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In China, an Empire Built by Aping Apple

David Barboza
Wednesday, 5 Jun 2013 | 2:09 AM ET
Xiaomi CEO Lei Jun speaks during the 2013 Global Mobile Internet Conference (GMIC) at China National Convention Center in Beijing, China, in May.
ChinaFotoPress | Getty Images
Xiaomi CEO Lei Jun speaks during the 2013 Global Mobile Internet Conference (GMIC) at China National Convention Center in Beijing, China, in May.

China is notorious for its knockoffs. But now comes a knockoff of one of the gods of American ingenuity: Steven P. Jobs.

In a country where products like iPhones are made but rarely invented, Lei Jun — entrepreneur, billionaire and professed Jobs acolyte — is positioning himself and his company as figurative heirs of Mr. Jobs. The Chinese media have nicknamed his company, Xiaomi, the "Apple of the East."

The title is a stretch, by almost any measure. But Mr. Lei nonetheless is carefully cultivating a Jobsian image here, right down to his jeans and dark shirts. He is also selling millions of mobile phones that look a lot like iPhones. Chinese consumers — and deep-pocketed investors overseas — seem to be believers.

And yet Mr. Lei's biggest believer may be himself. He bounds onto podiums to introduce new cellphones. He proclaims things that may, to many, sound outlandish. For instance:

"We're making the mobile phone like the PC, and this is a totally new idea," Mr. Lei, Xiaomi's chief executive, said during an interview at the company's spacious, high-rise headquarters here. "We're doing things other companies haven't done before."

That might come as a surprise to Apple and Samsung Electronics, the twin giants of smartphones. But Xiaomi (pronounced SHAO-mee) did sell $2 billion in handsets in China last year. It is emerging as a force in China, the world's largest mobile phone market, and it expects its revenue to double this year.

(Read More: With Latest Ban, Has Samsung Cornered Apple?)

Mr. Lei, for his part, hardly discourages comparisons to Apple and Mr. Jobs. And why would he? Founded by a group of Chinese engineers three years ago, his company sold seven million mobile phones last year by using designs that mimic the look and feel of the iPhone and using marketing that seems right out of Apple's playbook.

It's no surprise that entrepreneurs aspire to create a Chinese Apple. Many talk about moving China beyond the dead end of assembling devices for other companies.

So far, however, true innovators have been scarce. At best, they have adapted others' technology to the Chinese market.

Mr. Lei has attracted believers because no company's annual revenue has reached the $1 billion mark in China faster than Xiaomi, not even Amazon, which took five years to get there. Xiaomi did it while earning a profit.

Its backers include Qiming Venture Partners, the venture capital arm of Qualcomm and Digital Sky Technologies, an investment firm run by Yuri Milner, an early backer of Facebook, Groupon and Zynga.

Xiaomi, which is privately held, says an initial public offering is years away. But the company is worth $4 billion, according to its latest round of financing last June.

If that valuation holds up, it would make Xiaomi one of China's most valuable technology companies, behind Alibaba, Baidu, Tencent and Netease.

Xiaomi: Apple's New China Threat
A cheaper Chinese smartphone maker is gaining a cult-like following in China, reports CNBC's Eunice Yoon.

The company caters to young, college-educated people who want a smartphone but cannot quite afford one, people like Lu Da, a 26-year-old education consultant in Shanghai.

"I chose Xiaomi because it's good value for the money," he said.

Skeptics say the company produces low-price iPhone imitations with no significant software or hardware advantages. They also say the company faces stiff challenges from Apple and Samsung, which are in a position to offer low-price smartphones.

The marketing power of bigger local handset makers like Lenovo, Huawei and Taiwan's HTC, which together recently sold about 25 percent of all smartphones in China, cannot be discounted either.

(Read More: Why Apple's Court Battle May Not Lead to Cheaper E-Books)

Whether the company succeeds, its rise has solidified Mr. Lei's reputation as a start-up wizard. Part entrepreneur and part start-up investor, he spent more than a decade at the Chinese software company Kingsoft and took it public in 2007. (He remains chairman and holds a $300 million stake.)

He also invested in a string of successful software and Internet companies, including YY, an online social platform that went public on the Nasdaq stock exchange in the United States last year and is now worth about $1.5 billion. One of Mr. Lei's earliest successes came in 2004, when Amazon paid $75 million to acquire his e-commerce company Joyo.com.

"Lei Jun is a phenomenal entrepreneur," said Kai-Fu Lee, the former Google executive who now runs Innovation Works, a Beijing-based firm that invests in Chinese start-ups. "He's insightful about user needs and markets, and now he has this incredible desire to create a household brand in technology."

Mr. Lei has revealed little about his personal life, but he has nearly five million followers on Sina Weibo, a sort of Chinese Twitter, and is treated like a celebrity in technology circles.

He grew up near Wuhan, a gritty industrial city in central China, and studied computer science at Wuhan University. It was during college, in 1987, he says, that he read a book about Mr. Jobs, and decided to emulate him.

"I was greatly influenced by that book, and I wanted to establish a company that was first class," Mr. Lei said. "So I made a plan to get through college fast."

After finishing his coursework in two years, he joined Kingsoft, a Chinese software company. A talented engineer with sharp marketing skills, he worked his way up into the executive ranks, and was named chief executive in 1998.

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At Kingsoft, he also found time to set up Joyo.com and to become an angel investor in dozens of other companies.

"He has vision," said Liu Ren, a longtime friend who runs an investment fund. "He sees trends earlier than others and is always ready to adjust. For instance, Joyo started as a downloading platform and at the beginning YY was just doing RSS subscription."

With $41 million in initial financing, Mr. Lei teamed up with a former Microsoft and Google engineer, Bin Lin, and five other engineers to set up Xiaomi in a small office on the outskirts of Beijing.

Work began in 2010 on a software platform for the phone adapted from Google's Android system. The company also sought out many of the same suppliers and contract manufacturers that worked with Apple, including Qualcomm, Broadcom and Foxconn.

In August 2011, Xiaomi introduced its first smartphone, the Mi-1, which sold out in two days. The Mi-2 was released last August, and sold out so quickly that some analysts claimed Xiaomi was creating artificial shortages to generate buzz through "scarcity marketing."

To lower costs, the company cut out middlemen and distributors, selling directly through its Web site. The marketing was not just innovative for China, the company said, but allowed Xiaomi to sell smartphones for just half the price of the iPhone or Samsung Galaxy phones.

(Read More: Top-Ranked IT Analyst: Apple to Introduce 'Significant New Products')

Xiaomi also outsources designs and features online from its so-called Mi-Fans, and releases a new version of the operating system every Friday, to add new features and keep the Mi-Fans excited.

"For a start-up it's quite impressive what they've achieved," Sandy Shen, an analyst at the research firm Gartner, said. "But the question is: how are they going to grow their market share beyond the narrow segment they've targeted?"

Many technology analysts and investors in China say that the company's valuation is a bubble and that it will be difficult for Xiaomi to maintain its growth.

Mr. Lei insists his company could sell more than 15 million phones this year. Xiaomi — like Apple — is also looking at television.

Mr. Lei, listed by Forbes as one of China's wealthiest entrepreneurs, worth $1.7 billion, has already helped create three multibillion-dollar start-ups in the last decade. Little wonder, then, that he comes across as confident, even a little cocky.

"We're not just some cheap Chinese company making a cheap phone," he said. "We're going to be a Fortune 500 company."

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