>> the chinese smartphone maker xiaomi has great ambitions. already more popular in china than apple and with a staggering $10 billion. now china's number three smartphone maker is going global, launching into new countries this year. will it become apple's biggest threat in china? we reveal its secrets in this "bloomberg west" special. welcome to this special edition of "bloomberg west." it's one of the fastest-growing tech markets in the world. we are talking about a company that is only four years old and

already sells more smart phones in china than apple. we will take an in-depth look at its meteoric rise, its charismatic leader and his ambitious global plans. let's start by bringing in cory johnson and brad stone who will be with us for the hour. brad interviewed the company executives. "bloomberg businessweek" takes an in-depth look at technology companies outside of silicon valley. you spent 10 days there, that is a long time. this company is called the apple of china. is it really? >> in a lot of ways, it is. it is a relatively new company that has built a brand that consumers love. the remarkable thing is it has grown really fast. it has left a lot of customers disappointed. their primary challenge is

building and growing the supply chain. at these events, customers are hanging out outside. they are drawn to the company and the star power of the executives. the founder has a long career in chinese technology. he was a prolific angel investor and is really a star in the chinese technology scene. >> they brought together seven tech titans to found the company together. they have been called the avengers, the dream team. >> four years ago, starting a mobile phone company was very expensive and difficult to do. a lot of people thought, how can you compete in the era of apple and samsung? one thing he did was bring in all these other founders and

each of them has a piece of the company. one handles design and another is in charge of manufacturing the phones. >> cory, when you look from the outside at the numbers, does it show the promise of becoming a global player like apple? >> not yet, but the growth is very intriguing. the business model is very interesting. the way they have done things that other android phone makers have not been able to do, which is create a brand that is customized enough to offer a different user experience and a very different business model. selling products only online, having support that customers can get to. the company had some big hiccups with inventory problems. >> they have been selling

routers and sitting on inventory that went stale. that's one of the secrets about running a successful technology business. they never really got stuck sitting on product that wasn't hot. look at microsoft, hundreds of millions of dollars of inventory. this is a company that should know how to do it and couldn't manage it. this is a very different business model. regardless of how successful the company is -- >> we will take a deeper dive into the business model later in the show. i want to bring in a former executive at google in china. he is joining us from london.

as someone who has worked in china and help build a technology company, how impressive is the rise of xiaomi? >> it is not a low-cost copycat. it is easy for us in the west to think of them as that. they have gotten this far because it is a great product at an affordable price. as brad mentioned in his well-written article, the business model is very disruptive. they are not a global power but the product could be disruptive to someone like apple or samsung. >> they cut out the middleman. >> they saved a lot of money. they really don't advertise. it's one of the first technology companies to grow up relying almost solely on social media.

the big question is, can they port it over to other countries? >> the google dna that runs through this company is very interesting. from your standpoint, what do you see about this company that has taken notes from google? >> that's a great question. there definitely is a flavor of commoditizing the layer and giving it away. they are not giving away the hardware, but they cannot be making much margin on this, and they are ok with that. it is very much dependent on the android ecosystem and being able to be compatible with it. android is a popular o.s. it's very important for xiaomi to stay in sync with google and android.

>> if it had not reorganized its organization, you can have fewer android in china with apps like google maps, do you think it would be as successful as it is? >> i do think so. i certainly think that if you think about the way they developed, that is the other thing, the innovation there. it is very much based on user feedback. they push out software on a weekly basis. that is also a very google thing. you can imagine they will call it a beta phone. >> one of the early cofounders was a long time google executive. all of the founders came with

their different backgrounds and brought their own superpower to help give xiaomi what it used today to get to the top. >> there is a historical irony here. google back in 2010 did reorganize its operations. a lot of those based in beijing felt like a lot of their work was being lost by the google reorganization in china. google in some way set him and some of the other founders and early employers free to work with this company. he told me that was basically the spark. >> they also have a tablet. you went to the tablet launch. let's listen to him talking about that launch and the potential of this thing. >> we want to make the best android tablet out there.

