Ep. 4: Xiaomi’s Record-Breaking IPO and Baidu’s New Finance Spinout

This week on TechBuzz China, our hosts Rui Ma and Ying-Ying Lu discuss two major stories in China tech. Rui talks about the upcoming initial public offering of Xiaomi, which will be the world’s largest since Alibaba’s debut in 2014, and Ying-Ying shares the news of Baidu’s new financial services spinoff, called Du Xiaoman Financial, which is already valued at $4 billion.

TechBuzz China by Pandaily is a weekly technology podcast that is all about China’s innovations. It is co-hosted by Ying-Ying Lu and Rui Ma who are both seasoned China watchers with years of experience working in the technology space in China. They share and discuss the most important tech news from China every week with commentaries from investors, industry experts and entrepreneurs.

For our forth episode, Rui and Ying-Ying take you back through the history of Xiaomi, and in for a close-up look at its legendary founder and CEO, Lei Jun. Why should Lei Jun be compared to Elon Musk instead of Steve Jobs, and why is Xiaomi going public just eight years after its founding?

Ying-Ying then gives you the inside dish on the new Du Xiaoman Financial that’s raising $1.9 billion at a $4 billion valuation. Rui shares about how Alibaba and JD.com have done the same in the past, and explain that these moves skew the capital raising data from China. What does the decision really mean for Baidu, and how does it echo the disaster of LeEco? Tune in to find out!

As always, you can find these and other stories at pandaily.com and don’t forget to follow us on twitter at @thepandaily and like our Facebook page!


(Y: Ying-Ying Lu; R: Rui Ma)

[0:22] R: Hi everyone! Welcome to TechBuzz China by Pandaily, powered by the Sinica Podcast Network! We are a new weekly podcast focused on bringing you the most relevant, interesting, and buzz-worthy headlines in China tech. We are part of pandaily.com, a new English language site that tells you “everything about China’s innovation.” Let me introduce myself again for those of you who are just tuning in. I’m one of your two co-hosts Rui Ma, and I live in San Fransisco. I’m an Angel investor, entrepreneur, China-Watcher, and I still can’t get over how British Pop star Jessi J won this season’s Singer, which is the Voice or American Idol in this huge phenomenon China show. Seriously, I can’t take my eyes off the screen.

Y: Hi everyone, I’m Ying-Ying Lu. I’m also an entrepreneur and a China-watcher. We’d like to give a shoutout so some of you fans who have written in and helped spread the word. Thanks to Lexie Zhang, Omid Scheybani, David Rafanan, Anirudh Kishen, and Arman Zand. Keep the feedback coming!

[1:30] Y: It was a really big week in Chinese tech. Really big. Our first story is the upcoming initial public offering of Xiaomi, a Chinese smartphone and consumer electronics maker that was 5th largest last year in terms of shipment volume. The second is the spinout of Baidu’s financial services arm.

R: Thanks Ying ying. So we are going to talk about the Xiaomi story now. Although I have to correct you here on calling Xiaomi a smartphone maker. I think Lei Jun, the founder, would most definitely kill you for saying that. He’s been basically saying for the past eight years since Xiaomi’s founding that it is not a hardware company, but an internet company with hardware — smartphones, IoT, etc. — as its engine of innovation. And to be fair, it did have $1.5Bn or so, almost 10% of its revenues from services last year. Hint hint — unless you’re named after a fruit, hardware businesses have low multiples! Sometimes much lower than software businesses. That’s probably why he’s calling it an internet company.

R: Anyway, back to the Xiaomi IPO. It is not just big, it is biggest. Rumors of it going public has been swirling since the beginning of this year, and depending on whether or not you’re a mifen, or Xiaomi fan, guesses as to its eventual pricing have ranged from $50 to $200Bn. Since its 597 page prospectus came out Thursday morning Asia time, there’s been a steady stream of coverage on what’s shaping up to be the biggest IPO since Alibaba. Most experts think it will be targeting a $10Bn offering, and maaaaybe a $100Bn pricing. That’s a lot of zeroes there!

