China cannot rely on foreign technology for national security purposes

[TaiShang]

China cannot rely on foreign technology for national security purposes: expert

By Yang Sheng Source:Global Times Published: 2018/7/11

Redoubled efforts needed to develop pinnacle tech: official

By the end of June, China has had 1.475 million invention patents, which means for every 10,000 people in China, there are 10.6 invention patents on average, said China's intellectual property authorities.

At a press conference of the State Intellectual Property Office (SIPO) on Tuesday, authorities said China is also making greater effort to protecting intellectual property rights.

In the first half of 2018, the number of cases related to invention patents has increased by 29.5 percent compared to the same period last year. By the end of June, 13,600 cases about trademark violations have been handled, and the total value involved in these cases reached 210 million yuan ($31 million), according to SIPO.

"In the past, when China's industrial development partly relied on technology supplied by the outside world, the motivation for innovation was not as strong as that at present. Due to the trade war with the US, China's intention to strengthen its innovation capability will be even stronger than the past," Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, told the Global Times on Tuesday.

China still needs to redouble its efforts to develop pinnacle technologies such as optics, engine turbines and medical equipment, Bi Nan, director general of the Planning and Development Department of the SIPO, said at the Tuesday conference. "We are still at a disadvantage in core technologies," Bi said.

During the first half of this year, the SIPO received 23,000 patent applications based on the Patent Cooperation Treaty, with 21,600 of them coming from domestic industries, signaling a rise of 7.6 percent year on year.

Among the 35 sectors classified by the World Intellectual Property Organization, patents granted to domestic inventions outnumbered those to foreign ones in 32 categories.

Trade conflicts with the US, especially the ZTE case, have taught a cruel lesson to China, which is that the country cannot count on the outside world in the key areas regarding national security, said Zhao Zhanling, a legal counsel of the Beijing-based Internet Society of China.

"In the short term, the US' trade war against China might bring some difficulties and challenges, but in the long term, it will force China to increase investment and make much more efforts to reduce its reliability on core technologies introduced from the outside world," Zhao noted.

At the same time, Bi pointed out that Chinese entities were not as competent as their foreign counterparts in view of receiving long-term patents whose validity could extend for more than 10 years. The comparison was especially obvious in 28 of the 35 sectors, including transport facilities and computer science, she said.

"We should endeavor to improve the quality of patents, keep mapping out critical inventions in key areas and continue to reinforce the protection and utility of patents in important sectors," she added.

 

[ohmrlobalobayeh]

this ZTE case will bring the same effect as the Tiananmen embargo- n that is to force innovation, endure the short pain, but reap massive future benefits.

Time is of the essence

 

[TaiShang]

this ZTE case will bring the same effect as the Tiananmen embargo- n that is to force innovation, endure the short pain, but reap massive future benefits.

Time is of the essence

I feel the same way. Using the enemy's negative power against the enemy itself by turning it into a positive outcome that would eventually hurt the enemy by undermining its inherent advantages. In that sense, I guess, China is well-versed in that game. China views the entire battle-field across time and space. The US appears to care about only the next strategy. Hopefully, the US will insist on the 200 billion USD tariffs.

 

[rott]

This goes without saying. The first mistake was "depended on foreign technology" Why don't those idiots learn from the past.
Biggest idiot = ZTE
@Jlaw

 

[gambit]

This goes without saying. The first mistake was "depended on foreign technology" Why don't those idiots learn from the past.
Biggest idiot = ZTE
@Jlaw

You have no one to blame but yourselves.

First...China took after JPN. When Imperial JPN needed to modernize, she sent her best and brightest to study with the Europeans and the Americans. Learn whatever necessary, and the government allowed Western investments into JPN. Your China is doing the same.

Second...China allows capitalism. Your institutions were already corrupt to their cores. Instead of money, the currency was political capital. So when China allowed even controlled capitalism, corrupt bureaucrats were well placed to exploit existing loopholes and create new ones.

Your greed overrode any admonition about learning from the past. Dependency on foreign technology is well embedded into your industries. Your participation on this forum is one evidence of that.

 

[rott]

You have no one to blame but yourselves.

First...China took after JPN. When Imperial JPN needed to modernize, she sent her best and brightest to study with the Europeans and the Americans. Learn whatever necessary, and the government allowed Western investments into JPN. Your China is doing the same.