i hope that our efforts will put some effort on apple and prove that not all tablets are being hidden away in drawers. >> this is a guy who's often been compared to steve jobs, thee he wasn't wearing the black t-shirt and jeans there. do you see echoes of jobs in him? >> actually, he's much more humble. >> who isn't? >> he actually sort of apologized in some ways, particularly for the low-memory version of the pad. that he hadn't been as disruptive as prices as they were accustomed to being and also that the ipod is a great product. steve jobs never would have done that. >> we'll talk much more with brad stone and cory johnson, our editor at large and craig. stay with us. it may be huge in china but the company has global ambitions

with plans to enter 10 new markets this year alone. we'll look at what it has to succeed abroad. ♪

>> welcome back to a special edition of "bloomberg west," "xiaomi rising." the chinese tech company that was launched just four years ago but has already grabbed a bigger share of the market than apple. here's a look by the numbers. they may be a new kid on the block, but the scrappy chinese cell maker known as little rice is no longer little. it was formed in april 2010.

four months later it officially launched its first firmware. in 2011 they took on apple with its first smart phone and just like apple, they've introduced new products every year with great fanfare. how did the company rise so far so fast? first, there's the price. at $270, the flagship mi-3 costs less than half of the cheapest iphone in china. and it sells directly to consumers online with limited quantity available. when it's flagship product, the me 3 launched last year, they sold 190,000 phones in under 90 seconds. they plan to expand outside of china to 10 new markets and triple phones by the end of this year and they just dropped the "little" from its do main name,

proving this start-up is starting to think a lot bigger. xiaomi has been a smashing success in china but can it become a major player in the rest of the world? they certainly hope so. our guests are back with us. they're trying to expand to 10 international markets. do they have a chance? >> one of their advances is fox -- is proximity. they sell the phones as soon as they get them. when you extend into other countries you extend the supply chain. you add costs. you will also don't have the same star power and in other places people sell phones

through carriers. it's not clear how well that transports to other markets. >> long-time google executive, the eco system that xiaomi poached from google. can he be the one that makes this company successful abroad as they have been in china? >> i would think that of anybody on the planet he's a great hire and the one thing, something we talked about before, xiaomi, the core i.p. is the end of android. it needs to be harmonious with the rest of the android system. hugo is a software guy. and we've talked about handsets and the price but the meat of the company is to make money oven software and services. most people think it's making

small margins on the handsets just to get adoption. when they really kick up the services, i think we're in for a show. >> will xiaomi try to expand in the united states and can they do it? we asked him about this. take a listen. >> the u.s. is not in our plans this year. it's an insanely competitive market. we'll work up to that. we don't know when that's going to be yet but certainly that's the goal. >> it's the goal. can you do it? >> it's a long way off. they have a lot to prove and this market is controlled by a couple of major carriers. verizon and at&t. i don't see a place for the xiaomi model now but i imagine they will evolve it. >> there's a fundamental change in the u.s. phones led by t-mobile. taking the subsidies away from

these phones and letting the consumer pay for them over time through their monthly bill. it's a really big change and it could be accelerated by the iphone which is expected this fault. the phone won't be subsidized and the carriers love this. the phone makers kind of like this. if that were to change the u.s. business model, it could start to open thank you markets for companies like xiaomi. >> steve, the co-founder of apple thinks they're good enough for the united states. he said they have excellent products and are good now break the american market. one of the interesting points you spoke with hugo about is the cheaper bargain basement price like a $50 phone. >> i think a lot of companies are pursuing that. craig mailed a good point which

is they need to evolve their software and services and get their margin there. we haven't seen a lot of that yet from xiaomi. if they find they can make money on services, then they can work on the phone and don't need to make any more money on the hand set. >> after this break, how can their phones show cheaply next on this special edition of "bloomberg west." ♪

>> welcome back to this "bloomberg west" special, "xiaomi rising." when lei jun and co-founders started xiaomi they priced their phones barely above cost, sold their phones online and released them in batches of around 100,000 phones. if results, surging sales, hoping them over come apple in the surging china market. joining me, brad stone and former google executive in china. in china, xiaomi phones are half the cost of an iphone and pretty much the same when it comes to samsung galaxy. let's listen to ben len, the co-founder of xiaomi. >> the way we price our handsets

