After a Successful First Year, Liu Zuohu Says OnePlus's Biggest Worry Is Still Risk | Founders Speak

Of all the "internet phone" brands that sprang up after Xiaomi, OnePlus may be the most successful.

Yesterday morning OnePlus, a brand founded at the end of 2013, held simultaneous launch events in Beijing and San Francisco to unveil its new phone, the OnePlus 2. A price of 1,999 yuan, a 5.5-inch screen, a Qualcomm 810 processor, a fingerprint reader... everything is good. But every so often, it seems, you hear of yet another Chinese smartphone where everything is good.

What sets the OnePlus 2 apart from other Chinese phones at a similar price is this: less than an hour after launch, reports from more than 20 overseas tech outlets came pouring in, and the verdicts were overwhelmingly positive. Gizmodo, the veteran gadget blog, which got the phone early, called the OnePlus 2 "the best choice for a non-contract phone." The headline from the well-known tech news site The Verge went further: "The OnePlus 2 stretches the boundaries of cheap flagships."

In the little more than a year since it released its first smartphone in April 2014, OnePlus says it has sold more than 1.5 million units, 60% of them overseas, especially in Europe, North America and India.

After Xiaomi used online sales to bring high-performance, low-cost phones to market in 2011, new brands selling phones through e-commerce appeared in an endless stream. But OnePlus may be the only one still alive this year whose business can be called a success.

What makes OnePlus the exception? After the launch event, OnePlus founder and CEO Liu Zuohu sat down with QDaily in a café upstairs from the venue to talk about how OnePlus got started and what he wants to do next.

How Did OnePlus Take Off?

During the interview, Liu Zuohu kept picking up a phone with a "Black Apricot" back cover from the table to show us. This wooden cover is one of five options for the OnePlus 2.

"We had a domestic manufacturer make this back cover. The boss is an interesting guy, the kind who won't make anything for you unless you click with him," Liu Zuohu said, introducing the cover's maker, Xinxiu. "Look closely at the material of our back shell and you'll notice a heavy, solid wood feel, not the very thin veneer other manufacturers use."

Build quality, materials and design details are what Liu Zuohu likes to talk about most at every launch. With its previous phone, OnePlus was the first Chinese brand to offer a custom bamboo back cover, and at that launch it made the feel in the hand a centerpiece.

But the back covers were not what first drew attention to OnePlus, or what made media and users at home and abroad take this new Chinese phone maker seriously before they had even touched its phone. That was OnePlus's partnership with CyanogenMod (usually shortened to CM), a custom Android operating system.

"Some people say the OnePlus One succeeded because of CM. That's neither entirely right nor entirely wrong," Liu Zuohu said candidly.

Founded in 2008, CM is a team of enthusiasts who optimize and modify Android. Because it started fixing Android's problems very early, CM has a considerable reputation among Android enthusiasts in China and abroad. In 2013 CM began trying to commercialize, and the newly founded OnePlus became one of its first manufacturing partners.

"A lot of things weren't spelled out at the time, like what would happen with the second or third generation of OnePlus phones. CM knew we would definitely have our own software system eventually. But in the end both sides decided to just get on with it and sort things out later," Liu Zuohu said. At its founding OnePlus had only a little over 20 people and could not develop software and hardware at the same time, so Liu Zuohu decided to hand the software to the CM team as a partner.

CM's involvement won the OnePlus phone a good deal of attention from media and Android developers before the product even existed. Starting in March 2014, CM founder Steve Kondik promoted the OnePlus phone again and again. He announced the partnership on Google+ and praised Liu Zuohu, posted an unboxing video of the OnePlus phone on YouTube ahead of launch, and flew to Beijing on launch day to stand beside Liu Zuohu on stage.

After the first OnePlus phone launched in April 2014, it was covered not only by digital outlets such as The Verge, Gizmodo and TechCrunch but also, favorably, by established titles such as Wired and Time. Last October, The New York Times ran a story on OnePlus on the front page of its business section under the headline High Hopes for a Low-Price Phone. Xiaomi, by then already a giant, did not get the same attention until the end of that year.

But the partnership lasted less than a year. In December 2014, CM switched to working with Micromax, India's largest phone maker, and announced it would support more phone hardware in future, a direct challenge to Google. That was December 2014; soon afterward, OnePlus and CM formally announced their split.

According to Liu Zuohu, OnePlus had begun building its own phone software team in mid-2014. In October 2014 a friend introduced him to Xu Shiyan, founder of the Chinese design studio eico design, and the following month the two sides began working together on software design for the OnePlus 2.

