Exclusive: Behind Lei Jun's Hard, and Once-Reluctant, Decision to Build Xiaomi C...

Behind Lei Jun's Hard, and Once-Reluctant, Decision to Build Xiaomi Cars- PingWest

Exclusive: Behind Lei Jun's Hard, and Once-Reluctant, Decision to Build Xiaomi Cars

Wang Boyuan Chen Du Rebbeca Ren

posted on April 12, 2021 2:17 pmEditor : Chen Du

For years, Lei Jun avoided distracting himself to build cars & making enemies in the auto industry. Now he's making a Xiaomi car the last startup of his career, and will all in his chips.

The original Chinese version of this article appeared first on PingDrive, an automotive-focused Chinese language content channel by PingWest.

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A photo of Xiaomi CEO Lei Jun joining the founders of four prominent Chinese electric vehicles makers--BYD, Xpeng Motors, Nio, and LiAuto--went viral on April 1, further giving some a faint idea that what Lei claimed just 2 days ago, that he’s going to start an EV company from scratch, was some kind of a joke.

But it was not. After all, Xiaomi had delivered the news to the Hong Kong Exchange by the end of March that it’s making cars, via a wholly-owned subsidiary that is going to be led by none other than Lei himself, fulfilling a long-standing rumor in the industry.

Nevertheless, the photo was not taken by some kind of new Chinese car manufacturing union. It was only a regular internal networking event for a Chinese business school, which was actually organized as early as the end of last year.

That photo wasn’t planned out to be honest. It was taken at an event hosted by a business school that somehow managed to gather all the aforementioned founders for a group photo. But with Xiaomi’s latest announcements, the April 1 group photo had a much more significant meaning, becoming some sort of a collective oath taking event of several entrepreneurs who were convinced that they are destined to reshape the automotive industry for the next 100 years to come.

Sources at the event told Ping-Drive, an automotive-focused sub brand of PingWest, that Lei said that if there would be five companies remaining after 10-20 years when the smart EV market actually goes mature, he wished that it would be the five of them in the group photo. "Let's work hard to secure that future for ourselves," he said.

While Xiaomi’s entry to the scene is considered too little, too late by some, the automotive industry’s shift towards electric and smart is still early and far from endgame.

Despite years of speculation, Xiaomi had never thought of making cars as a viable option until very recently, PingWest has learned. Instead, the plan was set forward unexpectedly by an unforeseeable incident.

On January 4, 2021, the first trading day of HKEX in the New Year, Xiaomi's shares hit record high with a closing price at 34 Hong Kong dollars, doubling its issue price of 17 HKD. Back when it was just listed in 2018, Lei said privately that his goal was to double the earnings for Xiaomi’s public investors, which became public later after being reported by the media and had troubled him for more than 2 years. 

On January 5, sources close to Lei told PingWest that Lei was relieved and finally able to remove all the stock tracking apps on his phone.

Blasting a career of serial entrepreneurship of 30 years, Lei is not unfamiliar with the highs and lows of the stock market. Back in his earlier Kingsoft days, his team spent 8 years to get listed on HKEX, only to see its share price hit the bottom of 2 HKD. But this time, for Xiaomi’s IPO, everything was different. There was much baggage on his shoulder and much debt to repay. Devoted supporters and friends of Lei, such as He Xiaopeng, the founder and CEO of Xpeng Motors, dished out 100 million US dollars straight from his own pocket to buy in on Xiaomi’s IPO when there was absolutely no guarantee that the share price will go up. Fortunately in the end Lei kept the promise.

On the topic of actually making a Xiaomi car though,for many years Lei cared as little for as he does now for Xiaomi's stock price. He’d have seen a lot, after meeting Elon Musk, the founder and CEO of Tesla Inc., 2 times in 2013, ordering two Model S vehicles (one for his own and another just to be torn down to see how it was built;) He also personally invested in Nio and Xpeng, both current market leaders in the EV sector, in 2015 and 2016 respectively. Both Xiaomi and Shunwei Capital, Lei’s venture capital company, had plenty of portfolio companies in the new energy vehicles-related industry chains.