and almost like any other handsets. we do not incur other costs, including touring costs, r. and d. costs and shipping costs. we price this right at the rock bottom price material of the handset itself. >> how do they make money? [laughter] >> they don't know what the market is. >> they don't. they don't call tooling, r. and d., marketing. those are expenses. if that's not in the phone, someone else is paying for it. >> they bring the cost curve down. they start selling the mi-3 basically at break even. the phone has a yearlong life cycle so by the end of it they're making a 10% to 15% margin. >> as the component costs fall, margins start to appear. they also try to make money on certain services and use

software updates. >> that is one of the most unique things about xiaomi. they release a software update every friday. >> it is to a smaller group of baby users that love to try out new things that look for bugs and look for the company to develop new features. >> maybe that's the microsoft inspiration, which is our first version will stink and we know it. create scarcity around that have a sellout, have the line around the block but then fill the supply chain later when you have the potential for profit because in those first weeks, months, you don't. as the component costs fall, the phone is still hot then they've built up that demand. >> craig, what do you think is the smartest thing that xiaomi does and what could lead to some challenges down the line?

>> none of the overhead that brad mentioned is paid for and each phone is barely covering its own cost. we need to look at the broader meanwhile landscape and where is the value being created? interesting enough, messaging is the hot thing of the moment. some big players, including facebook and what they pay for messaging service. when you think about blackberry, one of their most valuable things their messaging platform. that is something i have to believe is in the works. the other things that xiaomi should look at and probably will launch in some ways is content direction like music or streaming and video. again, those things, we're seeing much more video consumption on the rise on mobile and that's absolutely a trend xiaomi can build on. >> interesting content. we'll talk about that later in the show.

former china google executive and coming up, he is a cult-like following in china. we're going to talk about china jobs. ♪

>> welcome back to a special edition of "bloomberg west: xiaomi rising." we're taking an in-depth look at the rapid rise of xiaomi, launched four years ago. the co-founder is known as the steve jobs of china, complete are with a wardrobe of black shirts and a cult following but who is he and how has his personality helped drive the company's success? take a look. xiaomi's co-founder may not like for his company to be compared to apple but one look at him on stage and you can't help but think of steve jocks.

it's not an accident. as an engineering student at university, he read a book about jobs and decided to emulate him in style and sub stance. >> he's hahn entrepreneur who has his hand in many things in technology. he understands what consumers want. >> before starting xiaomi he spent six years at a chinese software company working his way up to c.e.o. while founding an e-commerce company and investing in a social site. in 2010 he teamed up with a former google engineer and a few other accomplished founders and xiaomi was born. but while apple may have inspired him to start the company, he's quick to point out the differences. >> a lot of people think we're china's apple. i feel this only captures part of it. i feel we're very different from

apple and probably more like amazon with kindle. >> and growing fast enough to be a big threat to both. >> for more on the man behind xiaomi i want to bring back brad stone with us. brad's article is the centerpiece of "bloomberg business week," which looks at companies outside of silicon valley. also an early xiaomi board member robin chan, c.e.o. operator. thank you for joining us. i have to talk about the t-shirt because he used to wear the black t-shirt all the time and now he's not. is that on purpose? >> it's definitely on purpose. i think a lot of positive and interesting press have come out and the comparison of steve jobs was too much.

>> he didn't like the comparisons? >> he revered steve jobs very much and he didn't want people to think he is the next steve jobs. >> who is lei jun? he could have retired 10 times over. he was already wealthy but he decided to start a smart phone maker. why? >> when i first got to know him and learn the scale of his ambitions -- most entrepreneurs think about going to war with one weapon. he said i'll have an entire ecosystem of taking advantage of the millennium revolution. that's how he looked at it. what really drove him was impact at the global level and that's what got him going. >> he had some scars from his earlier e-commerce forays. he was a co-investor in a

retailer in china. before that he founded joyo, now amazon china. what did he learn from those experiences and put it into play in xiaomi? >> that's a great question. he had king soft and then like you said, joyo and every one of them he felt he didn't capture the right trend the right way. when he was doing a start-up. bob and jack and pony were just started out. they were all giants and he started striking hard with his company. he thought how come it's a lot smaller? he nailed it in the next company. >> you said he worked six days a

