How Xiaomi Stole From Tong Ren Tang

I recently read a 2019 speech by Lei Jun, the founder of Xiaomi on the inspirations he sought to emulate in starting Xiaomi.

I was possessed by it and decided to translate the speech for an English audience.

There are three reasons why I chose to translate this speech:

1. I thought Lei Jun's intellectual humility to be refreshing. For a man who wanted to revolutionise the smartphone industry in China, he didn't assume to have the answers himself. He studied successful companies in other industries and markets seriously- and applied principles he was convicted in.
2. It's an inside peek into the philosophy of one of China's best tech entrepreneurs of the past decade. Xiaomi has emerged as an industry leader in consumer electronics in China and other international markets. (Marques Brownlee, arguably the biggest consumer tech Youtuber called Xiaomi's smartphones 'impressive'.) As of June 2024, Xiaomi has a market cap of $56.81 Billion.
3. I think Lei Jun is a badass and his thinking deserves greater study. What I like most about him is that he represents the ideal of a mission-driven founder who (literally) puts his money where his mouth is. (No burning VC's money on stupid things, insisting on product excellence and genuinely wanting to improve China's technological capabilities.)

The original speech can be found here.

I am translating it into three posts because the speech is long and I want you to to enjoy every morsel of his speech.

(Keith's little note: 1) In translating this speech, I tried to be true to the spirit of his words and did not literally translate it word for word. If you want a literal translation, ChatGPT could do it for you 2) I add parentheses for commentary)

Lesson 1: The Lesson From Tong Ren Tang

On December 7, 2014, in the fifth year of Xiaomi's founding, I was invited by Zhu Linan, the President of Legend Capital (formerly Lenovo Investment), to share my reflections on founding Xiaomi and the role models we emulated.

In my speech, I shared that we primarily examined Tongrentang, Haidilao, Walmart and Costco and offered my thoughts on how we leveraged the internet to better Xiaomi.

In the blink of an eye, another five years have passed, and Xiaomi is about to enter its 10th year of operations. Looking back, Xiaomi's decade-long journey has consistently adhered to the principles we gleaned from these companies.

To mark this occasion, I have revised and supplemented this sharing to summarise Xiaomi's operational philosophy for the past decade.

Learning from Tongrentang: Excellent Products Require World-Class Materials And Deep Conviction

Mr. Liu Chuanzhi, the founder of Lenovo, once recommended Jim Collin's book Built To Last to me. The book sought to answer the central question: "How do you build an enterprise that could last beyond a century?"

Naturally, I asked myself : "Who in China has done this?" 

The first company that came to my mind was Tongrentang. (同仁堂)

(For those unacquainted: Tong Ren Tang is a Chinese pharmaceutical company founded in 1669 during the Qing Dynasty, renowned for its traditional Chinese medicine (TCM) and considered one of the oldest continuously operating pharmacies in China.)

While doing my research, I discovered that the company motto is the defining quality that explains its longevity.

"The price of high quality is steep, but we dare not skimp on our materials. The production process is tedious, but we dare not skimp on our efforts."

 (They take it so seriously that this couplet is hung at every door of its store.)

Simply put, when making products, use the best materials, even if they are expensive. Even if product development is tedious, don't be lazy; do the hard work. To be good, you have to be made of the real stuff.

This is easier said than done. 

In their wisdom, the founding fathers of Tongrentang added a second saying: " No one outside can see your refinement process. But your conscience and Heaven can see your heart's true disposition." This saying moved generations of workers to embody Tongrentang's mission wholeheartedly.

This deeply moved me.

After decades of reform, opening and hard work, China has become the world's manufacturer, but why were Chinese products often considered inferior? 

Sometimes, people joke that we Chinese are too clever because some of us always take the easy way out and cut corners - thereby perpetuating this stereotype.

If we are serious about being built to last, we must use the best materials first. If we want to endure for generations, we must transform our 'real stuff' into faith.