However, with many top-notch entrepreneurs, quite a few of whom are Lei’s personal friends delving into car making, industry observers have long begun wondering when Lei would join them. Considered a godfather-like figure in China’s entrepreneurship scene, Lei’s very well connected and has a track record of success, after proving nearly every doubter 11 years ago wrong when he made the decision to make smartphones. Back then, top brands including Samsung, Apple, Nokia and Motorola had a huge lead, but Xiaomi eventually thrived, building momentum in mere 2 years. Fast forward several years, when people were floating the idea of a Xiaomi car, Lei seemed uncharacteristically hesitant.

The truth is that It was not that Xiaomi had no ambition or enthusiasm about cars. Both external rumors and actual Xiaomi executive proposals regarding a new project of Xiaomi cars have floated around throughout the years. But for Lei, the ultimate decision maker of this company that possesses the unrivaled expertise in combining hardware and software to build great experiences, making cars was still long considered a faraway thing.

Lei’s hesitation came from what he once considered a near-death event for Xiaomi back in 2016, when the company missed its annual mark of 100 million smartphones shipped by nearly 50%, a full 10 million less than what it shipped in the prior year. The fear of the entire supply chain losing faith in a prominent phone company, sending it to a downward spiral that ends in unavoidable death of the company, crept up to Lei. He was surprised to find out that the entire smartphone R&D team had less than 300 people while Huawei had about 15,000.

The painful realization forced him to take over Xiaomi’s smartphone department himself and put the entire company on a journey that he calls “making up the missed lessons”.

Since 2016, Lei has put himself personally in charge of not only Xiaomi’s phone department, but also its entire China businesses, moved his corporate office to the levels of said departments, participated in front-line activities such as deciding on technical aspects of Xiaomi’s phones and field trips to suppliers and manufacturers. It was only after Lu Weibing, a new hire from former rival Gionee, proved himself to the boss and was promoted to the President of Xiaomi’s president for China market, that Lei was finally able to relinquish front-line duty around 2019 and 2020.

For almost 5 years, Lei was essentially putting himself to the limit in order to save Xiaomi from what later on happened to LG, Motorola, Nokia, Blackberry, etc., and could have happened to Xiaomi, too. In his perspective, he built a successful startup, only to watch it almost fall to the abyss, and turn it all around again. It was exhausting, to say the least.

When Xiaomi went public in Hong Kong in 2018, Lei was asked by a financial analyst why Xiaomi was still not in the car making business. To that question, Lei provided a simple and devastatingly honest answer: “If I was 10 years younger I would have done it without the slightest hesitation. But I won’t do it now.”

Honestly, Lei just did not care that much anymore, according to personnel with close ties to him. By Jan 4, 2021, Lei was no longer tunnel visioned on Xiaomi’s stock price, and was perfectly happy to focus on what he valued the most, plans like achieving an even larger global market share for Xiaomi’s smartphones, and making the company’s smart ecosystem even more diversified and comprehensive, etc. None of those plans included making a car.

That relief lasted for roughly 10 days, before everything abruptly changed.

On January 14, 2021, the US Department of Defense added nine Chinese companies, including Xiaomi, to its list of Chinese companies owned or controlled by the Chinese military.

Technically, the DoD sanction only bans US investment into the company, which did not hurt Xiaomi that much since it was already a Hong Kong-listed public company. However, the incident still became a sort of wake-up call for Xiaomi’s leadership.

It was during the board meeting on the following day to discuss the DoD sanction, according to investors who were briefed on the meeting, that board members were not actually that worried about DoD, but more concerned about whether the company, under Lei’s rein, will make a car or not. Sources told PingWest that during the meeting, some board members no longer advised Lei, but instead demanded that he would immediately begin researching and preparing for a new car making project.

They had an apparent and sound reason: the external environment is ever-changing and is full of uncertainty. Therefore the company must plan ahead, take initiative to change, and embrace new opportunities. The 10-year-old Xiaomi must now plan for a renewed growth curve in the upcoming decade.

Lei did not reject the board’s demand outright this time.

On the same day, a small task force designated to research and prepare for a new car project formed within Xiaomi’s office of chief of staff, headed by Lei himself, who was still not fully convinced that the new initiative might work.

But being the entrepreneur with a known serious attitude, Lei ordered the task force to work through the Spring Festival holidays, setting a goal to host at least 85 visits and interviews with a minimum of 200 recognized automotive insiders within the first 75 days.

