A year ago, Chinese smartphone maker Xiaomi (sha-oh-me) had fallen from the world’s most valuable unicorn to a “unicorpse.” Sales plunged in 2016, pushing the company from first to fifth place among China’s smartphone makers. No firm had ever come back from a wound that severe in the trench warfare of the global smartphone business.

Today, Xiaomi is being called a “Chinese phoenix.” The company has grown so fast in the past year that research firm Strategy Analytics says Xiaomi could overtake Oppo, Huawei, and Apple in the next year to become the world’s second-largest smartphone vendor, behind Samsung. Executives are reportedly considering an IPO in 2018, which could be among the highest-valued ever.

The comeback has made Xiaomi a poster child for China’s entrepreneurial dynamism. More than 10,000 new businesses are started every day in China — that’s seven Chinese startups born each minute. In the US, by contrast, startup formation has fallen 36 percent in the last 10 years, to roughly 1,000 per day. No longer a nation of “copycats,” China today leads the US in key technology sectors such as mobile payments, and is increasingly competitive in advanced microchips, and artificial intelligence. Xiaomi is one of the best exemplars of this entrepreneurial vigor.

What accounts for the company’s unprecedented turnaround? Is Xiaomi’s renewed success sustainable, or will it wither under the relentless margin pressures of the phone business? And can Xiaomi do what no homegrown Chinese phone maker has done — successfully crack the US market?

To find the answers to these questions, we have to go back to Xiaomi’s 2015-2016 debacle, which saw smartphone sales decline to a rumored 41 million in 2016, from a reported 70 million a year earlier. Xiaomi’s billionaire founder Lei Jun — sometimes called “the Steve Jobs of China” — blamed the slump on supply-chain problems associated with the company’s rapid growth. This forced Xiaomi to retreat from several overseas markets, including Brazil and Indonesia. There were organizational problems as well, prompting the restructuring of the smartphone hardware, R&D, supply chain, and quality-management teams. But perhaps the biggest source of Xiaomi’s troubles was its exclusive reliance on online sales, which left it unable to reach millions of less tech-savvy customers in China’s smaller cities and rural areas. Rivals Oppo and Vivo capitalized on Xiaomi’s absence by cementing sales partnerships with retailers in those areas.

In a classic case of “turning a bad thing into a good thing,” however, Xiaomi used its near-fatal stumble to fashion a radical new business model. With sales rebounding, and the company expanding globally, it’s worth examining the inner workings of that unusual model, and how it helped to power the company’s remarkable resurgence.

Like many businesses in the internet age, Xiaomi had initially relied on a dual business model of selling hardware products and online services. Most revenue came from the sale of affordable phones and smart TVs, which serve as platforms for Xiaomi’s online services. The hardware products have razor-thin profit margins, so most of Xiaomi’s profits came from the online services. These include hundreds of thousands of hours of movies and shows — available a la carte or via an all-you-can-eat $7.50 monthly fee — as well as games and other offerings. Xiaomi even operates a profitable online service offering small loans to Xiaomi phone users vetted with the help of a sophisticated artificial-intelligence engine to assess creditworthiness.

Ecosystem strategy

In the wake of Xiaomi’s setback, company executives concluded they needed a third leg to their business model — offline retail stores. But they wanted the stores to go beyond selling phones to forge sustainable bonds with customers. Their solution: create an ecosystem of some 100 startups as partners to provide Xiaomi with other internet-connected home and tech products that would draw customers to its stores.