At about the same time, the founding team of Paranoid ROM (PA ROM for short), another custom Android group in the US, joined OnePlus one after another. "Many of them took pay cuts to come work for us. They're quite idealistic people," Liu Zuohu said.

Soon after, OnePlus set up a new R&D center in Taiwan, where the newly formed software team mainly works. Asked why Taiwan, Liu Zuohu said he felt there were relatively few internet companies there, so engineers were more able to settle down and focus on building technology.

So OnePlus started on software from scratch. Liu Zuohu wanted a first version of the new system by March 2015, but the newly assembled team had time only to build "OnePlus Weather," an app with motion-sensing animations. It was still well received.

At the end of May this year, the team, which had been together for barely six months, delivered its first complete work: a beta of "Hydrogen OS," which uses Material Design, the design language Android introduced with version 5.0. In Liu Zuohu's words, Hydrogen OS is part of what makes the OnePlus phone different.

OnePlus's "Differentiation"

"Look, compared with those interfaces with garish backgrounds and lots of cluttered apps, isn't mine cleaner and more comfortable?" Liu Zuohu said, pointing at the Hydrogen OS screen on his OnePlus 2.

The first screen of Hydrogen OS does look cleaner, for two main reasons: it stops users from setting full-screen wallpapers, and it removes the Dock at the bottom of the screen. Instead, the screen is split into two blocks of color. The top 33% is the "Hydrogen window," the only part users can personalize. The other two-thirds holds a neat grid of 9 apps on a solid background whose color changes to match the user's wallpaper.

The Dock that Liu Zuohu removed was a classic iPhone design, and Android has kept it to this day. You may have heard of Steve Jobs's famous "rule of three" at the first iPhone launch: Jobs said he was making three things, a phone, a widescreen iPod and an internet browser. The Dock at the bottom of the first iPhone held four matching apps by default: phone, mail, browser and music.

OnePlus dropped the Dock because its design team felt people no longer rely on just three or four apps, so fixing it at four made no sense.

"We don't think today's smartphone market is just one look, like the iPhone. A hundred flowers are blooming, because users' needs are very personal," Liu Zuohu said. In his view, Hydrogen OS is an important part of what sets OnePlus apart from its competitors.

Every Android phone maker is chasing differentiation today, and it is extremely hard to achieve.

In 2008, when Android first arrived, the market had a range of operating systems in very different styles, from Apple, Microsoft, Nokia, Palm, BlackBerry and others. Phone designs were remarkably varied too: touchscreens, sliders, flip phones, candybar keyboard phones, candybar phones with 26 keys...

Today only two operating systems still draw attention: Android and iOS. And the phones released by the many Android makers all share the same slab shape, differing only in details. Even the choice of internal hardware is very limited: two processors to pick from, cameras mostly from Sony, glass only from Corning...

Without differentiation, the end result is a price war that drives prices ever lower. Only the makers with the tightest cost control, and a user base large enough to make money from software, survive it.

Liu Zuohu still believes differences exist. He says the phone you carry every day expresses your personal style, and differentiation here doesn't mean entirely new elements. "Differentiation means every part of the experience you give people is different from what others give them," he said.

"The iPhone keeps getting rounder, and that's our opportunity." He pointed to the lines of the OnePlus 2's back cover. "I just like these slightly hard-edged lines on the back. They're a bit different from everyone else's."

The OnePlus 2 differs from other makers' phones in quite a few small details. The fingerprint reader below the screen, for example, only reads fingerprints and is not a physical button, so the touch buttons along the bottom all feel the same.

The side of the OnePlus 2 also has a mute switch similar to the iPhone's. The difference is that, besides mute, it has a "Do Not Disturb" setting. In Do Not Disturb, only contacts the user has starred and key apps the user has chosen can send alerts; calls from strangers are silenced.

Judging from the reaction after the launch, these details have worked well. The Verge and Gizmodo, which tried the phone early, both singled out the mute switch and praised Hydrogen OS.

In a little over a year, OnePlus has used these differences to capture the attention of the most influential geek writers overseas. But for a startup, what matters most is growth. Selling 1.5 million phones in its first year is a decent start for a new brand. How will OnePlus grow from here?

How Does a Cautious Internet Brand Grow Fast?

Asked about future growth, Liu Zuohu talked mostly about risk.

