Nothing founder Carl Pei: ‘If you’re serious about hardware, you should spend time in China’

0:01There aren't many founders who would have the know-how, or frankly, the balls to take on Apple. But that's exactly what Nothing founder and CEO Carl Pei is up to, who joins me on the Sifted podcast today. And five years in, he's not slowing down. Nothing, which makes smartphones and earpods at a much more affordable price point than Apple, has now shipped millions of units and crossed$1 billion in sales. It also raised$200 million in September, hitting a$1.3 billion valuation, and unveiled plans to make AI-native devices and apps. All topics we'll be diving into on this podcast. Carl, welcome to the show.

0:39Thanks for having me. It's great to be here. So you're working on AI native devices. Why is the good old smartphone not up to scratch in the AI era? The smartphone is still great. It's the product we use the most every day. I think on average, depends on the region. Like here in Europe, we'll use it for about four hours a day. In some parts of the world, six hours a day. So it's definitely not going away. People love their phones. But I believe that in the age of AI, soon people realize that the more information you can feed into the system, the better response or output you get. And when that happens, and considering that the phone is not always going to be there for you, sometimes you're walking around in town or you're at a dinner, there will be a rise for new types of hardware devices that can help you capture more context.

1:25So I think that's going to be the driver. But even in this new world, the phone is still a pivotal part of it. And how do you go about figuring out what those new devices could be? What does that process look like in a company? What kind of research do you do to figure that out? Can you give us a hint of what you think those things are going to look like in the future? Yeah, I've been thinking about this a lot. And I believe we're in like a once in a lifetime opportunity era for tech companies in general. and I think the first thing is that we have to admit to ourselves that we are we're not product geniuses um I think Steve Jobs was a product genius he could imagine a new type of product a new way of using a technology and it will be a very high chance that it will be successful because they've done it so many times in the past so I think the first step was just um coming to terms with that we're not at that level so then we have to find a plan b um so if you can't guarantee a hit product then what is the next best thing you can do and i think here i'm pretty inspired by software companies like sometimes you just don't know what to build you test right and you make sure the experiments are relatively fast and relatively cost controlled and you take a lot of user feedback so you keep iterating based on how things work i think that's the second best approach now if we look at this industry and some other recent startup failures either they spend too much money and too much time on one experiment that may or may not work or they didn't because like we're also shipping consumer products consumers have high expectations because they're paying their hard-earned money to buy a product so it has to be fully functional it can't be like a prototype that we sell to people.

3:19I think that's where we've also seen some less successful companies make products recently. But how does it work prototyping when it's hardware? I feel like it's kind of easier and cheaper with software to try stuff and fail and pivot fast. How do you kind of control that when you actually need to build a thing that works? I think if you come from a very big environment like Apple, you're used to having a big team and a lot of resource. As an example, they have a lot of PhDs. Even on a single component, they might put a PhD on it just to make sure it's as good as possible. And that's how they deliver such high-quality products.

4:02But if you're a startup, you can't really work that way. So you need to find a more flexible way of working. And I think that's the world we come from. I've spent 10 years of my life in Shenzhen. And that's where I got to learn how to make hardware, be close to the supply chain, make prototypes quickly. So I think it comes from a different way of working, a different mindset to begin with. And then tactically, there's a lot of things we can do. so here in London we have our design studio which designs all our products worldwide and we have a workshop attached to it, it's got a lot of machines so it's very, as soon as you have an idea on the computer in the 3D CAD, you can make all types of prototypes from just foam prototypes to get a feel for the shape of something if it makes sense or not to more high fidelity prototypes like 3D prints or metal like cutting machines so it's So there's no easy answer, but it's cultural, but also there's a lot of tactics you can employ to do this.

5:07And can you give us any hints about what some of those devices might be or some of the ones you've tried out and realized maybe aren't going to work for some reason? So my first kind of conclusion is we don't know. So if we don't know, then we have to try. So we have to try things quickly. You can see that the smart glasses are picking up steam now. I was very skeptical about smart glasses, but the Meta Ray-Bans are doing quite well this year. So I'm warming up to this idea as well. We already have smartwatches. I think there's a lot of other cool stuff we can do with smartwatches once they become more intelligent.

5:50We already have phones. There's a lot of stuff we can do on the phone. we also have like different form factors like pendants and all types of gadgets that we're prototyping but the honest answer is we don't know so we should not spend too much time on each product not too much money we should ship it to the market be very close to our consumers and hearing the feedback iterating until we find something successful and then we you know really go and make it big might we see something that isn't a phone or a neobud in the market from nothing next year uh most likely yes can you give us any hints as to what it might be we don't know yet that's the honest answer we have a few things where we're exploring but we haven't signed off anything and you also kind of talk of a future where all of our phones and devices will be much more personalized than they are now with maybe like apps that we can make and design ourselves for anyone who's kind of listening including me who's maybe struggling a bit to pick to what that might actually look like can you talk us through what that what that future might be um if you think about the modern operating systems the one you're using on your computer or the ones we have on our phones.

7:13They are nice, they are easy to use, but fundamentally the user experience hasn't really changed for the last 20 years. It's more colorful now, the graphics are better, it's faster, but it's still folders and apps on your computer. It's still home screens, lock screens, full screen apps on the phone and I feel it's almost time for something different because ultimately technology should serve humans and there should be a way to use these devices in a more efficient manner so that we can have it take care of more things for us in the background things that are boring to us or tedious to us so that we can focus on more like our passion projects or our creativity so if you think about these products they have a lot of context on you you have your files you have your contacts you have your pictures etc but your different apps or software products they don't really talk to each other so today the operating system is like a container and you have like different things in the container but it's nothing is really integrated so I think the first step is to really understand you.