The task force first went to those automotive companies known as the “Xiaomi-affiliates”, meaning those directly invested by either Xiaomi, Shunwei Capital, or Lei himself. These companies include Momenta and IDRIVERPLUS in the autonomous driving software sector, BeneWake in LiDAR business, AECS for automotive ECU, as well as carmakers BYD, XPeng, and Nio. Afterwards, the scope was broadened to include all kinds of companies from the entire chain that could be involved in the automotive industry.

Some of these companies would be thrilled to supply to Xiaomi, while others in relatively good terms with Lei would be somewhat vacillated to face the inevitable of direct competition with his company. However, none were really surprised when Lei and the team came up to them. To figure out a solid reason why Xiaomi is to build a car, there were questions that had to be asked. And if there’s one thing these friends and acquaintances know about Lei, it’s that he will get his answers.

Around the same time the task force was knocking on doors across the industry, internal discussion among Xiaomi’s partnership and mid-to-high level executives were happening regularly, where Lei was present for most of them. With research reports developed by the task force in hand, all participants of these internal discussions, although still hesitant on the final decision, were beginning to sense the inevitable outcome.

Interestingly, while a February 19 internal meeting that involved more than 50 general manager level Xiaomi executives discussing the car making project was ongoing, media outlets citing uncorroborated sources reported that the company had just “confirmed car making as its latest strategic decision,” sending Xiaomi stock price skyrocketing. Situation got so intense, that the responsible investor relations and communications executives had to begin drafting disclosure statements for the stock exchange mid-meeting.

If anything, the media reports demonstrated the public support and enthusiasm of such a new project that was still non-existent at the time.

Combining that with the task force’s research report at the meeting, which demonstrated that smart EVs are publicly recognized as the next big thing; thatmature electronics technology made automotive manufacturing much easier; that the cost of power units and batteries decreased drastically over the years and are still dropping; that the key to differentiable competition has moved into who can build a smart cabin with the best software-enabled experience--Lei, his partners and subordinates became more and more convinced that Xiaomi could be uniquely positioned to step foot in the smart EV sector.

Lei told at a press conference on March 30 that some believe that Xiaomi should build its own cars, while multiple people also warned him about the difficulties, risks, huge capital investment, etc.

“Traditional carmakers venturing into smart vehicles felt like adding a smartphone to 4 existing wheels. But for Xiaomi, it would be like adding 4 wheels to a smartphone that already came with a suite of intelligent ecosystems,” one person who was interviewed by Lei told PingWest that that was what he said to him, “Which way is actually easier, can’t you see?”

Since then, Lei's attitude towards studying carmaking gradually shifted from "exhausting all reasons to support not making them" to something more intricate. By the end of February 2021, or about a month away from their final decision, the discussion within the task force has entered the key phases, where a number of determining questions required answers.

The first question is how Xiaomi will go about making the car. Essentially, to build a new business line within the current corporate structure, or register a new company with the potential to raise funds independently. PingWest has learned that by the Spring Festival holidays, multiple venture capital companies have heard about Lei's notion and reached out to convince him to set up an independent company with a guaranteed starting valuation of 10 billion US dollars.

However, different thoughts were still floating around within Xiaomi's leadership core, among its partners. The general idea is that compared to starting a new company and raising funds, it is quicker and easier to just acquire and assemble existing EV startups. The task force’s report suggested that if Xiaomi was about to go with this route, acquiring a number of startups as quickly as possible, the teams would be able to iterate faster with the potential to have a marketable product ready by the end of 2021.

PingWest has also learned that there was at least one founder of such existing car making startups, who went to Lei directly and proposed collaboration, with or without the involvement of capitals. "I'll build you the cars, you provide the smart systems and connected experiences. You can even put your own badge on the car," said that founder.

However, Lei's thinking was that a Xiaomi-made car will not be a true Xiaomi product without becoming a part of the entire ecosystem that the company has been building experiences upon for several years. That car had to be a key node within what Xiaomi's leadership imagines as the future of a connected, intelligent lifestyle. To achieve that, there must be a holistic approach, where the entire company's technology, product experience, and even the resources from sales, operations and marketing combined.

The answer: to make the car in-house via a wholly-owned subsidiary, under the guidance of the parent company, with a start-up capital of $10 billion out of Xiaomi's own pocket.

