(Chinese Version)

2015 witnessed the merger of several giant Internet companies. To name just a few here in China: the merger between Didi and Kuaidi, 58.com and Ganji.com, Meituan and Dianping, Ctrip and Qunar, etc. It seems that business insiders of different segment markets are all talking about mergers and acquisitions recently.

This topic was also dealt with during the Innovators Dialogue section of Caixin Talk held on November 6th, when Caixin Media’s editor-in-chief Hu Shuli and Xiaomi Technology’s founder and chairman Leijun had a thorough conversation on various topics.

In general, Mr. Lei was positive of such mergers and acquisitions. He believed that Chinese people preferred to lead than follow, which might help explain why there are so few mergers and acquisition in the past fifteen years in the Internet industry. In this sense, he concluded that Chinese entrepreneurs had changed their ideas and become more open to such things.

The past year witnessed four major mergers in the Chinese Internet industry. Whatever is going to happen to these merged companies in the future, I think we should all applaud them for their courage.

For Mr. Lei, mergers can effectively improve efficiency, avoid unnecessarily wasting social resources, reducing destructive competition and enhancing market order. He predicted that this wave of mergers and acquisitions could benefit mass innovation if it could spread further. After all, only few companies could list on the stock market. So it could be a good choice for entrepreneurs to sell their startups when their companies have reached a certain scale, Mr. Lei believed.

The more frequent mergers occurred, the more likely for entrepreneurs to quit their existing project and turn to the next one, and the more enthusiastic investors will become. Consequently, the entire Internet industry and even society will be upgraded. In the past, startups that failed to list were treated as failures, which was too cruel for entrepreneurs.

However, Ms. Hu voiced her and many others’ concern, saying that Internet industry should have been a place of free competition, yet these mergers only led to more monopoly by BAT.

Mr. Lei responded that at least there were three Internet giants out there, and he didn’t think that a dominant player would finally stand out among them.

I don’t find the monopoly by BAT a problem. What’s really urgent is to figure out an approach to monitoring unfair competition and maintain market order. The government should not worry about Internet giants, but rather put more efforts into governing unfair competition of these giants.

In a word, he believed that the public should not worry that Internet giants were becoming larger in scale, but if they were hindering innovation of the entire society.

In addition, he suggested that the Chinese Internet industry was still in the first stage of development. BAT used to be the only three dominant players. However, more and more unicorns have gradually emerged and four new tiny giants have come into existence up to now, which, he believed, indicated that the Chinese Internet market was still highly-active. For Mr. Lei, in the foreseeable future, the next decade would still be the golden days for entrepreneurs to make a difference and there were still huge potentials for them to explore.

Mr. Lei reiterated that only those who understand the market well and seized the opportunity could succeed in the next decade. The first round of competition has ended in the Chinese mobile Internet market, so nobody could achieve huge success in this round the competition.

He believed that rural areas in China would jump through IT stage and Internet stage and directly enter into the mobile Internet stage. He predicted that the next decade would witness a series of countryside-based Internet companies worthy of tens of billions USD. Mr. Lei revealed that the Internet market of rural areas would also be the focus of Xiaomi Technology in the next decade. Up till now, Xiaomi has invested in around ten related companies, but it planned to invest at least 100 companies in total at last.

He was also positive of the small and mid-sized enterprises’ management software market, SaaS and cloud services market in the next decade. He predicted that such markets have only begun to develop here in China.

Furthermore, Mr. Lei mentioned that smart hardware and IoT business would also be one of the major trends in the next five to ten years. He suggested that there was a sea of possibilities in this market and the current volume of smart hardware remained far from enough.

The following is the excerpt of Hu Shuli and Lei Jun’s dialogue:

Hu Shuli, editor-in-chief of Caixin Media

Hu Shuli: It seems that everybody is talking about the capital winter right now, what’s your opinion? Are we really in capital winter now?

Lei Jun: Coincidently, it’s also snowy in Beijing today. Winter comes a little earlier in Beijing this year, and likewise, I do admit that the Chinese private crowd-funding market and startup market were less active compared to three months ago. In this sense, it looks like winter today yet summer in the past year, during which time the Chinese capital market was too hot.

Hu Shuli: A summer that lasts for around a year?

Lei Jun: Yep. The Chinese capital market was so hot in the past year that every entrepreneur seems to believe that his or her startup is worthy of hundreds of thousands of million USD. At that time, people tend to have too high expectation for their startups and all compete to list on the stock market. However, as the Chinese secondary market cooled down, the startup market was also affected. I predicted that entrepreneurs would meet huge challenges when raising fund in 2016. The capital market has been so hot in the past year, especially in the past three months, making many investors fear to invest. So I believe that we will be more like in autumn during the next three months, to be accurate. During this period, the market will cool down to a healthy stage, so that the entire industry could develop better in the future.

Lei Jun, the founder of Xiaomi echnology

The first round of competition has already ended in the Chinese Internet industry and there is little possibility to make huge success right now

Hu Shuli: Should startup owners raise a round of financing when the market value of their startups higher or more normal? I observed that many entrepreneurs loved to compete with others over the market value of their startups, believing that investors would be more likely to invest them.