Y: Yeah I read that. Kinda crazy, because, as you said, the company is just barely eight years old right? I mean. I remember living in China and in 2012 or so hearing about this hip new brand that only sold phones online at rock bottom prices. But they made it really hard to buy one. They made you jump through all sorts of hoops, like you needed to have VIP status in their fan forums to even be eligible to put in a preorder.

R: Seriously, it was way harder than getting Burning Man tickets. Anyway, I never did that, as I am a lazy guofen 果粉, that’s Chinese for Apple fan, but it was a total phenomenon when they did that. At airports you would see shelves of business books about this kind of 饥饿营销 (scarcity marketing).

Y: I totally remember that time. Xiaomi and Lei Jun were everywhere. He was called China’s Steve Jobs. It wasn’t just because he was also selling smartphones. It was also because he was really good at marketing. Xiaomi product announcements were just as highly anticipated as Apple. And didn’t Lei Jun wear black turtlenecks too?

[4:14] R: Lei Jun’s nickname in China is Leibusi. It’s cuz in Chinese Jobs is Qiaobusi. Qiaobusi, Leibusi. Anyways, Lei Jun, just like Jack Ma, is a marketing genius. It’s just that his English is bad so we don’t hear much from him in Western media, unlike Jack, who was an English teacher before he started Alibaba and polished speaker and on CNBC or whatever all the time. But Lei Jun is a really good story teller, very humble, very grass roots, and very charming in a dorky way. He is super quotable and has a lot of aphorisms that have really redefined how Chinese people think about entrepreneurship, such as one about how if you find the right opportunity, even pigs can fly. Hmmm, I guess that one translates into English pretty well. Anyway, I had the great luck to sit down with him a year ago and pitch a business idea to him and found him just really easy-going but also super sharp. And because Lei Jun embodies the Xiaomi brand so much, they are so intertwined, the entire company is just one that exudes humility, focus, and intelligence.

Y: All great qualities for a company! And I know that Xiaomi’s corporate slogan is 感动人心、价格厚道, which translates into make products that touch our users’ hearts at a generous AKA cheap price. I’ve not met Lei Jun but have seen Li Wanqiang, or Alee Li, the cofounder who has headed up a lot of design and e-commerce projects within 小米。He’s quite a reflective and a deeply thoughtful, down to earth person.

R: Yup. Lei Jun has built the company around value, which he defines as superior functionality, design and experience at low prices. Extremely low prices. In fact, he just announced that Xiaomi will never make more than a 5% net profit margin on any of its hardware ever. And it looks like he’s making good on it. Their phones range from $1-400 and experts estimate that the net profit per phone may be as low as $2. $2! Compared to over $150 for iPhones. OK maybe that’s a bad comparison because Apple is a ripoff. But even other Chinese smartphone manufacturers have 10% margins.

Y: Wow, maybe I should look into Xiaomi phones again once they’re set up for US customers. But I get that it’s great for consumers, but why are investors buying into this vision? Or are they?

[6:35] R: Well you bring up a good point, and that’s definitely what Xiaomi usually gets hammered for in the press. And while they recorded profits for a few years operating on those razor thin margins, they weren’t very high. And 2016 in particular was a bad year when they actually suffered a decline in revenue. In fact, Lei Jun proudly proclaimed that they were the only phone manufacturer to reverse a drop in sales — that’s looking at you, Motorola, Nokia, Blackberry, etc. — and grew almost 70% to 18Bn of revenues last year. But then, they also lost money last year. Like a lot of money. $7Bn.

Y: $7Bn?! Is that why they’re rushing to go IPO?