The ultimate reasoning behind that is that it would be easier at first and harder later on to build a car externally, and internally vice versa. Lei chose the latter because he was convinced that if Xiaomi was to build a car, the first stage would be the most important and his company must secure a favorable situation. The first battle must be won. And he understood that this approach would take time, which is why he said on April 6th on Xiaomi's 11th anniversary that a Xiaomi car was estimated to be revealed in 3 years.

The next important question was "who's going to build it?" Namely, how will the team be assembled and who is going to be put in charge? It would seem like that Xiaomi had an abundant supply of high quality talents from various departments including supply chain, software engineering, AI research and development, and marketing and communications, to be dispatched to the new venture. However, the internal perception was that these employees, although highly capable of and seasoned at making good smartphones and internet-connected smart devices, a smart, electric car would need to be a much more sophisticated and larger electronic device for the future. Such a device requires a team of specifically trained and experienced talents.

The core leadership eventually decided that it would go about assembling a team both internally and externally, with an inclination to use outside talents with regards to important technology aspects such as autonomous driving, LiDAR, and the manufacturing process, through conventional hiring and unconventional methods that include acqui-hires. What made it easier for Xiaomi was that the company, as well as Lei personally, already had a good establishment in China's car making scene through financial investments.

As for the CEO, it would have to be Lei himself, in order for Xiaomi's board to agree to grant the new venture a one-time commitment of $10 billion in 10 years. Only Lei can best mobilize all internal and external resources to serve the purpose.

Lei's shift of his personal focus onto the new venture can also be observed by looking at a series of recent executive reshuffle, where Lu Weibing, Xiaomi China's president who gained partnership status less than a year ago, was promoted to senior vice president, leading both the corporation's China and international businesses. Zeng Xuezhong, president of Xiaomi's smartphone business, was also promoted to SVP. Meanwhile Zhang Feng, SVP and Xiaomi's Chief of Staff, was also re-confirmed publicly by the company to be put in charge of Xiaomi's laptop, Smart TV and home appliances divisions. These arrangements would show that Lei is ready to put the current core business into the hands of these trusted partners, so that he himself can focus more on the new venture.

"Many people tend to underestimate Lei Jun's determination and action when he's about to roll up his sleeves and get his hands dirty. If he said so, he will act so and it's going to be as real as it gets, just like years ago when he said that he was going to be personally running Xiaomi's smartphone businesses and the Chinese market as presidents for these 2 departments," said a former Kingsoft personnel who knew Lei well, "There is no such thing as a nominal CEO for him."

Then there was the question of whether this new venture will succeed at all.

During the entire researching process, Lei has been extremely cautious and can be recognized as conservative-leaning within the partnership.

He only came to the conclusion that the new venture might just make it, considering the following facts, which he put into a March company-wide email announcing the new venture: that smart electric vehicles has changed the business model of the automotive industry completely, and Xiaomi has a deep understanding in terms of hardware-based internet-connected services; that Xiaomi is the most vertically and horizontally integrated company in the industry with unmatched experience dealing with manufacturing; that Xiaomi already has the largest and most category-rich smart ecosystem; that the company can reuse a lot of its key technologies built in-house along the way; that it has a well established brand image and the unwavering support of tis fans; that it has a deep enough war chest.

While Xiaomi's core leadership is now settled on making the car, industry-wide chatters continued to question if the company was already too late to the game —— 10 years after Tesla, 6 after domestic EV brands had entered the market. Even Apple, which does not have a car yet, had already been in preparation for roughly 28 years.

Xiaomi's timing is, to be fair, indeed not early. The R&D process of a car compared to a new smartphone is only going to be significantly longer. The lukewarm response from many industry observers falls on the potential future that no one, or at least significantly less customers than Xiaomi projected, would buy a Xiaomi car in 3 years just for Xiaomi's namesake.

People with knowledge of Xiaomi's car making plans told PingWest that Lei concluded that it is not too late still, that carmaking is an entrepreneurial adventure of a hundred years, and the current car making buzz is just the beginning of a very long cycle. Data referenced by the task force suggested that global EV penetration is at about 4% only. Therefore, what the industry observers thought of as a huge temporary lead by the aforementioned companies is quite minimal when people think of it in Lei's way. He thinks that Xiaomi being slightly late to the game could actually help it make less mistakes compared to the forerunners.