Second...China allows capitalism. Your institutions were already corrupt to their cores. Instead of money, the currency was political capital. So when China allowed even controlled capitalism, corrupt bureaucrats were well placed to exploit existing loopholes and create new ones.

Your greed overrode any admonition about learning from the past. Dependency on foreign technology is well embedded into your industries. Your participation on this forum is one evidence of that.

Thank you for your reply, Gambit. But I'll let someone else respond to your post since I am not into writing anything long.

 

[ohmrlobalobayeh]

This goes without saying. The first mistake was "depended on foreign technology" Why don't those idiots learn from the past.
Biggest idiot = ZTE
@Jlaw

xiaomi's leijun is also another idiot- he is just interested in making easy money flooding india with their low end phones now. If they have true far vision, they would had invested a good sum of money into developing processors instead of relying on qualcomm's Snapdragon.

Only Jack ma has true far vision. Alibaba is only a shopping spree for semiconductor companies right now- similar to what qualcomm did by buying over multiple small semiconductor companies and merging all their technologies into 1.

Time is running out, there must be a breakthrough in semiconductors industry. Now there's Kirin, but their chips are not on par with snapdragon yet.

china has to produce not 1, but at least 2 more world-conquering chipset companies.

Gamers will know that desktop processors has been dominated by only Intel and AMD.

I hope i will be able to use a Chinese desktop processor with my Taiwanese MSI motherboard one day(instead of the Intel core i7 im using now)

if China can get the C919 going to break duopoly of commercial aircraft industry, she will definitely also be able to break the desktop/laptop duopoly controlled by intel n amd.

Only Jack Ma is a true nationalist, patriot and far-sighted visionary:

Countries need to break free of US dominance of semiconductor industry, Alibaba’s Jack Ma says

Alibaba has invested in five semiconductor firms in the last four years

PUBLISHED : Wednesday, 25 April, 2018, 10:18pm
UPDATED : Wednesday, 25 April, 2018, 10:18pm

COMMENTS: 27

TECH
China’s most popular app now has 1 million mini programs
4 Jul 2018
The co-founder of Chinese e-commerce giant Alibaba Group Holding, Jack Ma, said nations from Japan to China needed to develop their own semiconductor technology to get around America’s grip on the global chip market.

Ma, explaining his company’s growing interest in chips, including this month’s acquisition of local design house Hangzhou C-Sky Microsystems, said he was motivated in part by a desire to make chips “inclusive” – cheap, efficient and available to all. He said his company had invested in five semiconductor firms in the past four years.

“America was the early mover and China, we need a lot of things. 100 per cent of the market for chips is controlled by Americans,” he told students and entrepreneurs at Japan’s Waseda University. “And suddenly if they stop selling – what that means, you understand. And that’s why China, Japan, and any country, you need core technologies.”

Ma’s comments dovetail with the views of Chinese business leaders and politicians. Ma joins industry peers such as Tencent Holdings founder Pony Ma in espousing a world-class domestic chip industry as tensions simmer with the US, the global leader in semiconductor technology.

Semiconductors lie at the heart of a spat between the world’s two largest economies, a dispute that has swollen tariffs, chilled Chinese investments in American companies and hampered China’s development of technologies from fifth-generation wireless to artificial intelligence.

The US government is even reviewing the possible use of a 1977 law under which President Donald Trump could declare a national emergency, block transactions and seize assets. Along with the US blacklisting of Chinese telecoms firm ZTE for seven years, that only reminded Beijing of the urgent need to whittle down its dependency on American technologies.

US semiconductor makers dwarf Chinese peers in market valuation as China’s chip dream remains distant

The action taken against ZTE has ironically given a further boost to China’s existing plan to shell out some US$150 billion over 10 years to achieve a leading position in chip design and manufacturing – a vision that US executives and officials have repeatedly warned could harm American interests.

“We’re entering a world where people don’t trust each other. That’s why we have trade wars and so many problems,” Ma said. “But don’t give up. Trust isn’t just gained, it’s about building. And we can build.”

