A well-known American writer wrote a book about Xiaomi — but before it was even translated, Xiaomi's world had changed

The book is called Little Rice: Smartphones, Xiaomi, and the Chinese Dream

A foreigner who couldn't read the subway station names got off at the wrong stop, wandered into a phone shop and ended up buying a Xiaomi — the kind you couldn't get on the official site no matter how fast you clicked.

It's a story Clay Shirky, NYU professor and author of the social-media bestseller Cognitive Surplus, has told on many different occasions over the past year.

Two years on, Shirky has practically become a "Mi Boy," even if he won't call himself one. When I met him last month at an event held by Zhanlu Culture, the phone he was using was a black Mi 4.

"I have a Mi 3, a Mi 4, a Mi Note and a Mi 5. My wife has a Redmi and a Mi 4. My son has a Mi 3. I've bought eight Xiaomi phones on my own," he said, pulling the Mi 4 out of his pocket to show me as he counted up the Xiaomi products he'd bought. "I still need to buy a Xiaomi rice cooker as a Father's Day present."

In the second half of 2014, Shirky moved his whole family to Shanghai to take up a visiting professorship at NYU Shanghai. Not long after he arrived, he got off at the wrong subway stop and walked into a phone shop inside a shopping mall. He happened to need a new phone, and picked one more or less at random within ten minutes. It was a Mi 3.

In Shirky's words, that phone briefly made young people jealous of him — not something that happens to a middle-aged man very often.

Little Rice: Smartphones, Xiaomi, and the Chinese Dream takes us back to Xiaomi at its peak

When he pulled the phone out in class, Shirky's students all asked the same thing: "Where did you buy that phone?"

Like Xiaomi's other online-only products, the Mi 3 back then sold out within minutes of every flash sale.

"When I took it out of my pocket, every Chinese student knew what it was. They didn't ask what phone it was — they asked where I got it," Shirky said, still relishing the story after telling it many times. "Their feeling was, that phone is impossible to buy anywhere in China, so where did you get one? And they'd never seen a foreigner using a Xiaomi phone before."

In mid-2015, Shirky's new book, Little Rice: Smartphones, Xiaomi, and the Chinese Dream, came out.

In it, he records Xiaomi at its most glorious. On the cover of the original edition, a huge five-pointed star fills the screen of a Xiaomi phone. The parts of the book that can be published in China are now being translated into Chinese.

But Xiaomi's situation had already changed before the book was even out.

In the final chapter, Shirky writes: "Xiaomi is facing some challenges. One of them is that the companies that learned from Xiaomi are becoming better competitors."

Those challenges arrived faster than he expected. Before the book reached shelves in China, things had changed again.

At the end of 2014, Lei Jun expected Xiaomi to sell 100 million phones in 2015; the target was later cut to between 80 million and 100 million. Xiaomi's actual 2015 sales came to 70 million. As its smartphone shipment growth slowed, component suppliers lowered their expectations too, and Xiaomi's $45 billion valuation looked liable to shrink.

A report from the market research firm IDC shows that in the first quarter of this year, Huawei, OPPO and vivo pushed Xiaomi and Lenovo out of the global top five in phone shipments.

From 2014 to 2015, OPPO and vivo grew 153% and 123% respectively, ranking fourth and fifth in the world by shipments. Xiaomi's growth over the same period was 14.5%.

Xiaomi's fast rise usually gets boiled down to three things

Xiaomi was founded in 2010 and launched its first phone in 2011. Between 2013 and 2014 it rose fast, and its valuation quickly passed $40 billion, second only to Uber's. Even next to Uber, Xiaomi's rate of valuation growth was something Uber couldn't match. As the company whose valuation was growing fastest in the world, Xiaomi became the name even Apple measured itself against.

In May 2015, Apple CEO Tim Cook told reporters in Beijing that Apple had passed Xiaomi in China to become the top smartphone vendor, and that he was thrilled by the news. Apple never names HTC or Huawei.

In Shirky's view, Xiaomi got at least three things right early on.

The first was building an operating system at the pace of an internet service.

Xiaomi caught a good moment: in the early stages of the smartphone revolution, there was an enormous amount about the operating system that needed fixing and improving.

"Apart from controlling the supply chain, the operating system was very important," Shirky told QDaily. "At a time when the Android market was held by Samsung, HTC and Huawei, and everyone thought you competed on hardware, Xiaomi showed everyone that the OS could reach a lot of people."

With MIUI, Xiaomi captured the users who like to tinker with their phones. They may not have been the very first wave of smartphone owners, but they were early.

In 2010, Xiaomi started building its phone operating system. MIUI shipped a new version every Friday, and the bugs and feature requests users posted on Xiaomi's forums were folded into the next one.

