China’s most successful startup?
Ask people in China to name the country’s most successful and innovative new mobile phone brand and most will immediately declare Xiaomi. Ask tech-savvy Americans and Europeans and they will just as quickly suggest OnePlus. Though largely still unknown in China, Shenzhen-headquartered OnePlus, established less than 18 months ago, has achieved more success more quickly in US and European markets than any other Chinese mobile phone company. It is also possibly the China’s most successful startup since Xiaomi was established five years ago.
OnePlus, by my estimate, has now joined the most exclusive club in the technology world, a “unicorn”, meaning technology startups with a valuation of over $1 billion. Other Chinese unicorns besides Xiaomi are China’s Uber, Kuaidi Dache and group buying site Meituan. Unlike those other Chinese companies, OnePlus has not yet raised any money from venture capitalists. OnePlus is also the only truly international Chinese unicorn, since most of its sales and growth are outside China.
With just a tiny amount of seed capital, the company began selling its phones little more than a year ago in late April 2014. Its 2014 full-year revenues were $300mn, well behind Xiaomi’s $12 billion. But, unlike Xiaomi, OnePlus chose to focus its efforts on the US, Western Europe and India. In these places, OnePlus is doing far better than Xiaomi, and is now considered a legitimate competitor to major international Android phone brands like Korea’s Samsung, Taiwan’s HTC, Japan’s Sony and America’s Google Nexus. OnePlus is cheaper than these others, but that doesn’t seem to be the main reason its winning customers as well as enthusiastic reviews from experts. It’s mainly because of the quality of both OnePlus’s hardware and Android software.
According to the Wall Street Journal, the One Plus phone is “exceptional” and it “beats Apple iPhone 6 and Samsung Galaxy S5 in many ways.” The New York Times has called the OnePlus phone “fantastic, about the fastest Android phone you can buy, and its screen is stunning “. Time Magazine chimed in with OnePlus is “exactly how a smartphone should be.” Engadget, the widely-read US technology blog, recently rated the best phones to buy in the US. Oneplus came out on top. That’s certainly a first for a Chinese brand.
In my seven years as an investment banker in China and before that as CEO of a California venture capital firm, I’ve never met quite such a mold-breaking company. OnePlus set out to achieve what no other Chinese company has ever done, to excel not just at making low-cost fast-to-market products but making ones of the highest quality, in engineering and design, hardware and software.
They next did something else no Chinese, and few American companies have done successfully: use social media sites Twitter, Facebook and Youtube to market its products at almost zero cost, and build a brand with a high reputation and a growing band of loyal customers and followers in the US and European markets.
Both Xiaomi and OnePlus say they plan to make most of their money from selling services and software, not from selling phones. Xiaomi has the advantage of much larger scale, with far more users. But, OnePlus may actually do better with this strategy and make more money for the simple reason that in the US and Europe, compared to China, a lot of people are accustomed to paying for mobile software and services.
OnePlus sold over one million phones last year between May and December, mainly in the US and Europe. It spent a total of about $10,000 on advertising worldwide. Samsung, by contrast, spends over $350mn a year in the US advertising its mobile phones. Worldwide, Samsung is spending over $14bn in advertising and its mobile phone market share has been declining since 2013.
On many fundamental levels, OnePlus thinks and acts differently than any other successful startup in China. Start with its two founders, Pete Lau and Carl Pei. They met while working at a Chinese domestic mobile phone and Blu-ray player manufacturer called Oppo. Lau is responsible for OnePlus’s manufacturing and product engineering, including overseeing a network of outsourced suppliers and manufacturers in and around Shenzhen. “We want to tell the world: Chinese products are great,” Lau says.
Pei’s background is more unusual. He is responsible for the company’s international growth and unique marketing strategy. Everything about Pei – his background, his way of thinking and his approach to selling mobile phones successfully in the US and Europe – sets him well apart from all other Chinese tech entrepreneurs I’ve met. He is ethnically Chinese, but before coming to Shenzhen three years ago, had never lived or worked in China and his Chinese language ability, by his own admission, is so-so. Now 25, Pei was raised mainly in Sweden.
To understand Pei’s approach to business, it’s useful to understand something about business and culture in Sweden. It’s a small country, with less than 10 million people and fewer than 17,000 Chinese. Yet, it has arguably produced more innovative, world-changing companies, per capita, than any other country in the world. There’s a long list of them. My five favorites are furniture retailer IKEA, milk packaging company Tetra-Pak, bearing manufacturer SKF, fashion retailer H&M and music streaming company Spotify. In each case, these companies now dominate entire industries, with high-quality products and fair prices. Sweden has no real luxury brands. Instead it has a lot of great companies that have changed the ways a huge mass of people across the world live their lives, from the milk they drink to the beds they sleep on, the clothes they wear and now even the music they pay to listen to.
Sweden’s last attempt at success in mobile phones ended up badly. Ericsson once had a decent business selling basic phones, but the birth of smartphones was the death of Ericsson’s mobile business. OnePlus stands a better chance, in part because it’s a mix of Swedish focus on targeting a mass customer market together with Chinese speed and adaptability. I expect to see more of these “mixed blood” companies emerging in China, as China becomes more globalized and more welcoming to non-natives immigrating to start new businesses.
By basing itself in Shenzhen, OnePlus sits inside the world’s most densely-packed ecosystem of component, chip and contract manufacturing companies. It’s hard to imagine OnePlus could have been built as successfully anywhere else in the world. Foxconn, manufacturer of iPhones, is among the companies with its China base in Shenzhen. Intel has also moved in in force to win business from these small, nimble Chinese electronics companies.