Lei Jun: In general, it’s wiser to raise a round of financing when the market value of their startups is higher, since the cost is also lower at that time. To be more specific, an investor will have to invest 1 million, 10 million or even 100 million USD to grab 10% share of the startup when the market value is higher, yet when the market value is lower, they get to invest less to grab the same amount of share. For startup owners, it seems that they will benefit more when they raise funds when the market value of their startups is higher.

Many entrepreneurs might feel more accomplished when they raised a larger sum of money. However, the more you raised, the higher expectation you have to live up to afterwards. The more funds you raised from investors, the most pressure your board of directors and your employees will give to you. It’s not always better to raise more money, since you are ultimately selling your startup. The more money you raise, the more risks you have to bear. In a word, it’s always wiser to raise an appropriate volume of fund.

Hu Shuli: Still, what will happen after autumn end? What’s the next trend of the Chinese mobile Internet? What segment market is worthy of attention in the future?

Lei Jun: The Chinese mobile Internet market started five years ago, but reached its peak within three years. Today, many entrepreneurs may feel that there’s nothing left for them to do. I do admit that there is little possibility to make huge success right now since the first round of competition has already ended in China. Yet, the mobile Internet industry has actually only begun to influence the entire society.

Many entrepreneurs may feel hopeless considering the monopoly of Internet giants. However, nobody can tell what will happen in the next decade. For example, there is still huge possibility in the Internet market of rural areas. As a matter of fact, rural areas in China have jumped through IT stage and Internet stage and directly enter into the mobile Internet stage, with the introduction of 4G networks and affordable mobile devices out there.

Hu Shuli: What specific opportunities do you think are out there in rural areas?

Lei Jun: While it takes two decades for urban China to go through the IT stage, Internet stage and mobile Internet stage, it will take less than five to 10 years for rural China to enter into the mobile Internet stage. There is a sea of opportunities in this market, and I predict that the next decade would witness a series of countryside-based Internet companies worthy of tens of billions USD.

Hu Shuli: How can new tech companies enter the enterprise-level market when there are already lots of traditional players such as ZTE and Huawei out there?

Lei Jun: The fundamental reason why the Chinese enterprise-level market remains small is that IT is still not well-spread in China. However, with the rise of labor cost, IT service will be in larger need in the future. For example, even grocery store owners are now using smartphones, so I predict that mobile cloud services will be much needed in the management of Chinese enterprises. The small and mid-sized enterprises’ management software market, SaaS and cloud services market in the next decade. He predicted that such markets have only begun to develop here in China.

Chinese entrepreneurs have changed their ideas and become more open to mergers and acquisitions

Hu Shuli: It seems that major Chinese Internet companies have been merging with each other recently one after another. It seems that business insiders of different segment markets are all talking about mergers and acquisitions. Internet industry should have been a place of free competition, yet these mergers only led to more monopoly by BAT. What do you think of BAT’s monopoly of the Chinese Internet industry? Which way the Chinese Internet industry is heading for under the monopoly of BAT?

Lei Jun: The past year witnessed four major mergers in the Chinese Internet industry. Chinese people seem to prefer to lead than follow, which might help explain why there were so few mergers and acquisitions in the past fifteen years in the Internet industry. In this sense, I think Chinese entrepreneurs have changed their ideas and become more open to such things. Whatever happened to these merged companies in the future, I think we should all applaud them for their courage.

Mergers can effectively improve efficiency, avoid unnecessarily wasting social resources, reducing destructive competition and enhancing market order. I believe this wave of mergers and acquisitions could benefit mass innovation if it could spread further. After all, only few companies could list on the stock market. So it could be a good choice for entrepreneurs to sell their startups when their companies have reached a certain scale. The more frequent mergers occurred, the more likely for entrepreneurs to quit their existing project and turn to the next one, and the more enthusiastic investors will become. Consequently, the entire Internet industry and even society will be upgraded. In the past, startups that failed to list were treated as failure, which was too cruel for entrepreneurs.

Hu Shuli: I worried if the Chinese Internet industry would be monopolized by BAT at last, if there would be no competition at all, and if only BAT would be competing with each at that time?

Lei Jun: I’d like to answer this question from two aspects:

On the one hand, I don’t find the monopoly by BAT a problem. What’s really urgent is to figure out an approach to monitoring unfair competition and maintain market order. The government should not worry about Internet giants, but rather put more efforts into governing unfair competition of these giants. In a word, the public has no need to worry that Internet giants are becoming larger in scale, but if they are hindering innovation of the entire society.

On the other hand, the Chinese Internet industry was still in the first stage of development. BAT used to be the only three dominant players. However, more and more unicorns have gradually emerged and four new tiny giants have come into existence up to now, which, he believed, indicated that the Chinese Internet market was still highly-active. In the foreseeable future, the next decade will still be the golden days for entrepreneurs to make a difference and there are still huge potentials for them to explore.

Hu Shuli: What can startup owners do when Internet giants enter their segment markets? Should they sell their startups when their startups have already reached a certain scale, or should they continue to compete with Internet giants? Do you have any specific suggestions for them?