Alibaba has invested in five semiconductor firms in the last four years

Alibaba is doing what Qualcomm did- buying over more than multiple small semiconductor companies, absorbing and combining all their accumulated technologies into a single family of products


Qualcomm's acquisitions- all of them are small semicondcutor companies with their own patented technologies:

Acquisitions[edit]
Date announced/
publicly reported Company Business Value References
November 1997 Now Software Calendar and scheduling software Not disclosed [27]
January 2000 SnapTrack Cell-phone tracking software $1 billion [28]
March 2001 FleetAdvisor Fleet management software Not disclosed [29]
September 2004 Iridigm Display Corporation Display technology $170 million [30]
September 2004 Spike Technologies Semiconductor design services $19 million [31]
October 2004 Trigenix Cell phone user interface tools and apps $36 million [32]
August 2005 Elata Mobile content software $57 million [33][34]
August 2005 Flarion Wireless Orthogonal Frequency Division Multiplex Access $600 million [34][35]
January 2006 Barkana Wireless Inc. Radio frequency circuits $56 million [36]
August 2006 Qualphone IP-based Multimedia Subsystems (IMS) $18 million [37]
November 2006 nPhase machine-to-machine (M2M) software Not disclosed [38]
December 2006 Airgo Networks Inc. Wi-fi networking Not disclosed [39]
December 2006 Bluetooth assets of RFMD Bluetooth $39 million [40]
November 2007 Firethorn Holdings Mobile banking services $210 million [41]
December 2007 SoftMax Noise cancellation for mobile phones Not disclosed [42]
March 2008 Xiam Technologies Ltd Content-targeting software $32 million [43]
January 2009 AMD handset division Graphics and multimedia software $65 million [44]
February 2009 Digital Fountain IPTV and mobile video Not disclosed [45]
April 2010 Tapioca URL-linking Not disclosed [46]
September 2010 WiPower Wireless charging pads for mobile devices Not disclosed [47][48]
October 2010 iSkoot Software for social media feeds on mobile devices Not disclosed [49]
September 2010 Sandbridge Technologies Software defined LTE multicore processor designs Estimated $55 million [50]
January 2011 Atheros Wi-fi networking $3.1 billion [51]
February 2011 Sylectus Wireless technologies for fleet management Not disclosed [52]
May 2011 SolLink (50 million shares) Flat panel displays $40 million [53]
June 2011 Rapid Bridge Configurable semiconductors (LiquidCell) Not disclosed [54]
July 25, 2011 GestureTek (some assets) Gesture recognition software Not disclosed [55]
September 2011 Bigfoot Networking Networking Not disclosed [56]
September 2011 Integrated Device Technology (a division) Video IC design division $60 million [57]
November 2011 HaloIPT Wireless charging for electric vehicles Not disclosed [58]
December 2011 Pixtronix Inc. Fabless MEMS displays $175–$200 million [59]
June 2012 Summit Microelectronics Programmable power integrated circuits Not disclosed [60]
August 2012 DesignArt Networks Miniature Wi-Fi access points Not disclosed [61]
November 2012 EPOS Development Ltd (some assets) ultrasound technologies for device input Not disclosed [62]
May 2013 Orb Networks Streaming video software Not disclosed [63]
May 2014 Wilocity WiGig semiconductor products Estimated $300 million [64]
January 2014 HP Patents 2,400 patents related to Palm, iPaq and Bitfone Not disclosed [65][66]
June 2014 Black Sand Technologies Inc. Power amplifier technology for wireless devices Not disclosed [67][68]
September 2014 Stonestreet One LLC Bluetooth Protocol Stack provider Not disclosed [69]
September 2015 Ikanos Inc xDSL transceiver chipsets, network processors $47 million [70]
October 2015 CSR plc. Bluetooth and WiFi for Automotive, Audio, and IoT $2.5 billion [7]
October 2016 NXP Semiconductors N.V. Mixed Signal Semiconductor Products $47 billion [71]
August 2017 Scyfer B.V. Machine Learning & Deep Learning Not disclosed [72]

 

[ckf]

this ZTE case will bring the same effect as the Tiananmen embargo- n that is to force innovation, endure the short pain, but reap massive future benefits.

Time is of the essence

Donald and the Congress refuse to let ZTE die:

https://www.scmp.com/news/china/eco...other-hurdle-escrow-agreement-ban-still-place

I wouldn't call LeiJun an idiot, he's building an global ecosphere to take on Google and Apple. Xiaomi has far less commercial and capital reach than Alibaba. But he's very successful in building a global brand that rivals google and apple in half the time. Not many companies can claim that distinction.