Manufacturing smartphones in Shenzhen is comparatively easy. Far harder is convincing Americans to buy a mobile phone without a subsidy and a service contract from a network provider like Verizon or AT&T. Yet, OnePlus is so far succeeding. One reason: other companies that tried ended up spending millions of dollars on advertising to try to explain to Americans why they should buy a phone directly. It was mainly burned money. OnePlus spent nothing on advertising but used Twitter, Facebook, Google Plus and Youtube to build up a group of early adopters, who then went out and evangelized their friends.
OnePlus has 1.1mn “likes” on Facebook, double Xiaomi’s, along with four times as many followers on Twitter. On Youtube, the Oneplus channel has five times more subscribers than Xiaomi. Keep in mind Youtube, Twitter and Facebook are banned in China, where all of OnePlus’s employees are. OnePlus has become an expert at selling and brand-building using websites OnePlus’s own team aren’t supposed to even be looking at.
Ask Carl how he figured out how to do things in the US market that American companies, including hundreds with millions of dollars in VC money, weren’t able to do and he just shrugs, like it was all pretty easy. OnePlus still has no office in the US, no staff there, no repair centers, nothing. In the beginning you could only buy a OnePlus in the US and Europe with an invitation. Even with one, OnePlus only accepted orders from new customers one day a week, on Tuesdays. As OnePlus’s reputation grew, the invitations became themselves valuable commodities. They still sell on eBay for $10-$20 each. OnePlus is now gradually loosening up and letting those without an invitation buy its phones, but again, only one-day-a-week, on Tuesdays.
Selling by invitation only may seem counterproductive. But, it’s proved vital to OnePlus’s success up to now. The reason: making mobile phones is generally a very cash-intensive business, since you need to have huge amounts of working capital to buy parts, build phones, supply to retail channels, and then wait for cash to return. OnePlus had no access to a big pot of working capital. So they have basically built phones to order, after the customer has paid.
One-third of the OnePlus’s 400 staff, including about 50 non-Chinese, are dedicated to customer service, which mainly means answering emails and responding to comments and questions on the company’s website and forums. This is another core thing OnePlus does better than any company I’ve seen in China. It’s establishing a new idea in the US and Europe about what a Chinese company is and does. Not just a source of cheap manufactured goods, but a company with a clear and powerful brand identity, one knows how to communicate well and sell things to college-educated 20-30 year-olds who live in San Francisco, Berlin and London.
Success has come quickly, but Pei, from my discussion over dinner with him, is certainly not complacent. He sees risks everywhere, not only from the obvious examples of Nokia and Blackberry, two once world-conquering mobile phone companies that have all but disappeared from the market. Apple remains very powerful. It and Google also own a lot of the key intellectual property patents for mobile phone signal processing, software and chip design. If either chooses to sue OnePlus, they have far more money to fight a patent lawsuit in a US court. Legal fees could easily top $20mn, money OnePlus does not now have. The US patent law system has been abused before, a big company sues a small but fast-growing one, not because it has a good legal case, but knowing that fighting the lawsuit, paying the legal bills, can put this new competitor out of business.
Pei’s three burning concerns are the OnePlus fails to attract enough talented global executives to join the company, loses its edge in designing hardware and software, or grows too large to maintain its quirky brand image and identity. OnePlus is in the process of opening new offices and moving key people from Shenzhen to Bangalore and Berlin because Pei believes it will be easier to find talented staff there.
Another worry, surprisingly, is how and when to bring in venture capital investors. OnePlus will likely try to raise money from one of the world’s famous Silicon Valley VCs. They have the most experience investing in disruptive businesses, helping startups like OnePlus to grow, especially in the US market, and they also can provide lots of help finding top executives and distribution partners. But, these Silicon Valley VCs have also not seen anything exactly like OnePlus before, a Chinese startup, likely with some core operations in India, and a magical ability to sell to Americans without having any Americans involved. If successful, OnePlus could have one of the largest Series A VC rounds in history, raising perhaps $100mn-$200mn. Will money spoil the company or improve it?
OnePlus’s revenues are on track to more than triple this year to over $1 billion. But, there are lots of places where OnePlus could stumble and fall. Its new model launches and software upgrades could get delayed. Cost pressures could force them to raise prices in the US as they recently had to do in Europe, because of steep fall in the Euro. Also, US and European early-adopters are a fickle bunch. They could start throwing bricks at OnePlus instead of kisses. Case in point, in less than two years, Taiwanese mobile phone company HTC went from the most talked-about and fastest-growing company in the industry to an also-ran.
China’s mobile phone industry, as well as much of the TMT sector, have a reputation for being not much more than a bunch of knock-off artists, with no real innovation worthy of the name. OnePlus and Xiaomi both point the way towards a different and better future for China industry. Yes, OnePlus is good at assembling components cheaply. But, its core strengths as a company are too rarely found in China: an obsessive focus on product design, product quality, branding and customer engagement. These are what determine a company’s value as well as competitive strength. OnePlus is the first Chinese company to gain a large number of buyers and fans in the US and Europe by being simultaneously good at all these.
China’s long-term economic competiveness requires that more companies like OnePlus emerge. But, until it came along, China didn’t have a single one. It’s the most concrete sign that China may transition away from being a source of copy-cat products sold cheap and begin to play in the global big leagues, generating buzz while competing and taking market share from large, rich incumbents like Google and Samsung.