week 10:00 to 10:00? >> maybe seven days a week. i emailed him at midnight. he responded me at 1:00 in the morning and talked to me at 2:00 in the morning. >> would you say he is on the scale of robin lee, is he that big? >> he certainly has that scale. the real question is how much bigger does he go? xiaomi is a very unique company where it has capabilities to go global. you see an opportunity for him to go into other markets that historical internet companies haven't gone before. >> you guys invested early on. why? why a company that was trying to crack a mature smart phone market, why did you think lei jun had what it takes? >> when he first spoke to me back in late 2009, he had an idea that he would start a

company that would do o.s. app and hardware. a crazy idea. he had a different way to do it than in china. he had done some of the same business before in different setups. i thought if anybody could pull it off it would be him but they were lack the hardware pieces. there was no hardware guy at all on the team at first. for the first six months, his job 70% of the time was recruiting and that's why you see an amazing co-founding team. and he gave a lot of options. >> it was dr. joe who created the ming phone series for motorola. >> right. but he couldn't get all the supplies so they couldn't go with dr. joe. they went to see every supplier on earth asking for inventory.

on the day of the earthquake in japan, they went out the next day to talk to sharp to ask for l.e.d. screens. people were afraid of japan. these guys went and got it done. >> lei jun doesn't speak english. ma is an international executive. can lei get to that level? >> almost all of the co-founders are bilingual. the long term trend is you will start to see more and more global talent coming onto this platform and scaling up the company. >> you brought the earliest models of the xiaomi phone. you said early on the first phone was like a brick. [laughter] it's got an lot better. >> that's mi 1. >> but there have been

comparisons made to apple, that it looks lue -- a lot like a iphone. some of it has been copied. >> we didn't say that. >> some have said that. is there nil truth to it? >> they have come with their own flavor. i would say it's pound for pound, spec for spec one of the best phones out there and they really focus on building something with essentially a live operating system where every week they have all these viewers telling them what to do. >> do you think it's like apple? >> i think it's very different. it's a very live and engaged and dynamic platform. >> the big different is apple phones in china are unaffordable to the masses of chinese consumers. it feels like they set out to create something that was just economically feasible for chinese consumers. >> he doesn't even have to listen to consumers.

lei jun has made an equal system where every consumer can voice opinions and on a weekly basis stuff gets updated and people get recognized for their contributions. >> how much of this is like a deep-seated desire to have a local chinese favorite? >> before xiaomi came out there were a lot of local fans. a lot of rep table, great firms and xiaomi came out with a way of doing things that get so many people involved, it's so special. i've not seen it anywhere else in the world. >> we'll continue the conversation with these two early investors in xiaomi with us and brad stone. coming up, xiaomi poached google executive hugo baron. what happened behind the scenes during that recruiting process?

that's next. ♪

>> this is a special edition of "bloomberg west: xiaomi rising." i'm emily chang. many people had never heard of xiaomi until hugo barrera said he was loving google for a chinese upstart. two early investors who influenced barrera's decision are with us. how did you do it? >> it started with an email. i wrote an email to lei jun saying, you know, you know hugo,

he's doing very well at google and because he's such a key man at android he gets a lot of recruiting offers. we talked about it and he said you can do anything. you're in a great spot but do something incredible and the opportunity was could you take this company global and be essentially the ambassador and the face of this young brand? you know, after that email, the ball started rolling. >> it took a long time, right? it took about a year. >> it took about a year. there was a harmonization of timing, culture, opportunity for the company. all those things had to fall into place. >> how much is hugo having to adjust the business model as xiaomi moves into new markets like singapore and malaysia? >> so far, xiaomi is doing very well in those places.

the fan place interaction is something that precedes itself, so i think originally we all thought it would be harder for hugo but i think it's a smoother process than we anticipated. having said that i think hugo is perfect for this company to expand internationally. >> he's about to start getting more ambition in brazil, mexico. that's a long supply chain. what are the prices starting to look like in these new markets? >> foxon in particular have built a global supply chain so they have plans in mexico, which is a key focus for them in north america. india will be coming out of eastern europe and asia. the costs in independence iowa -- india could be higher but i think the lack of choices in

india will make it easier for xiaomi to penetrate. >> can the brand translate as well as in other countries as it does in china and maybe some day in the united states? >> the business model, which is the efficient, sustainable model that they've invented, can they put all the pieces together and customize it for the international market? this is what they're doing. >> we have a quick piece about what his plans are. >> i'm actually not that interested in being a huge company. i want to be a good company focusing seriously on a few products. i have no interest in being a boss. [laughter] >> wait. what?