 

[xunzi]

xiaomi's leijun is also another idiot- he is just interested in making easy money flooding india with their low end phones now. If they have true far vision, they would had invested a good sum of money into developing processors instead of relying on qualcomm's Snapdragon.

Only Jack ma has true far vision. Alibaba is only a shopping spree for semiconductor companies right now- similar to what qualcomm did by buying over multiple small semiconductor companies and merging all their technologies into 1.

Time is running out, there must be a breakthrough in semiconductors industry. Now there's Kirin, but their chips are not on par with snapdragon yet.

china has to produce not 1, but at least 2 more world-conquering chipset companies.

Gamers will know that desktop processors has been dominated by only Intel and AMD.

I hope i will be able to use a Chinese desktop processor with my Taiwanese MSI motherboard one day(instead of the Intel core i7 im using now)

if China can get the C919 going to break duopoly of commercial aircraft industry, she will definitely also be able to break the desktop/laptop duopoly controlled by intel n amd.

Only Jack Ma is a true nationalist, patriot and far-sighted visionary:

Countries need to break free of US dominance of semiconductor industry, Alibaba’s Jack Ma says

Alibaba has invested in five semiconductor firms in the last four years

PUBLISHED : Wednesday, 25 April, 2018, 10:18pm
UPDATED : Wednesday, 25 April, 2018, 10:18pm

COMMENTS: 27

TECH
China’s most popular app now has 1 million mini programs
4 Jul 2018
The co-founder of Chinese e-commerce giant Alibaba Group Holding, Jack Ma, said nations from Japan to China needed to develop their own semiconductor technology to get around America’s grip on the global chip market.

Ma, explaining his company’s growing interest in chips, including this month’s acquisition of local design house Hangzhou C-Sky Microsystems, said he was motivated in part by a desire to make chips “inclusive” – cheap, efficient and available to all. He said his company had invested in five semiconductor firms in the past four years.

“America was the early mover and China, we need a lot of things. 100 per cent of the market for chips is controlled by Americans,” he told students and entrepreneurs at Japan’s Waseda University. “And suddenly if they stop selling – what that means, you understand. And that’s why China, Japan, and any country, you need core technologies.”

Ma’s comments dovetail with the views of Chinese business leaders and politicians. Ma joins industry peers such as Tencent Holdings founder Pony Ma in espousing a world-class domestic chip industry as tensions simmer with the US, the global leader in semiconductor technology.

Semiconductors lie at the heart of a spat between the world’s two largest economies, a dispute that has swollen tariffs, chilled Chinese investments in American companies and hampered China’s development of technologies from fifth-generation wireless to artificial intelligence.

The US government is even reviewing the possible use of a 1977 law under which President Donald Trump could declare a national emergency, block transactions and seize assets. Along with the US blacklisting of Chinese telecoms firm ZTE for seven years, that only reminded Beijing of the urgent need to whittle down its dependency on American technologies.

US semiconductor makers dwarf Chinese peers in market valuation as China’s chip dream remains distant

The action taken against ZTE has ironically given a further boost to China’s existing plan to shell out some US$150 billion over 10 years to achieve a leading position in chip design and manufacturing – a vision that US executives and officials have repeatedly warned could harm American interests.

“We’re entering a world where people don’t trust each other. That’s why we have trade wars and so many problems,” Ma said. “But don’t give up. Trust isn’t just gained, it’s about building. And we can build.”






Alibaba is doing what Qualcomm did- buying over more than multiple small semiconductor companies, absorbing and combining all their accumulated technologies into a single family of products


Qualcomm's acquisitions- all of them are small semicondcutor companies with their own patented technologies:

Acquisitions[edit]
Date announced/
publicly reported Company Business Value References
November 1997 Now Software Calendar and scheduling software Not disclosed [27]
January 2000 SnapTrack Cell-phone tracking software $1 billion [28]
March 2001 FleetAdvisor Fleet management software Not disclosed [29]
September 2004 Iridigm Display Corporation Display technology $170 million [30]
September 2004 Spike Technologies Semiconductor design services $19 million [31]
October 2004 Trigenix Cell phone user interface tools and apps $36 million [32]
August 2005 Elata Mobile content software $57 million [33][34]
August 2005 Flarion Wireless Orthogonal Frequency Division Multiplex Access $600 million [34][35]
January 2006 Barkana Wireless Inc. Radio frequency circuits $56 million [36]
August 2006 Qualphone IP-based Multimedia Subsystems (IMS) $18 million [37]
November 2006 nPhase machine-to-machine (M2M) software Not disclosed [38]
December 2006 Airgo Networks Inc. Wi-fi networking Not disclosed [39]
December 2006 Bluetooth assets of RFMD Bluetooth $39 million [40]
November 2007 Firethorn Holdings Mobile banking services $210 million [41]
December 2007 SoftMax Noise cancellation for mobile phones Not disclosed [42]
March 2008 Xiam Technologies Ltd Content-targeting software $32 million [43]
January 2009 AMD handset division Graphics and multimedia software $65 million [44]
February 2009 Digital Fountain IPTV and mobile video Not disclosed [45]
April 2010 Tapioca URL-linking Not disclosed [46]
September 2010 WiPower Wireless charging pads for mobile devices Not disclosed [47][48]
October 2010 iSkoot Software for social media feeds on mobile devices Not disclosed [49]
September 2010 Sandbridge Technologies Software defined LTE multicore processor designs Estimated $55 million [50]
January 2011 Atheros Wi-fi networking $3.1 billion [51]
February 2011 Sylectus Wireless technologies for fleet management Not disclosed [52]
May 2011 SolLink (50 million shares) Flat panel displays $40 million [53]
June 2011 Rapid Bridge Configurable semiconductors (LiquidCell) Not disclosed [54]
July 25, 2011 GestureTek (some assets) Gesture recognition software Not disclosed [55]
September 2011 Bigfoot Networking Networking Not disclosed [56]
September 2011 Integrated Device Technology (a division) Video IC design division $60 million [57]
November 2011 HaloIPT Wireless charging for electric vehicles Not disclosed [58]
December 2011 Pixtronix Inc. Fabless MEMS displays $175–$200 million [59]
June 2012 Summit Microelectronics Programmable power integrated circuits Not disclosed [60]
August 2012 DesignArt Networks Miniature Wi-Fi access points Not disclosed [61]
November 2012 EPOS Development Ltd (some assets) ultrasound technologies for device input Not disclosed [62]
May 2013 Orb Networks Streaming video software Not disclosed [63]
May 2014 Wilocity WiGig semiconductor products Estimated $300 million [64]
January 2014 HP Patents 2,400 patents related to Palm, iPaq and Bitfone Not disclosed [65][66]
June 2014 Black Sand Technologies Inc. Power amplifier technology for wireless devices Not disclosed [67][68]
September 2014 Stonestreet One LLC Bluetooth Protocol Stack provider Not disclosed [69]
September 2015 Ikanos Inc xDSL transceiver chipsets, network processors $47 million [70]
October 2015 CSR plc. Bluetooth and WiFi for Automotive, Audio, and IoT $2.5 billion [7]
October 2016 NXP Semiconductors N.V. Mixed Signal Semiconductor Products $47 billion [71]
August 2017 Scyfer B.V. Machine Learning & Deep Learning Not disclosed [72]

Nah, don't underestimate Xiaomi founder. His vision is not simple to carry out but it might actually work. The truth is Xiaomi is not a hardware company but a software. His vision is to sell as much low end products to gain a large userbase to sell services software. So in a way this tactic will only work depends how much innovative Xiaomi is at providing software in the future but first step is to gain lot of user base. They can do that in India ut his end goal is to turn Xiaomi into a software led company.

 

[qwerrty]

xiaomi is designing their own cpu, it's just not good enough to compete with other high end chips yet. they are still learning..

the best kirin chip will always be behind the best snapdragon chip if they don't design their own custom gpu.

 

[powastick]

ZTE is not the only one. Years back already know US will weaponize trade when it block the sales of CPU to China.

 

[antonius123]

You have no one to blame but yourselves.

First...China took after JPN. When Imperial JPN needed to modernize, she sent her best and brightest to study with the Europeans and the Americans. Learn whatever necessary, and the government allowed Western investments into JPN. Your China is doing the same.