A weekly release is normal for an internet service. But before Xiaomi, no phone maker had managed it.

"Like open-source communities such as Wikipedia and Linux, and like Android itself, Xiaomi's long-term advantage lies in continuous evolution," Shirky writes in the book.

The second thing Xiaomi got right was selling phones through e-commerce, which held down the cost of selling them.

Xiaomi launched its first phone in 2011. After that, by selling purely online, it managed to keep sales costs under 3%. It captured the users who cared most about value for money. That is why it was able to grow so fast.

Refusing to go offline in those early years was an extension of Xiaomi's idea that a phone business could be run like an internet service.

In 2014, Xiaomi co-founder Li Wanqiang explained to QDaily that Xiaomi kept carrier sales below 30% of the total, because people who buy phones from carriers don't tend to spend much on digital content, so that share of the user base had to be limited.

The third thing Xiaomi got right, in Shirky's view, was user-centered marketing. "What you show users is what people can do with the phone, not the phone by itself. When Huawei, Meizu and OnePlus launch a phone now, they put more emphasis on what you can do with the hardware specs, and they all learned that from Xiaomi," he said. "It's a permanent change."

Xiaomi also put its whole staff on social media, from Lei Jun down to every engineer, with performance targets to match. In a 2013 interview, Lei Jun said: "Starting with me — I spend an hour every day replying to comments on Weibo."

Marketing on social platforms, rather than buying offline ads or paying a fortune to title-sponsor a hit variety show, let Xiaomi do a great deal for very little. Lines like "the artistic journey of a steel plate" and "austenitic 304 stainless steel" — concept marketing, Xiaomi-style — put its voice everywhere.

By the time Shirky started using Xiaomi, every young person knew the phone, and the Mi 3 he pulled out in class was one his students could identify at a glance.

Through online channels, Xiaomi captured young people who were sensitive to price and extremely sensitive to information. Passing Samsung, then the biggest Android brand by share, seemed to take no more than an instant.

In 2012, Xiaomi sold 7.19 million phones. In 2013 the number grew to 18.7 million, and in 2014 Xiaomi sold 61.12 million phones, up 227%.

If the smartphone market were a 400-meter race, Xiaomi was far out in front for the first 100 meters, even the first 200.

The iPhone went on sale in 2007 and smartphones began to spread. In China, they started reaching the general public around 2010. For many people the first smartphone was the iPhone 4. WeChat's first versions for the iPhone and for Android both shipped in January 2011.

In 2011, Xiaomi captured the people who cared about how a phone felt to use and who got their information online.

But going by the past year or so, Xiaomi missed far more people than it caught.

What did Xiaomi miss?

Xiaomi's problem is that it failed to capture an enormous group of people. They aren't that sensitive to information online, and they aren't that sensitive to price either. As they too started buying smartphones, Xiaomi badly underestimated these people, who get their information through traditional channels.

Even with the global smartphone market trending toward saturation, several Chinese makers have done well lately.

At the door of a China Telecom phone store in Beijing, a handwritten poster listed the brands currently running promotions: OPPO, vivo and Huawei.

The best spots just inside the door held phones from those same brands. Seeing that I looked a little lost, the salesperson immediately recommended OPPO's R9 and vivo's X5, for a simple reason: "These are the ones they've been using on Go Fighting! and U Can U BiBi, and there's a promotion on right now, so it's a good deal."

When I asked about Xiaomi, the salesperson gave me a quick history of internet phones over the past few years. The gist: a few years ago Chinese brands weren't any good, so everyone bought Xiaomi for the value; now that Chinese brands have come up, those are the better buy.

Salespeople naturally push the brands that pay them more. OPPO, vivo and others have been building mature offline distribution networks since the feature-phone era, and they build the distributor's cut into the price of the phone. That is exactly what Xiaomi used to refuse to do: it stayed out of offline sales precisely to keep one price everywhere.

Beijing is not the exception. At the end of 2014, OPPO had close to 140,000 retail outlets; by the end of 2015 the number was nearly 200,000.

Feng Lei, vivo's global vice president, said in an interview: "We've been cultivating offline channels for 20 years. Today we have an absolute advantage in third-, fourth- and fifth-tier markets. It's not that we fought anyone for it — nobody else went."

In third- and fourth-tier cities, even in a small county town with a single decent commercial street, you'll find an OPPO or a vivo shop.

Besides the distributors, huge marketing budgets went to wherever the target audience was closest at hand: hit variety shows and popular stars. From 2011 on, the way vivo and OPPO appeared before the public most often was through title sponsorships and product placement in those shows.

From Happy Camp and Where Are We Going, Dad? to recent hits like U Can U BiBi and Go Fighting!, stars repeated lines like "charge for five minutes, talk for two hours" and "fast enough to make you fly." That is how OPPO and vivo captured the young people who don't much enjoy tinkering with a phone.