R: Maybe. Although it did have operating profits of almost $2Bn so their situation isn’t that dire. But it is true that some analysts think maybe the industry is going to slow down because global smartphone shipments declined for the first time this year. So might as well go to market with big momentum behind it. Xiaomi shipped 92 million smartphones last year, and really dominated in India, where it accounted for 31% of shipments last quarter.

Y: Yup, it was number one in India, edging out Samsung. We also know that it has aggressively expanded outside of phones very early on and now sells a whole suite of consumer products in a revenue sharing scheme with smaller startups. These smaller companies make anything from air purifiers to home camera systems, VR headsets, to electric scooters. By the way, some of those scooters on the streets of San Francisco? Xiaomi scooters. Anyways, while the products differ, the designs are all very modern and minimalist, and the price is always cheap.

R: I haven’t tried the scooters yet because I’m bike girl, but I do have a Yi camera at home and it’s great. Xiaomi typically invests and owns a substantial stake in these companies, and now have over 100 in its portfolio. At least four of them are unicorns, and one of them even listed on the NYSE in February in its own IPO. We know that last year, $3Bn of revenues were generated from these products.

[8:42] Y: Let’s go back to the Xiaomi IPO. I remember that in December 2014 Xiaomi announced it had raised over $1Bn at a $45Bn valuation. At the time, it was the highest valued private tech company in the world and worth more than Uber.

R: Yup, Xiaomi’s rise was super rapid. But what we didn’t mention yet is that Lei Jun didn’t become famous as a result of Xiaomi. Before founding Xiaomi, he had already had multiple successful startups under his belt, either as co-founder or major investor and chairman. In fact, he was actually already a billionaire.

Y: Yeah, and that’s why Xiaomi was able to raise $41MM at a $250MM valuation for its Series A straight out of the gate. You know, there are so many mega fundraises these days we forget how big of a deal that was. In 2010 ALL of China only deployed $3.5Bn into VC so Xiaomi’s Series A was over 1% of the entire market for that year. Although, as Rui said, he was such a proven quantity, it wasn’t that risky of a bet. So he’s more of a Elon Musk and this is his Tesla.

R: Actually, that’s closer to the truth than you think. Musk owns a bit over a quarter of Tesla. Lei Jun owns almost a third of Xiaomi. If Xiaomi does go public at $100Bn, Lei Jun is gonna be worth north of $30Bn, well above Robin Li of Baidu and not far behind Jack and Pony Ma of Alibaba and Tencent. Maybe we should change BAT to TAX …

Y: And even if Xiaomi goes public at the low end of their rumored valuation, it’s going to make such a big splash in Chinese tech.

R: Even more so than Alibaba, it’s going to be a watershed moment for Chinese entrepreneurs because not only is Lei Jun a techie through and through — he finished his engineering degree in 2 years instead of 4 at China’s top Wuhan University — he’s made something that is globally competitive, not just relying on the massive domestic market of China venturing beyond closed off Internet. Although yes, China is still over two thirds of Xiaomi’s revenues. Anyway, I wonder what new heights enthusiasm for tech will surge to in China after Xiaomi goes public. I always feel like the market can’t get hotter, but I’m always wrong.

Y: What do you think? Let us know!

[11:15] R: Yingying, what’s the latest on Baidu?

Y: Baidu has a spinoff! It’s called 度小满, du is short for Baidu, and xiaoman literally means “small full”, and it’s essentially Baidu bringing a bunch of PE firms into its FSG, or financial services business. This “bunch” is led by TPG. Specifically, it’s a $1.9B deal valuing the unit at $4B. Baidu keeps 38 percent of Du Xiao Man, TPG gets a bit over one quarter, and other investors, who collectively put in about 900 million dollars, get the rest. These other investors include PE firm Carlyle Group and Beijing-based Taikang Insurance (so a corporation funding another corporate finance arm). It’s expected to have something like half a billion dollars of revenue this year and maybe be slightly profitable.

