Interview: China's Xiaomi hopes for revolution in

Mon Feb 27, 2012 3:53am EST
 
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By Melanie Lee

SHANGHAI (Reuters) - Chinese handset maker Xiaomi Technology is looking to raise more funds within the next year or two to boost production and sees revenue in the future coming from software applications rather than handset sales, the firm's president told Reuters on Monday.

Xiaomi, whose name literally means millet but refers to a revolutionary idiom from the early days of the Chinese Communist Party, was founded in 2010 with a focus on becoming a mobile Internet company.

The firm's first handset, called MiOne, was released in October to popular and critical acclaim, its draw being that it boasts high-end technical specifications, such as a dual-core processor and an eight mega-pixel camera, at an affordable price of 1,999 yuan ($320) -- less than half that of similar models from Apple Inc and Samsung Electronics.

Xiaomi racked up more than 300,000 orders for the phone in less than two days at its launch, and it is now perpetually back-ordered, pointing to the need to expand production capacity.

"Manufacturing a phone is very capital intensive; it requires a large flow of capital," Lin Bin, president of Xiaomi, said in an interview.

"Within the next one to two years, we will have to select a time frame to raise and find suitable financing," Lin said.

Xiaomi has raised $131 million in financing so far, including a B-round investment of $90 million done late last year that valued the firm at $1 billion.

Xiaomi's chief executive Lei Jun told local media that his firm was targeting 5 billion yuan ($793.9 million) in revenue this year on 2 million handsets sold.

"I think that is a very conservative number," Lin said of that sales target.

FOCUS ON USERS, NOT PROFITS

The low price of the smartphone is due to Xiaomi selling the MiOne directly to customers via its website, thereby cutting down on distribution costs, Lin said.

"We are really not looking to make a lot of profit on the handset itself," Lin added.

Lin was formerly the vice president of Google Inc's China Engineering Research Institute and he also previously worked at Microsoft Inc. The plan is for Xiaomi to monetize its software and applications in the future, he said.

Beijing-based Xiaomi is looking to push out a new phone once every 9-12 months and will seek to break even on each handset.

"As an early stage start-up, our shareholders do not expect us to turn profitable any time soon. Our key focus right now is to continue to polish this product and make it great and continue to improve the performance of our software," Lin said.

Lin declined to comment on rumors in the market about Xiaomi's second-generation smartphone.

Xiaomi's MiOne phone runs the firm's self-developed mobile operating system, MIUI, which allows users to personalize many aspects of the phone, Lin said.

China, the world's largest mobile phone market, is highly competitive for handset makers.

With the number of mobile subscribers set to top 1 billion in China this year, there is cut-throat competition among Samsung, Apple, Taiwan's HTC Corp and local firms Huawei Technologies Co Ltd and ZTE Corp.

Underscoring that pressure, HTC launched a new series of smartphone models touting advanced cameras and music functions at the Barcelona Mobile World Congress on Sunday.

Low-priced smartphones, such as those provided by ZTE, Huawei and Xiaomi, have eaten into Apple's share of the market. In the last quarter, Samsung came out on top, with 24.3 percent of China's smartphone market, more than three times Apple's share, data from research firm Gartner showed.

Lin said the key to competing with the likes of Apple and Samsung would be to push out high-quality devices with good technical specifications, at affordable prices.

"It's about revolution and being able to bring innovation into a new area. Having this business innovation may revolutionize the handset industry," Lin said of Xiaomi's name, based on a Chinese idiom that calls on fighters to have millet and a rifle on hand to be ready to fight.

($1 = 6.2978 Chinese yuan)

(Additional reporting by David Lin; Editing by Jason Subler)