What Lei is more concerned about is a much grander picture: What will the smart EV industry’s endgame look like?

That was the question that he asked everyone during the research process. The picture has become clearer by the day: if smart EV is to become just like the present day consumer electronics, then "winner takes all", which was what happened to the PC and smartphone industries, will definitely happen again. Within 10-20 years of the emergence of a new paradigm-shift market, the top 5 players will take about 80% of the market, leaving smaller ones struggling to make ends meet before quitting the market altogether.

But who can take these 5 seats, and what guarantees Xiaomi one of them?

Meanwhile, external situations began to shift towards Xiaomi's favor. On March 13th, a US court issued an order enjoining the US Department of Defense from sanctioning Xiaomi due to the lack of factual evidence supporting the DoD's claim that Xiaomi is involved in China's military projects, granting the company a preliminary victory. Around the same time, Xiaomi also issued its annual reports that beat market expectation despite the pandemic, making the company the only mainstream smartphone maker with a significant growth last year.

Morale is high within Xiaomi, where employees have begun messaging Lei and other senior executives privately, and sometimes publicly, that they would stand with the company's yet-to-be-announced plan to move into carmaking, with some even boldly promising that they are willing to forgo their salary just to be assigned to the new venture, according to sources who spoke to PingWest. For a moment, it was looking like that Xiaomi might even frustrate a lot of its employees if it eventually decided not to build cars. "If we don't do this, we might eventually be seen as an outdated appliance company," one employee said.

After delivering a strong 2020 performance, the entire company moved on to prepare for its March new products launch, one of the largest events for the year. The launch, featuring a new high-end smartphone with record-slashing camera quality, another new smartphone that first cross the 10,000RMB price tag mark for Xiaomi, and the company's entirely new (but still very much the same) logo, was themed "生生不息", or roughly translated as neverending growth.

Around the event, Lei caught a cold that hindered his ability to best showcase the company's new products and its grand ambition, causing him to abruptly decide that the event would be split into two days.

However, according to sources, it was during those rough days that Lei finally let go of many of the key questions left unanswered, and just embraced what would inevitably come.

Everybody else is building cars. That has basically become the trend that Lei was left with no option but to follow suit. As for getting a seat at the high table, he might as well not worry about it now, for those who think about the endgame without getting into the game first would be fools.

For the time being, what Lei cares about the most is how could his new company make a good car that Xiaomi’s core users like and are willing to buy.

For other mainstream carmakers that try their best targeting mass audiences to achieve quantity, Xiaomi's approach of wooing a certain fan base may seem childish. But according to Lei, there are tens of millions of Mi Fans around the world, and satisfying a small percentage of the fan base, who might be in the market for a new EV, would suffice the newcomer to the car making scene to jump into top 3 in terms of delivery. This is because Xiaomi already enjoys a unimaginably loyal fan base. It would be completely logical for Xiaomi's masterplan to heavily rely on pleasing its fans to succeed, as the company had been doing so for the past 10 years.

Xiaomi disclosed to the HKEX that its board has officially approved a new project for building EVs to be set up, a wholly-owned subsidiary to be established, with a first stage investment of 10 billion RMB and a 10-year investment commitment of $10 billion.

Lei was appointed as the CEO of the new company. Finally, the well-respected executive and serial entrepreneur who once followed his heart whether it is decided or not, is now back on the table and prepared to all in his chips once again.

The first 75 days since Jan 14, 2021 was an unimaginably busy and exhausting period of time for Lei's career.

During these 75 days, he visited all the major players in the automotive industries, hosted discussions, and pulled his heart out in front of his old pals whose EV startups he invested in. He decided to launch a lawsuit against the US DoD and ultimately won, participated in China's annual legislative council meetings and submitted drafts, and handled the departure of Shou Zi Chew, Xiaomi's former CFO and one of his most trusted decision making allies. He worked through a 2-day product launch event and decided on the final plan for Xiaomi's branding upgrade. And on March 30th, he moved on to the latest stage of his entrepreneurial life, as the CEO of a brand new car company.

He eventually broke the earlier promise of "If I was 10 years younger I would have done it without the slightest hesitation", back when he was asked why Xiaomi was not making cars.

He made a new promise, however, that this new car company will be the very last startup project of his lifetime, the success of which he will bet all of him on to guarantee.