R: Aren’t BaiduAlibaba and Tencent always spinning off companies? In fact, that’s one of my pet peeves when we look at capital raising data from China. It’s riddled with what I would call fake fundraisings because they’re really more like restructurings. Look at Alibaba’s Ant Financial. Its Series A was valued at $45Bn or so. Series A! Anyway, back to spinoffs. They’re happening with more and more frequency– companies taking fast growing sectors and spinning them out to list them. JD.com, Tencent’s e-commerce partner, spun out its financial services division about two years ago. Tencent is about to list its music unit for something like $25Bn. For Baidu, it just successfully listed its video streaming unit, iQiyi listed on Nasdaq this past March for over $2Bn! Maybe America invented Wall Street, but Chinese companies are no dummies when it comes to financial engineering in Capital Market.

[13:03] Y: So that could well be true, but I’d like to think that Baidu is also making some high level strategic decisions here, ones that reflect on China’s leadership in and future in AI. Baidu has been one of the big companies most public about its commitment to AI and applying all of the loads of data it’s got from search and other verticals to really enhance its ability to create meaningful applications. And, as many of you know, at a national government level, China itself has long proclaimed its intention to become the world leader in AI. In all of these, China with its massive amounts of mined data, will have the opportunity to really step it up and find ways to apply AI. And financial services is a big sector.

R: I agree with you that the advancement of AI in China could be a topic for an episode. In fact we should definitely do a review at one point of Kaifu Lee’s new book on AI, coming out later this year, written in collaboration with our friend Matt Sheehan. Anyway, Baidu CEO Robin Li has called what they’re creating an “AI Ecosystem.” I’m a bit allergic to that phrase because it’s hard to tell whether it’s a spin off to offload a big cost center, or truly something proactive and strategic.

[14:12] Y: The real question I want to know is, what does this actually mean for China’s consumers? Alibaba and Tencent have had such a monopoly with Alipay and Wechat Pay. Baidu Wallet claims to have 100 million users by the end of last year. While that sounds like a lot, Wechat has 600 million, and Alipay is pretty close as well. It’s got a long way to climb if it wants a larger piece of the pie.

R: Well, we will see if this “ecosystem strategy” works out for Baidu. That eerily echoes now pretty much defunct company LeEco, the internet video turned film turned smartphone turned smart car making company that just kept growing and growing until well, it blew up. We should cover that someday, by the way. Hey, do you think Kevin will let us? He used to work there. And so did you, Yingying, with their US launch! We should maybe thank Jia Yue Ting the founder and CEO for letting the finances get away from him, because without his failure, Kevin and Lily wouldn’t have struck out on their own and we wouldn’t have Pandaily!

[15:31] Y: Special thanks to our sponsor this week– fabulous gaming company Zenjoy. They have this really awesome live trivia game, called Cash Show! Where you can win real money for answering questions correctly. I started playing this week and got to level 7 of 10. Special thank you to Eric Wang, VP International, and his team at Zenjoy.

Y: To recap, this week we talked about Xiaomi’s imminent IPO, as well as well as the spinoff of the financial services arm of Baidu. As always, you can find these and other stories we didn’t get to cover on Pandaily.com.

R: Okay. That’s all for this week folks. Thanks for listening. We really enjoy putting this together as always and we are always open to any comments and suggestions. You can find us on twitter, at @thepandaily, @techbuzzchina, and my personal twitter account is @ruima.

Y: And my twitter is @ginyginy. We’ll be back here at the same time next week.

R: TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is a new English language site that tells you “everything about China’s innovation.” Our producers are Carol Yin and Kaiser Kuo. Special shoutout to Dawei Chen, who redid our theme music and made us that much cooler. And yes, you heard it right, he included a soundbite from Jack Ma as well as a line from the hottest Chinese hip hop group of the moment, Higher Brothers. If it sounded familiar, that’s because it’s from their hit song, Made in China, which played during the ending credits of last week’s Silicon Valley on HBO. Go take a listen. Thanks Dawei!