Thus, I have come to believe that two things are necessary in building a lasting business: first, use the best available materials, and second, have a clear conscience.

After an intense study, I decided that the path Xiaomi ought to start on had to be radically different: the materials we use for our products must be world-class. This is to say we didn't want to settle on buying the correct materials, we were willing to pay a premium for best-in-class inputs.

For a startup like Xiaomi, this was an extremely difficult decision to make because our costs would be much higher than the incumbents.

However, we did it.

We used Qualcomm for processors, Sharp for screens, and assembled at Foxconn, the world's largest contract manufacturer.

I learnt that the Chinese people need quality products first and foremost, not just cheap things.

Making something good is not easy. When Xiaomi started, our biggest problem was that no one really wanted to work with a startup.

I assumed that making smartphones was the same as making a PC. I thought I just needed to buy components and build it myself. Later, I found out that my assumptions were wrong.

 Most smartphone parts are electric components that require substantial customisation. This means manufacturers needed to co-invest in substantial R&D and take on huge risks.

Every supplier was extremely cautious when choosing their partner.

All four of the top four contract manufacturers ignored me. I finally persuaded the fifth, Inventec Appliances, to work with me. I spoke to the GM in Nanjing thrice; he saw that my idea was technically feasible and gambled on me.

In 2011, the cost of our first smartphone was as high as 2,000 yuan. At that time, the average price of domestic phones was 600-700 yuan; how could we sell a 2,000 yuan phone?

We had no confidence internally. We initially aimed to sell at 1499 yuan with zero compromises in performance and quality, but losing 500 yuan per phone was unacceptable.

I spent a sleepless night contemplating our pricing strategy the week before our product launch.

The following evening, after intensive discussions with my partners, we decided to set the price of our phone at 1,999 yuan. We firmly believed our product was exceptional and justified the price.

A week later, we launched, and the market response was overwhelming—we achieved a resounding success.

This launch reinforced my conviction that we Chinese primarily seek quality, not just low prices.

In an era where China has an enormous manufacturing capacity, if we don't commit ourselves to creating superior products, aren't we simply engaging in deception?

(Rewinding a little, Lei Jun takes us to the early days of Xiaomi)

To underscore our commitment to product quality, Xiaomi refrained from releasing a single press release in the first eighteen months after our founding. We mandated strict confidentiality among all employees, even concealing my role as the founder.

Our strategy was clear: let the product speak for itself without relying on external publicity.

We began by leveraging our core competency—software development. We created MIUI on the Android OS.

Xiaomi was established on April 6, 2010, and by August 16, we had released the first version of MIUI. Initially, we had a mere 100 users, but our user base doubled weekly—200 in the second week and 400 in the third. By October, we had caught the attention of XDA, the globally renowned developer forum.

This catapulted us to international fame, culminating in a nomination for the best Android product that year.

The lesson is clear: focus on developing high-quality products and have a deep conviction in your workmanship.

We source every Xiaomi phone from China's premier suppliers, including our 1000 yuan models. I personally use each model for six months to a year, gaining intimate knowledge of its strengths and shortcomings.

With three decades in the technology sector, I firmly believe that I cannot endorse a product I haven't personally used or don't appreciate.

How else could I stand before you with conviction?

I founded Xiaomi at 40, after attaining financial independence. That's my greatest competitive advantage. I have the luxury of pursuing passion projects and not chasing whatever is financially lucrative. Hence, Xiaomi's priority was to produce a valuable product.

I suspect that many here, perhaps the majority, were once loyal to Apple or Samsung. But today, I'm confident that many have transitioned to domestic brands.

Just three years ago, Chinese smartphones were a rarity. Now, spearheaded by Xiaomi, domestic phone manufacturers are making remarkable strides in quality and innovation.

This relentless focus on developing high-quality products was the first lesson I learnt from Tong Ren Tang.

You can find Lei Jun's lessons from Haidilao and why he felt his trip to Dubai was underwhelming here

And, for his lessons from Walmart and Costco, check it here.