[laughter] >> the company raised $90 billion last year, i think. the value of the company last summer was 10 billion. do they need to raise more money to finance this global expansion? >> if anything they'll probably be raising money only to price the body of the stock. so the potential for recruitment of new executives as a way to value the company. i laughed at that because he's very modest. i think xiaomi is going to be a gigantic company. >> what is the valuation of the company? it was $10 billion last year. but i hear private shares are being bought. >> there are rumors that the price is higher than 10 billion now. >> rumors? >> hasn't within officially confirmed yet. i wouldn't be surprised but it's personal, inside information. >> what do you think is next for

xiaomi and do you think this is a company that goes public? >> i think it just keeps going. i think it's up to the team to find the narrative. >> so they have a phone, they have a tablet. they have a smart tv, which apple doesn't have yet. you likened it more to nest, potentially than apple. are we going to see more smart devices, a sort of family of other things? >> i don't think there's any boundary to their ambitions. the mi brand is very valuable and extensive to this phone and we're starting to see more and more products. >> in his letter last year, lei jun said he was seeing imitations of the show mi model. handsets, low prices. what does that mean nor xiaomi now that the cat is out of the bag? i can't imagine that samsung is going to let it come into these

markets and let it underprice it. >> they are all great companies. they have come through the carriers with a long time. jun has come up with a new way of doing things. so the other companies have to adjust accordingly. i think it's possible for every company to acquire the internet d.n.a. >> also, the quality of that brand. they've achieved a scale with the quality of the users, it's not just a phone company that's selling hardware, it is really a live platform. it's a different proposition compared to other hardware suppliers. >> where is xiaomi in four years? >> that's a very good, interesting company. in china, it's the manufacturing

center of the world with the global supply chain eco system. can xiaomi have a family of gadgets, manufactured by people, designed in house, selling over the mi.com eco system. that will be very interesting to watch in the next four years. >> thank you both for sharing us your slice of the xiaomi story. coming up, more with fred stone and when we come back, the comparisons are thrown around all the time. is xiaomi the am of china? we've talked about it for almost an hour now. we'll make a conclusion next on "bloomberg west." ♪

>> welcome back to a special edition of "bloomberg west,"

xiaomi rising. i'm emily chang. xiaomi sent shock waves through the tech world when it started outselling smart phones in china. how could it sell more smart phones than apple ice mighty iphone. it unveiled its first tablet, the mi pad. how similar are the two companies and can xiaomi pose a real threat to am outside of china? joining me are business week's senior writer brad stone. does xiaomi have an edge because they have a mascot? >> the mi-2 doll. >> hold it up. >> this is actually my doll. they sell these for $16. one, xiaomi has a lot of fan brand loyalty in china. they sell other things other than phones, the dolls. but also rechargers. >> this is a tech company with chinese character. >> i think it's worth noting

this says as much about an until china as it does about xiaomi. apple products are expensive in china. that iphone 7 c -- 5 c is $700, $800, easy for xiaomi to underprice it. >> especially when they're not concerned with profits and apple certainly is apple has had one hand held behind its back in china. they haven't had the freedom to open up business in china like they would so on a global basis, apple sold $91 billion in smartphones last year compared to the $5 billion in xiaomi. those numbers aren't close. >> but they are opening chinese retail stores. they have the partnership with china mobile now. samsung is the number one smart phone seller in china. apple, i believe, is number four behind xiaomi. i wonder whether xiaomi has what

it takes to get to the top. >> you know, it's -- for them the challenge is supply chain. they sold 18 million phones last year but they left a lot of customers disappointed. those phones are hard to get. the mi 3 is only now fully available almost a year after it was released. their problem is execution. >> if you lose one in every phone maybe you don't want to have a lot of supply. apple is a $421 billion company by enterprise value. xiaomi may be $10 billion. i think the interest is how the business works, how the business is today. >> and the comparison to apple? >> in china it's strong but outside of china it's unknown. >> xiaomi rising and rising fast but the question remains how high will it go? thank you for joining us. that does it for our special "xiaomi rising." ♪

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