Every major company in China has a car project. Specifically, a smart, electric vehicle initiative. Internet giant Tencent, which owns WeChat, has long invested in Tesla and Nio. It has also teamed up with Geely, owner of Volvo, to develop smart car technologies. Meanwhile, Alibaba, already a major investor in a China EV startup, Xpeng, has formed a joint venture with SAIC, China’s largest car company. Its JV unveiled two electric sedans that can be charged wirelessly.
In China, car making is the new IT. Where cars are made is the opposite of the Rust Belt states. China’s carmakers are in Shenzhen and Shanghai, and inflow of investment is reaching an all-time high.
The latest addition to the EV race is Xiaomi, the world’s third-largest smartphone brand. Headquartered in Beijing, Xiaomi’s smartphone trailed only behind Apple and Samsung in global volume. It has more than 1,800 stores in China and 6,000 locations worldwide. And in a dramatic turn of events, the Biden administration has agreed to back away from blacklisting the company, so Xiaomi will have access to U.S. technologies and American investors.
All eyes were on Xiaomi’s first quarter result, made public on Wednesday. Net profits more than doubled as its market share grew. This is the context in which Xiaomi committed to spending about $10 billion over the next decade on manufacturing electric cars. It plans to set up a wholly owned subsidiary with an initial investment of about $1.5bn. Founder and CEO Lei Jun is heading up the new venture immediately.
That last point is striking. Xiaomi doesn’t rely on joint ventures. It doesn’t merely invest in some startups. It was all in with the CEO directly taking charge, which would be like CEO Tim Cook launching Apple Car and then running the project himself, an unthinkable prospect in Cupertino. What Xiaomi exhibits here is the most extreme form of strategic commitment. Not financial commitment, which any rich company can do. It’s a commitment to organizational learning at the most rapid pace.
Two Types Of Investment
In late 2008, Warren Buffett made a $232 million investment for a roughly 10% stake in BYD. BYD, once an obscure Chinese battery maker, exploded into a major EV manufacturer in the world’s largest car market. It rivals other players like Xpeng, Nio, and of course, Tesla.
Buffett’s investment was significant. But it didn’t lock his company, Berkshire Hathaway, into any organizational development. The financial conglomerate continued to practice value investing, as its stake in BYD swelled to roughly $1.6 billion. Conversely, had BYD tanked, Buffett could have sold his stake to reduce losses. Berkshire Hathaway would continue business as usual either way.
Compare this to another type of investment that locks in an organization.
I’ve argued here before that cloud computing, for example, isn’t merely a cost saving measure. A company moving to the cloud will ditch its proprietary and decentralized database. But more than that, it could allow information to travel across silos. Managers from different divisions could have access to a common pool of information. There can finally be a single source of truth. All these will reinforce the company culture of being transparent. Which, of course, is the prerequisite of any meaningful collaboration.
Migrating to the cloud can be hugely expensive. Netflix spent over $800 million in 2016 to finish migrating to the Amazon cloud (AWS). But this spending also has a lock-in effect. It’s not just a financial investment. It locks Netflix into a learning mode on managing streaming performance. Netflix no longer takes care of the basic running of computer servers; Amazon does this. Netflix moved on to develop stress tests, including “Chaos Monkey,” a piece of software that randomly shut down Netflix’s virtual servers on AWS. Engineers want to make sure other backup measures seamlessly kick in. Netflix’s customers should never notice any delays in movie streaming.
In other words, moving to the cloud is not just expensive, it’s also irreversible. It would be prohibitively more expensive to roll back away from AWS. But moving to the cloud is a choice that has bought Netflix the freedom to focus on a higher-level playing field ever since.
What Made Xiaomi Reluctant
Irreversibility is scary. Closing out options is stressful, something managers don’t like being forced into. All too often, executives evaluate funding an initiative as if they worked at a financial conglomerate. They use a mathematical formula to forecast a project’s return, acting like venture capitalists when they are not. Where CEO Lei Jun at Xiaomi differs is that he understands entering the EV race will permanently pivot his company’s trajectory. And because it could reshape the company’s fundamentals, the CEO is all in.
Pictured CEO Lei Jun, founder of Xiaomi
Lei is no newbie to EV startups. He has invested in dozens of them already. But he resisted letting Xiaomi build cars and make enemies in the auto industry. A near-death event at Xiaomi was the reason for that resistance. In 2016, Xiaomi missed its sales target by almost 30%. Lei had to lead a brutal turnaround to save the company from the same fate as Motorola, HTC, Nokia, and Blackberry.
Even after Xiaomi regained lost ground and went public in Hong Kong in 2018, Lei remained paranoid. Financial analysts kept pestering the CEO about the car making business. Lei replied, “If I was 10 years younger I would have done it without the slightest hesitation. But I won’t do it now.” So why now? The pursuit of sustainable advantage.
This Time Is Different
Today, Xiaomi is China’s largest phone maker. Despite billing itself as a technology company, Xiaomi’s retail stores are more akin to Japanese lifestyle brand Muji. Not all of Xiaomi’s products are tech heavy. Some best-selling products are “dumb” items like backpacks, luggage, and umbrellas. There’s little sustainable advantage in a country where everything can be copied.
Car making is different.
With all its understanding of smartphones, Xiaomi could, if it persisted, develop unrivaled expertise in the auto industry. That was a demand, not a request, from the board. Members of Xiaomi’s board demand that Lei Jun investigate car making immediately.
Straight after the board meeting, Lei ordered a taskforce to work through the Spring Festival holidays. He went on to host 85 visits and 200 interviews within 75 days, initially talking with EV startups and autonomous vehicle makers, ones in which Xiaomi or Lei had directly invested. They then widened their contact efforts to all major EV manufacturers. Next came companies from the entire supply chain of the automotive industry.
But this was not a secret deliberation by Lei and his taskforce. More than 50 general managers joined the debate at an internal meeting on February 19. The shared viewpoint was built from the bottom up through a guided approach driven by Lei. Lei didn’t have a strong opinion. He only wanted the investigative process to exhaust “all reasons to support not making cars.”
Yet a strong conviction is built through such a process. For Xiaomi, car building would be like adding four wheels to a smartphone that already came with a suite of intelligent ecosystems. That’s how Lei came to his realization. For traditional carmakers to venture into smart vehicles, it would be like adding a smartphone to four existing wheels. Lei asked a journalist, “Which way is actually easier, can’t you see?”
What Commitment Looks Like
No one would deny that making cars was a stretch, even for Xiaomi. But Lei is committing Xiaomi to develop a bundle of durable, specialized, untraded assets. Such assets will combine the entire company’s technology, product experience, and even the resources from sales, operations and marketing. Joint venture won’t cut it. Financial investment won’t make it either. It requires Xiaomi to go all in.
Deep pockets are needed. That’s why Lei is also setting up a new business unit within the current corporate structure to raise additional money independently. These are all hard work. And the CEO decided he couldn’t afford to delegate it. Not to some strategic partners. Not even someone other than himself.
Thanks for reading—and be well.
This article has been co-authored with Lawrence Tempel, a researcher at The Center of Future Readiness at IMD.