Second...China allows capitalism. Your institutions were already corrupt to their cores. Instead of money, the currency was political capital. So when China allowed even controlled capitalism, corrupt bureaucrats were well placed to exploit existing loopholes and create new ones.

LOL. In fact currently Chinese government is one of the most efficient one. They can make decision and conduct execution very fast.

Your greed overrode any admonition about learning from the past. Dependency on foreign technology is well embedded into your industries. Your participation on this forum is one evidence of that.

Wrong analysis.

In fact it is not only China, but also japan korea and europe are the same they still depend on US in some area of technology.

The reason is because US control the market of the core tech. But as you should be able to see, it is China from the rest who has capability to break US dominance.

 

[My-Analogous]

I feel the same way. Using the enemy's negative power against the enemy itself by turning it into a positive outcome that would eventually hurt the enemy by undermining its inherent advantages. In that sense, I guess, China is well-versed in that game. China views the entire battle-field across time and space. The US appears to care about only the next strategy. Hopefully, the US will insist on the 200 billion USD tariffs.

Brother you are going on right direction and we Pakistan is facing same issues and our enemy make us stronger. They teach us where we are weak.

 

[ohmrlobalobayeh]

Nah, don't underestimate Xiaomi founder. His vision is not simple to carry out but it might actually work. The truth is Xiaomi is not a hardware company but a software. His vision is to sell as much low end products to gain a large userbase to sell services software. So in a way this tactic will only work depends how much innovative Xiaomi is at providing software in the future but first step is to gain lot of user base. They can do that in India ut his end goal is to turn Xiaomi into a software led company.

Not true - at all. Nothing to do with software-focused or hardware--focused. Xiaomi would had thought of an entire self-reliant ecosystem instead of relying on Qualcomm.

If Huawei can do it, so can Xiaomi.

 

[xunzi]

Not true - at all. Nothing to do with software-focused or hardware--focused. Xiaomi would had thought of an entire self-reliant ecosystem instead of relying on Qualcomm.

If Huawei can do it, so can Xiaomi.

No. You are wrong. Xiaomi is worth 100 bil in market cap not because it is selling smartphone but because of their vision.

For Xiaomi, the real money is not in gadgets

Rita Liao
2 months ago

Xiaomi’s bus stop advertisement in Shenzhen: “Technology on one facet, art on the other.” / Image credit: Tech in Asia

It’s official. Chinese behemoth Xiaomi has applied to sell its shares on the Hong Kong Stock Exchange, seeking to raise US$10 billion at a valuation of US$100 billion.

That would make the eight-year-old firm China’s third-most valuable technology company, trailing behind leader Alibaba and second-placer Tencent, as of this writing.

Xiaomi has long been known for its affordable handsets, but it’s not really banking on them – and connected devices in general – to make money. Company CEO and founder Lei Jun describes the firm’s business model as a “triathlon”, where it invests in companies producing hardware and devices, sells the products through its online and offline stores, and offers services for product users on the internet.

The internet services, according to the hardware giant’s playbook, will drive the bulk of its revenues down the road.

Not your average hardware company
From inception, Xiaomi has prided itself on offering “value for price.” Now it’s making good on that promise – indefinitely.

In late April, Lei announced that the company would put a five percent net profit margin cap on its hardware products, including smartphones and gadgets like hoverboards and air purifiers.

Although it’s low, the single-digit figure is “above average in China’s hardware industry,” Alex Huang, Asia-Pacific chairman of Segway-Ninebot, tells Tech in Asia. Huang’s company makes hoverboards for Xiaomi and is a top player in its field after acquiring its American counterpart three years ago.

Henry Chang, senior marketing manager at Xiaomi’s smart-home device manufacturer, Lumi United Technology, has the same view. “Hitting a five percent margin is difficult for Chinese hardware companies.”

In other words, selling hardware isn’t that lucrative in China.

Zooming in on smartphones, Xiaomi is dwarfed by its rivals – both locally and globally. While the company earns a meager US$2 in profit for every phone shipped, according to data collected by Counterpoint Research, its Chinese peers Vivo and Oppo – which also focus on affordable smartphones – earn about seven times that. For further comparison, Apple’s profit per unit shipped stands at a staggering US$151.

For now, gadgets remain Xiaomi’s major source of income, but this is expected to change soon.

