would challenge a startup which is five years old. You have to prove to them again and again that we're actually consistent with what we tell the world. So in four years, we come from selling our first handset to become the number one in the handset market in China. Now the question, of course, is how did that happen? Or more specifically, what have we done as a company? So other than the fact that the team actually worked our butts off, putting in 80 hours a week in and week out in the last five years, I believe that these three things, among the probably thousands of things that we have done in the last five years, but these three things really are at the essence of what we have tried to focus on in the last five years. The first one, the essence of any company in our opinion is definitely the products or the services. That's basically the ultimate value we are trying to create out of a company. I will go into more detail of that. The second is, you know what Roger just gave a great presentation on, in order to change something, you have to first understand the current value chain of the industry. You have to analyze it and then break it down and then come up with a new way of disrupting the value chain. Sometimes just producing new products or new service is not enough to disrupt. Sometimes you have to fundamentally rethink the value chain. We'll talk more about that later. The third is my favorite. You see people talking about how to become close to the customers, how to be friends with your clients, but how exactly do you leverage the new tools today to really achieve that and get to what I call the zero distance with the consumers. So back to the phones. You might be wondering how the heck do we sell a top-end hardware spec phone using all the top components from the great companies around the world, yet we actually were able to sell it to the end user at such a low price? Well, the answer is you have to look at the value chain of the traditional phone business. In a traditional phone business, between 40 to 45 percent of the cost goes into the retail channel. There's a reason why if you go into a retail store, among the hundreds of phones, the salesman actually picks one of them and tells you that you should be buying this phone. There's a lot of cost involved in this sales channel. And so that's the number one. Second, in traditional phone business, between 30 to 35 and sometimes even more percent of the cost goes into marketing or traditional advertisement. That's why when you go to the bus stop or MTR, you see a lot of Korean movie stars holding up those phones. That's where the cost actually goes into. And third, of course, the profitability of cell phone, although it's not as lucrative as selling software, but still it's basically how the business model was. So once we analyze this, the solution is actually quite simple now that we look backward. Number one is how about we go direct to the users? We sell online. We basically do not go into the retail channel, period. And that basically eliminated 40 to 45 percent additional cost that could have gone right back into the consumer pockets. The second is you probably don't see a lot of advertisement of Xiaomi in MTR or bus stations because we simply don't do a lot of advertisement. I like to joke that although many people associate Xiaomi as a company that gets on the headlines a lot in China, does a lot of PR and marketing, but our budget in the marketing department is very close to zero. And that would surprise a lot of the existing traditional companies. So third, I would probably save this for a later moment, is the question if you actually do not gain a lot from selling hardware, what exactly is your business model? I will save that for later. But as you can see, building a top-end phone, trying to improve the user experience day in and day out, in fact, we actually release an updated ROM on a weekly basis, and changing the value chain, we were able to go into the market, to one of the most competitive markets, the phone market, and be able to make some breakthrough in the last four years. So this is our latest Mi Note. Although this is not on sale yet in Hong Kong, but right now this is trending to be our most successful product so far. The build and make of this phone is the best we have done so far. So I just wanted to give you some examples of what we mean by building disruptive products. This is not a way for me to do advertisement today, that's why we moved the price tag from all the pictures. So when we go into the TV market, well, the TV market is a very mature market. So how exactly do you go in and excite people? So other than bumping it from 2K to 4K resolution and making the TV as good as it can be, what we did is we also flew in the subwoofer and the soundbar. This actually has six-channel surround sound speakers as part of it, and this is a very powerful subwoofer. We flew in the home theater as part of the TV package, and we actually priced this at a price which is significantly lower than just a 2K TV. And when this was a 4K TV, as you can see, we use the same model to go into a new market and disrupt it in a way that the users would actually feel that this not only has met my expectation, we hope to exceed the expectation. That's how you can actually get word-of-mouth marketing, which I will go into more detail. So you probably have seen this Mi Box. Although we haven't formally sold this thing in Hong Kong, but apparently the demand in Hong Kong is very healthy and strong. So I'm threatened to see a lot of my relatives already using it. So how do you actually exceed people's expectation in the newer version of it? When I give this as a gift to people, they open the box and say, KK, why do you give me a plug? Where's the actual product? You see, this is the charger, right? And this is the plug. And I tell them the plug itself is the product. So we have actually built in the Mi Box that small, which can fit into a plug. So this actually earned us a lot of interesting press. So when we do router, how do you make a very traditional device sexy again? It's not easy. Router is a router, the device that sits at the back of your sofa. I don't want to see it again after I set it up. Well, how about making this to be super powerful? To make it a dual-band AC, dual-core Broadcom chipset, and also throwing a one-terabyte hard drive into it. So that whenever you connect to your home Wi-Fi, you also connect to a one-terabyte remote drive from all your devices. So you can start pre-downloading contents, you can start using it to store all your 4K self-made movies. Roger just asked for people that just bought a camera, so the multimedia content is actually growing in every home. So when we do that, how do we actually make the users realize the difference between this and the traditional router? Well, when we do the beta testing, this is the packaging we actually gave to our users. We don't give them a router that