Pei Yu, another OnePlus co-founder, had earlier announced an annual sales target of 3 to 5 million units. But in the interview Liu Zuohu said, "That's just the number we set internally. Honestly, I'm not sure either. I don't know how many we'll sell."

For a company in its first year, OnePlus's sales of 1.5 million units were outstanding, yet Liu Zuohu remains very cautious about expansion.

Every week he holds an in-person production-and-sales meeting with the manufacturers to decide whether the production plan for the next two months needs adjusting. Part of what his orders rest on is how many invitation codes OnePlus users have used to buy phones. OnePlus was the first smartphone maker to take China's "invitation code" system and apply it to overseas pre-orders too.

When setting each week's production numbers, Liu Zuohu follows an 80/100 rule.

"Better to sell too few than too many. If we think we can sell 1 million units, we order 800,000," he said. "At 2,000 yuan a phone, 200,000 units is 400 million yuan. If they don't sell, those phones end up dumped at scrap prices."

This caution led Liu Zuohu to turn down an order for 500,000 units from a South Korean carrier last year. Negotiations had reached the final step, and the carrier had agreed to pay in full on delivery, but Liu Zuohu still worried about what could go wrong. "I'd have had to buy components three months ahead. If anything went wrong on the carrier's side, the company would have been stuck with it. We weren't strong enough," he recalled.

In Western Europe and the US, carriers dominate phone sales, yet OnePlus does not work with a single carrier anywhere in the world. Liu Zuohu says this is because the company is not yet strong enough to negotiate terms with carriers. Asked whether "not strong enough" meant he feared carriers would force pre-installed apps onto OnePlus phones and spoil the experience, he shook his head. "Apps are secondary. What matters more is the payment terms."

"Payment terms," meaning when you ship the goods and when you get paid, are something every businessman in manufacturing and trade keeps in mind. But from internet founders you usually hear about burning money to win users, or finding new business models.

"One careless step and a company can easily collapse," Liu Zuohu told QDaily, returning to the point several times. "I think entrepreneurs shouldn't read Zero to One; they should read The Hard Thing About Hard Things. I couldn't get a third of the way through Zero to One. It's all about teaching you to seize opportunities and build monopolies. But of 100 people seizing opportunities, how many are still alive?"

Yet when it comes to using the internet to cut costs and protect profits, Liu Zuohu, who spent many years making DVD players at OPPO, is cautious in a different way.

OnePlus does the same thing in China and abroad: it cuts out middlemen and sells only directly online to protect its margins. At this launch OnePlus announced flagship stores in Beijing and Shanghai, but these physical stores are mainly showrooms, not an important sales channel. Elsewhere, OnePlus sells mainly through its own website plus logistics partners. To draw shoppers, OnePlus has also taken Chinese internet marketing tactics overseas, such as invitation codes and forum-thread giveaways where users "build floors" of replies to win free phones.

And although OnePlus said outright at the launch that it hates talking about value for money, it does not challenge the price expectations Xiaomi has set over the years. For the same specs, neither generation of OnePlus phone has cost more than a Xiaomi. By contrast, Smartisan, and at one time Meizu, both tried to sell better products at higher prices than Xiaomi.

Looking back at the first OnePlus launch a little over a year ago, Liu Zuohu bet right on two things: the 5.5-inch large screen and overseas markets. Now, on both fronts, OnePlus's Chinese rivals have caught up.

One overseas tech blogger came to China in 2013 and 2014 to attend Xiaomi's launch events. When she spoke with QDaily last year, she recalled that at the first event she attended, Xiaomi's arrangements were quite disorganized, but by 2014 it had a dedicated person handling information for the press. Soon she herself was invited to join Xiaomi. By the time the Xiaomi Note launched in 2015, overseas coverage was arriving almost in step with the launch event.

In India, where OnePlus is active, Xiaomi has clearly stepped up its overseas brand push. Hugo Barra, the executive Xiaomi poached from Google, has made India a priority. Lei Jun came in person to hold a launch event, and the company even released an India-specific model, the Mi 4i. Xiaomi's presence on Indian social media has grown fast. Other phone makers, particularly Lenovo and Huawei, have also carved out a place in India.

As growth in China's own smartphone market slows and Chinese phone makers turn overseas, OnePlus will face even fiercer competition in its second year.

In this new landscape, "staying alive" is how Liu Zuohu will judge whether OnePlus succeeds. "The risks ahead are hard to predict," he said, "but if OnePlus is still here in three years, I believe we will have succeeded."