By 2019, Xiaomi aims to widen the share of its internet services beyond that of hardware, a freelance technology writer familiar with the matter wrote in a blog post.

As Lei pointed out in his speech at Yale Center Beijing last fall, “If we don’t offer internet services, our model would be the same as any hardware company, and our company wouldn’t be sustainable.”

Being cheap
Unlike most hardware firms, Xiaomi doesn’t make gadgets itself. It employs an “ecosystem” approach, where it invests in device manufacturers like Lumi United and Segway-Ninebot, which then carry out Xiaomi’s product requests.

To ensure that the startups stick to its core values of quality and affordability, Xiaomi sends engineers to work alongside them. The startups accept low margins in exchange for huge sales volumes that come with joining the Xiaomi ecosystem. As of the fourth quarter of 2017, Xiaomi was the world’s third-largest wearables company by shipment, according to IDC.

See: Inside Xiaomi: The perks and perils of startups that join its ecosystem

The finished products are then sold via Xiaomi’s online retail channels and its growing network of brick-and-mortar shops across China, as well as in developing countries such as India. Having in-house channels helps Xiaomi save on distribution fees, a common stumbling block for phone brands.

These strategies have allowed Xiaomi to gain price advantage over its rivals. The company’s IPO filings show that its average phone costs only US$138, while an average iPhone has surged to nearly US$800.

Cashing in
While internet services are expected to be the main revenue driver, Xiaomi’s ability to amass users for those services depends on how many devices it can sell via its retail channels.

Amidst slowing online retail growth in China, the company has been ramping up its physical presence, a move that other internet giants like Alibaba and JD have also made. Offline channels, coupled with aggressive overseas expansion, have played a huge role in Xiaomi’s comeback in 2017, following several quarters of depressing smartphone sales.

Xiaomi’s flagship store in Shenzhen. / Image credit: Xiaomi

“When customers shop for Xiaomi phones at its storefronts, they may also end up buying its non-phone products like a power bank or a suitcase, and vice versa,” notes James Yan, research director at Counterpoint Research.

Margins for offline retail may be low – it costs a lot more to operate physical outlets – but the sales volume will be huge, he adds.

Once consumers get on Xiaomi’s cheap devices, the firm presents a more aggressive payment schedule. For instance, it lures users to buy software from its app store, make purchases inside its games, or pay for customized themes to jazz up their Xiaomi operating systems. Those who own Xiaomi’s smart-home devices may opt to pay for its suite of entertainment services, akin to how Apple users pay for its content.

When customers shop for Xiaomi phones at its storefronts, they may also end up buying its non-phone products like a power bank or a suitcase, and vice versa.
On the business side, brands can buy ads pushed to Xiaomi software, and developers can pay to get their apps pre-loaded onto Xiaomi devices.

With a gross margin of roughly 60 percent, the internet services segment was already the main driver behind Xiaomi’s operating profit last year, which more than tripled to US$1.92 billion, according to its filings.

Moving up the income ladder
As rosy as the plan sounds, Xiaomi will need to diversify its user base to sustain growth. The brand is particularly popular amongst China’s lower-income population, which means less generous spenders. Xiaomi, along with Oppo and Vivo, account for 70.5 percent of the smartphone consumption by Chinese people with a monthly salary less than US$628, according to a research by MobData.

“Xiaomi will soon hit the ceiling on the lower-income group,” suggests Flora Tang, an analyst at Counterpoint Research.

Xiaomi’s foray into lifestyle products might help. Its ecommerce platform Youpin focuses on affordable premium goods, such as a smart scale that can calculate one’s body fat. This approach could appeal to China’s sophisticated consumers.

[The] challenge of Xiaomi is that it’s trying to do something that hasn’t been done before by either Apple or Fitbit: becoming a software company built on hardware.
According to big data company Jiguang, over half of the users on premium ecommerce apps live in China’s first- and second-tier cities. Youpin is ranked third among these apps.

“I think the challenge of Xiaomi is that it’s trying to do something that hasn’t been done before by either Apple or Fitbit: becoming a software company built on hardware,” contends Benjamin Joffe, general partner at HAX.

Lei once said that it’s hard to define what Xiaomi is without knowing what the company does. Following the giant’s flotation, the world will be watching more closely how its triathlon model plays out.

Currency converted from Chinese yuan. Rate: US$1 = RMB 6.37