By Yan Wei (闫威)
Issue 575, June 25, 2012
Corporation, Page 25
Translated by Tang Xiangyang
Original article: [Chinese]

Correction: This translation has been edited since it was originally published. We've changed our description of Lei Jun's reaction to a question from the EO journalist, noting that he slammed his phone down on the table rather than throwing it on the floor as we originally stated. The error was made during the translation and editing of the article.

China’s smart phone industry is entering a period or rapid change this summer – and the industry is being reshaped as the cost of a smart phone continuously decreases and China’s internet giants enter the market.

 
The Economic Observer spoke to Lei Jun (雷军), the president of Xiaomi Co.（小米公司), who has shifted his focus from the internet to smartphone manufacturing.

 
Mr. Lei recently launched the Xiaomi MI-One, a smartphone whose 1,999-yuan price tag surprised industry analysts.

 
“How much profit does each MIUI smart phone generate?” the EO’s reporter asked.

 
Lei frowned and then, raising his voice as if the remark was directed at his own staff, he said “Do you think that’s a polite question?”

 
Xiaomi Co. has claimed that its products are priced at cost, but analysts have said that the profit margin on each phone is at least 700 yuan.

 
“Your competitors are selling phones of the same high quality for only one thousand yuan. What’s MIUI’s selling point?”

 
Lei Jun slammed his phone onto the table: “You are making an insult by comparing a first-class international brand to domestic products.”

 
But if you do an Internet search with the key words “quality” and “MIUI phone”, the result will give a list of its problems. People say it’s badly manufactured and the quality is poor.

 
Xiaomi Co. had claimed that it has been out of stock, but it’s now offering discount vouchers – it recently issued 300,000 vouchers for 300 yuan each.

 
Why did Lei Jun lose his temper? 

 
The question of profit

 
At a trade fair organized by China Telecom (中国电信) for third generation smart phones, Lei Jun said that the biggest public doubt about Xiaomi was whether it had really sold three million MIUI phones since the launch in August. Lei Jun asked people in the audience to raise their hands if they believed the data.

 
Not many people did. Embarrassed, Lei Jun said he wouldn’t use the audit report as evidence and that he didn’t care whether people believed him or not.

 
He also refused to answer when the EO reporter asked twice about how much profit is generated on each MIUI sale. He said the “price of components and parts is a business secret” and that “questions about profit is impertinent” since the company has been insisting on that the price is “based on cost”.

 
Meanwhile, Lei said repeatedly that Samsungs and iPhones have taken in 99% of all the profit in the smart phone industry.

 
At the trade fair, Motorola, Huawei, HTC, K-touch（天宇朗通), Coolpad（宇龙酷派), TCL and other traditional manufacturers were all exhibiting high-end smart phones with advanced configurations and prices ranging from 1,000 yuan to 3,000 yuan.

 
For example, the Huawei C 8812, with Qualcomm processor, 4.0 Android system and face-recognition function is priced at only 990 yuan.

 
Competitors

Aside from Motorola, Huawei, HTC, K-touch, Coolpad, TCL, and even Nieche (尼彩) have joined the battle to make the most popular cheap smartphone.

 
Chinese phone makers used to focus on making basic phones because it was a market that many big international phone makers were ignoring, but as the cost of smart phones has fallen they’ve rushed into the country.

 
Li Wang (李旺), deputy president of Coolpad, said that if MIUI wants to sell in high volumes it won’t be able to ignore the competition and specifically the problems of storage and technology updates.

 
With a 1.5G Dikaryon Qualcomm processor, Android 2.3 operating system and Sharp’s (later Toshiba’s) 4-inch screen, MIUI was competitive in last August. It’s not now.

 
The life span for each smart phone model has also been shortened, says Wang Weijun (王伟军), president of the China branch of Huawei Terminal Co Ltd (华为终端有限公司).

 
“Consumers and merchandisers’ demands are changing constantly,” explained Wang.

 
Coolpad’s Li Wang estimates that the life span for each smart phone is now only three months.

 
HTC is one of the manufacturers that’s underrepresented at the bottom end of the smartphone market and executive Ren Weiguang (任伟光) said that this reflects the cost of buying patents.

The price of patents is fixed, unlike the cost of materials, manufacturing, research, development and marketing.

 
Nieche founder Lu Hongbo （卢洪波）said the biggest difference between smart phones and standard phones is after-sale service.

 
Standard phones are just a tool for messaging and calling, but the sale of smartphones requires salespeople in physical stores where buyers can get help with software installation and downloads.

 
“That’s our largest difference from Xiaomi,” said Lu Hongbo said, adding that Xiaomi relies on online sales while Nieche wants to attract customers by offering various additional services.

 
Coolpad’s Li reckons that, once sales volumes grow, Xiaomi will encounter the same problems as traditional phone makers. As an Internet company, Xiaomi has neither a supply chain nor research and development investment.

 
Interestingly, after the trade fair and its claims of stock shortages, Xiaomi tried a sales promotion - the price of MIUI phone was reduced to 1,599 yuan.