Huawei learned online selling from Xiaomi, and with the strong offline channels it already had, its performance over the year-odd in which Xiaomi's growth topped out was startling.

"Huawei is the company that really surprised me. Their phones used to be the most boring, ordinary ones, but the Mate series now is a very good phone," Shirky said of Huawei, one of the companies that learned from Xiaomi.

At home, Huawei has quietly filled the mid-to-high-end space Samsung used to occupy.

"After we suddenly became the market leader, we weren't used to it ourselves, and every gun was pointed at me," Xiaomi CEO Lei Jun told The Wall Street Journal in October 2015.

As Shirky says, Xiaomi is now competing with the people who learned from it. It is still very successful. It's just no longer the only company that understands the market it's in.

In the race to bring smartphones to everyone in China, Apple has held tight to the people most willing to spend. Of the rest, Xiaomi took the early users who cared how a phone felt to use. But Huawei, OPPO and vivo took the people with no great interest in technology — most of China's smartphone users.

This year Xiaomi changed the way it sells phones

While OPPO and vivo were expanding offline, Xiaomi was busy going after the shops selling fake Xiaomi. This year Xiaomi came round and started paying attention to offline channels.

Reuters recently cited sources saying Xiaomi's 2016 goal is to double its 2015 offline sales volume, and that its eventual target is to sell 58 million phones through offline channels such as Gome and Dixintong.

In March, at the ribbon-cutting for the Mi Home store in Beijing's Wucai City mall, Xiaomi co-founder Lin Bin said 2016 would be a year of top-to-bottom transformation for Xiaomi, centered on building offline channels. Besides turning Mi Home from a repair service into a sales channel, Xiaomi's partnership with Suning is another important part of that push.

At one Suning store in Beijing, we found a Xiaomi counter too. The salesperson there told QDaily that on price, Xiaomi phones there were generally more than 100 yuan cheaper than online.

Only, the entrance to the store was stacked with OPPO and vivo promotional material; Huawei, OPPO and Coolpad held the spots by the escalator; and the Xiaomi counter sat further back. Unless you were already a Xiaomi fan, you might well have bought a phone before you found it.

The more visible change is advertising. The Mi 5 has turned up in the elevators of office buildings and apartment complexes, and people waiting for a film to start can now see Xiaomi's pre-roll ads. None of this is something the online-only Xiaomi of a few years ago had ever tried.

This company also wants to make premium home appliances — but does its culture suit that?

Besides phones, Xiaomi is trying to sell more and more things that have nothing to do with phones.

Apart from phones, TVs, routers and some phone accessories, the products made by companies in Xiaomi's "ecosystem chain" have all been grouped under a new brand, Mijia.

After launching Mijia's first product — a rice cooker — with much fanfare, Mijia added an electric kettle, a desk lamp, a blood pressure monitor and a bicycle, among others, in the space of two months.

Where a few years ago Xiaomi stressed that its products were "smart," Mijia stresses "making art for everyday life." Xiaomi looks more and more like an appliance brand that lives on the internet.

But appliances are unlikely to hold up Xiaomi's current valuation either.

Traditional appliance brands aren't doing all that well themselves these days. From the 1990s on, the rise of big appliance chains like Gome and Suning forced appliance makers to accept thinner and thinner margins.

Unlike cheap Midea, Mijia's rice cookers and bicycles all tell a story about design.

Mijia products share the same clean white look, and Lei Jun can spend an hour at a launch explaining what makes that design unusual. If a smart rice cooker with 2,000 heating programs seems unnecessary, building a brand with a sense of design may be an easier sell today.

But the problem Xiaomi ran into with phones has to be solved for small appliances too.

Building a Chinese Muji is certainly worth doing. It just isn't easy.

What it aims at is the relatively high end of the market. A 999-yuan rice cooker costs less than half of a Japanese-made Tiger, but it is already enough to buy four or five Midea cookers.

Will the people who aren't satisfied with a Midea rice cooker, and are willing to pay a lot more, go on buying a "design" that looks exactly like the expensive original?

From big things like rice cookers and air purifiers to small ones like action cameras and security cameras, Xiaomi's products have been accused of copying other brands' designs the moment they launched. The reason is easy to understand: lifting someone else's proven concept is far less risky than putting out a design of your own.

Whether or not the copying is bad enough to sue over, that reputation is extremely damaging for a company that wants to make premium appliances — it suggests its buyers can't afford the original.

"Xiaomi's problems aren't that serious yet," Shirky said, still fairly upbeat about the company's situation. "They're not going bankrupt. They've just run into competition."

Maybe so. But to get back to the height the book gives it, Xiaomi will have to change more than its phones.

Cover image from By Joi - Own work, CC BY 3.0