is being built. We actually ask them to assemble the routers on their own. So this is the box that contains the motherboard, the case, the hard drive. We want them to participate, and along the way, they understand this is actually very different than the traditional router they have seen in the past. All the components, we even give them a screwdriver and hand gloves as what they use in the factory. So some of the fun things. And this is a smaller version of the router, and I have to thank Roger for doing a word-of-mouth sales for Xiaomi. You see how powerful this word-of-mouth is. Roger getting the recommendation from his son, who actually got the recommendation from the rest of the class. This is the most powerful marketing you can achieve nowadays, word-of-mouth and social media. So I won't go into detail of this other than telling you that the only reason why this stays on Roger's hand, I believe, is this. Every single charge will last, in my experience, close to 60 days of usage, where the competitor's handband you have to charge it on a weekly basis. Okay, purifier. Okay, I'll just jump through. So now you can see that we rely not on the traditional advertisement to sell our product. We actually rely on the product itself to sell itself. When the product is attractive, you can actually get a lot of word-of-mouth. And with the social media like Facebook or Twitter or Weibo in China, the speed of spread is amazing. Think of it, four years ago, nobody even heard of the company called Xiaomi. But with the social media, right now, a lot of people in the third, fourth, fifth tier villages in China, they know Xiaomi. I don't think you can achieve that with any of the traditional advertisement channels. So I won't go into detail of this fantastic picture, which actually encapsulates the way we understand the internet model. But I just wanted to pinpoint that the center, in English, is called reputation. How do you translate it? Reputation. Okay, so this is the center of the word-of-mouth. If your product is good, people would spread it. If your product sucks, well, the same effect would actually happen. The negative comments from the users is just equally powerful. But once you actually see the users as your friends, you see how powerful they can help you and your product and your company to the social media and close the loop and make it bigger and bigger. Now coming back to the question, when we change the value chain by saying that we don't make money, our business model is not by selling hardware, how exactly do we make money? Well, it turns out that the internet model is based on a foundation, the volume of users. If you have enough number of active and sticky users, you can actually deploy, you literally become a very powerful portal and channel on the internet. And so any of the existing internet business model that has already been matured and perfected by the various internet companies in the last 10 years, all apply. So what we see is in the last few years, we have already accumulated over 100 million daily active users. By saying daily, I'm being modest. Think about how often you open your phone. You probably use your phone on an hourly basis or sometimes even less than that. So this is what we see as the most active usage devices ever. So this year, our internal target, our external target, actually is to sell between 80 million to 100 million handsets. So give us a few years, I can see that the number of active users would actually be no less than any of the major internet companies that has traditionally relied only on software. But the major difference is we acquire those users through smart devices, through hardware. But the challenge, of course, is how can we in 10 years convince the users that are using our phones, our devices today, to still choose to use our devices in 10 years? That means we have to continue to do a good job in innovating in our products, just to make it highly satisfiable. So I think Roger has secretly peeked into my slide deck because he has already told you what he thinks to be the next typhoon center. I just wanted to quickly share with you that I agree with his assessment 100%. I believe the next opportunity of IoT would definitely be five to 10 times the size of the mobile internet and the internet combined. Think about how many devices or appliances in your home, in your office, in your car that is still not smart enough, that's still not digitized or data-ized. You can see the amount of opportunities out there. So today, I think is the perfect timing for startups. There's just so many to innovate. So many, if I look around our physical world, I see that the chair, the table is some the same shape and form that they have been invented hundreds or thousands of years ago. This is a time of change. And from the Xiaomi perspective, how do we contribute to this? We believe when you have a lot of smart devices around you, you need to have an interface to interface with these devices, to have a screen that's easy for you to not only monitor their whereabouts, their data, their status, but also to control them or to piece them together to form some unique and interesting but useful scenarios. So we see that the cell phone can be at the center of this to interconnect a lot of the smart devices and be the screen, be the key interface with the users, because this is actually a very natural way for users to interact with their devices instead of having to install a panel here, panel there, you have to touch the button here to turn on the light, right? It's just too unnatural. There's some pictures. So to conclude, I think Xiaomi as a startup has done a little experiment in the last five years. Can we as a company simply focus in building what we think to be the best products we are humanly able to build by focusing in only that and turn the products into something that can sell itself? And at the same time, to relook, to reevaluate the value chain of the industry that we're going into and try to disrupt that in a way that we can not only give value to the company but most importantly, we can give value to the consumers at the same time, because only then they actually would come to your side in a very quick way. So with five years, we have experimented that in not just one industry, not just the phone industry, we have done that in other industries. I showed you some products in other areas as well, and this model has proven to be very effective. So just to call the key mission, the core mission and value of Xiaomi, the reason why we joined the startup, did Xiaomi five years ago, is we had a vision. We wanted to build products, innovative products that everyone can enjoy, not just people that can afford the premium products, but we wanted our purifier to be able to be used by people in every stage of the society, low income, middle income. We want our products to be used by as many users as actively as possible. With that, thank you very much.