Lei Jun: Entrepreneurs have always been held in a dilemma when Internet giants enter their segment markets in the past decade. If you ask for my suggestions, then I advise entrepreneurs to be well-prepared for competitions in any segment market, since nobody can develop in a market free of competition. Even though in the face of competitions from Internet giants, startup owners who have key competitiveness, who move faster and who can develop better products will ultimately stand out.

Hu Shuli: Although smart hardware sector is gaining attention in China right now, it seems that the market demand remains insignificant? What do you see the future of this sector? How can such demand be boosted by innovations?

Lei Jun: The current fad for smart hardware started when Google acquired Nest last year. Within less than two years, however, smart hardware market has boomed significantly. I believe that smart hardware and IoT business will be one of the major trends in the next five to ten years, and that there is a sea of possibilities in this market and the current volume of smart hardware remained far from enough. In a word, smart hardware market is under the spotlight in today’s Internet industry.

Hu Shuli: Some people seem to believe that Chinese startups, whether it's O2O platforms, online retailers or Xiaomi, are significantly reforming consuming channels. Others, however, believe that Chinese startups don’t have any core competitiveness, such as innovations that reform the basic principles of IT. What kind of innovations do you think can be called real?

Lei Jun: To be innovative is to either do things others haven’t done or do things others have failed. Innovations should first of all be helpful to society. Many innovations look no big deal at first. For example, the invention of “links” look insignificant at first, but it is links that later lead to the development of Internet and Internet revolution. In this sense, real innovations may look no big deal at first. What we really need is innovations of different kinds and levels, such as basic technological innovations, practical innovations and innovations related to business models.

It’s no easy thing to expand in overseas markets with currencies devaluing a great deal

Hu Shuli: You once said that even pigs would be able to fly when put in the wind, let alone entrepreneurs who were surrounded by social trend. Everybody seems to be talking about the current trend Internet+ right now, but what do you expect to be the next trend?

Lei Jun: Fundamentally, Internet+ is about improving user experience and efficiency, as can be seen in the development of Internet+ in the past two to three years. In my opinion, Internet+ is still immature in China and there remains huge possibilities. Speaking of the next trend, I’ve mentioned two possible trends above: Internet of rural China and enterprise-level applications. The former is one of the core areas of investment of Xiaomi in the next decade. As a matter of fact, we have already invested in around ten related companies, and will invest at least 100 companies in total at last.

Hu Shuli: Can you be a little bit more specific?

Lei Jun: Where there is eagerness and enthusiasm, there is a way. Suppose we are like shoe-sellers and we are now in an isolated island where nobody wears shoes, I prefer to believe that there is huge market potential, while some shoe-sellers may feel desperate and hopeless, fearing that nobody will buy their shoes.

Hu Shuli: What do you expect the future of the Chinese Internet market will look like? Recently, Google and Facebook have both expressed their wishes to enter China.

Lei Jun: Chinese Internet companies have become quite competitive globally after two decades of development. Although it’s still too bold to say we have already surpassed the Western world, it is fair to say that China has already been leading the world in some areas.

Hu Shuli: Which markets around the world do you expect Chinese Internet companies to enter and play a role in? What kinds of Chinese Internet companies may be at an advantage abroad?

Lei Jun: Chinese Internet companies that are focused on improving the consuming experience all have great opportunities abroad. The Chinese manufacturing industry is undergoing huge changes right now, and products that are “created in China” will gradually win recognition from consumers around the world. These new products will be not only cheap, but also of high quality and good user experience. At that time, Chinese products will be more welcome by foreign consumers and a bunch of transnational enterprises may gradually come into existence.

In today’s international economic environment, India can be a tryout spot. Indian economy is on the rise, yet there remains huge possibilities and market potentials. India is also one of the core markets of Xiaomi, and we have invested quite a lot out there. At present, we are actively looking for Indian startups worthy of our investment. Yet, I have to admit that the average market value of Indian companies tends to be much higher than that of Chinese companies.

Hu Shuli: How about the American market?

Lei Jun: Although Xiaomi developed rapidly in the past five years, we still need to expand step by step. At present, we need to stand firmly in China and account for a fair market share in burgeoning markets. Only then can we eye on the developed European and American markets.

Hu Shuli: How about African markets and other possible ones, then?

Lei Jun: It’s no easy thing to expand in overseas markets. In the past year, many countries, including Indonesia and Brazil, devalued their currencies by over 40%, making the cost rise by 80% or even double. So it can be quite a problem if we can sell our products in these markets.

Hu Shuli: If Xiaomi develop step by step, when do you expect Xiaomi to compete in the European and American markets at last?

Lei Jun: Well, I don’t have any specific timetable right now. We will make necessary moves when we have gathered enough momentum. At present, Xiaomi has succeeded in the first stage and is still consolidating ourselves. At this moment, what we need to do is again focus our attention on our products. Only when our products are embraced by our users can we finally succeed.

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Translated by Levin Feng (Senior Translator at ECHO), working for TMTpost.