8:33Of course, privacy and security will be really important because the level of information that technology will have access to is going to be way greater than before. So there needs to be a lot of thought put into that part of it. But theoretically, it should really know you well based on the permissions that you've given it. It should know about your past context and also where you might want to go in the future as a human. And if it knows you really well, it should start being able to predict what you want to do. Because today, the usage of these devices are quite manual. Like we have to come up with an idea, oh, I got to write this email, or I got to write this document.

9:16And then we go through multiple steps, multiple apps, maybe we have a web browser open for research. So it's still very manual. I think if it already knows us, it should be able to predict what we might want to do. and then it should also be able to help us get as close to possible to the final action or the final product with as little input from our site as possible of course when it comes to signing off on payments or signing off on the final product we should have as humans have final control but I think there's a space for a brand new way of operating these machines with software and lastly the user interface should just be like just be there when you need it like just in time based on your current context what is the most likely thing you want to do is guess it correctly and just be there so we don't have to look around in folders and apps for stuff so what might that look like when i'm about to leave the office by my like geographical location it knows i'm there and it starts telling me when my next train is or something like that or can you give can you talk us through some examples yeah it could be um Yeah, when you're leaving your office, it knows you prefer a certain type of music.

10:31Or it might even know that you're feeling a little bit down today and tweak the music to something more uplifting. It will know what you want to do when you get home. So, like, I don't know exactly what that is, but it will start trying to help you. Hey, do you want to order this food delivery so it's there when you arrive? there's these kind of movie recommendations on Netflix or Apple TV that you could potentially watch I don't know like use cases I think you get the gist of it but everybody's habits are a little bit different do you find that idea comforting or slightly creepy like hey Carl I know you've had a tough day do you want me to order you a huge tub of ice cream it's um it's about trust I think in the beginning it will be way more manual but as you trust it if you take flights or travel booking as an example it's quite expensive you would definitely want to have a look at what you're paying for before you pay but if you got it right the last hundred times then the next time you're probably okay with just trusting it so I think there's going to be a period of time to earn the trust.

11:51And on the ice cream example, but if it knows that my health is not perfect right now and I want to get to a better place, it will not recommend me ice cream. How close are we to that kind of a future, do you think? I think technically we could do it next year, but I don't think it will be a great consumer product because the current way we use our electronic devices and smartphones are very ingrained in in our in our memory our collective memory so i think it's about taking people on a journey if this is a state we want to get to in five years there's going to be a lot of checkpoints along the way we change it a little bit but we still have to check you know do people like these changes is there anything we can do to make these changes better for you right now so i think first we got to break down the the big goal into like smaller checkpoints and then every checkpoint we have to rediscover pmf or product market fit whether somebody would be happy using something like this so it's not going to be like a linear uh we're not going to get there in a linear way it's going to be like a long-winded road i think and what about kind of you've also spoken about personalized apps at the moment pretty much all the apps we use are ones we download from the from the app store how do you see us having much more personalized stuff in the future and what's the journey to get consumers to wanting to do that for themselves i think the longer term end state is uh just one app it's os it's the app um it's got everything you need it predicts what you need it does it for you um but i think um in between we will have you so first we'll have users create their own apps.

13:40We released an alpha of something we call essential apps recently. And basically, it's an online platform where you can use natural language to describe the software you want. Maybe it doesn't get it right the first time you can prompt it to change. If you're technical, you can go into the code editor and change it manually. And despite it being in a very alpha stage, there's a lot of features we haven't built yet. I did sense of sense of magic when i clicked deploy because it just showed up on my phone and it it wasn't beautiful it didn't have a ton of functionality but i just created something in a couple of minutes and and it showed up so it's a glimpse of where things can go in the future there's a lot of work we have to do to make it more capable but i think the in a couple of years the way we think about software will fundamentally change because today if you're an app developer and you spend a lot of resources making an app that only has very few users, you're going to feel sad because it's a failure.

14:42But in the future, even apps with one user will be considered successful if that one user loves the app because the cost of making the app is going to drop to zero or close to zero. And I guess we've already seen in other areas, companies like Lovable, people are already becoming so familiar with the idea of being able to create apps and websites and things themselves in a way that just wasn't possible for the vast majority of us a few years ago. It's like the ultimate democratization of creativity like whatever you can imagine can just show up and I think it's really exciting to do it on a phone because we can give it access to like play sounds or generate images or pull up the calendar or set an alarm like when you're on a phone there's way more things you can do that are connected between these apps and the system itself.

15:36What do you think this means for kind of traditional app makers longer term? There is consensus, I think, like if you talk to those people as well, that apps will eventually not exist. It's just a matter of time. And some apps are more vulnerable in the short term than others. I would think there's broadly like two categories of apps. There's apps where we waste time and apps where we save time. so entertainment apps are the waste time apps like games and video platforms and that stuff I think they have more time but the utility apps the apps where we just want to get something done and get away from they're going to disappear first because there's no joy or happiness value for us as humans using them so yeah, it's going to happen it's going to take time the apps will fight for their lives to stay because you know if they if they disappear then their margins will get compressed because they lose their brand they lose their interface to the consumer so effectively they become a white label service and when you're a white label service it's very hard to command higher margins so there if i ran an app i will try my best to avoid that as well.

16:56Do you think Apple sees this future developing in the same way as you? I haven't spoken to people at Apple, but I think my guess is most of the tech industry sees the same future. I've spoken to people at big apps companies. They definitely see the same future. But I think it's a little bit different for Apple because they have a thriving developer ecosystem on iOS. They have a huge app store and tons of developers are making a lot of money. So I think changes are going to be quite considered with Apple because you have all these vested interests that you don't want to piss off because your current business model needs all of that to work for your business model to work.

17:44As I mentioned in the intro, you're described as an Apple competitor. Do you really believe that you could one day take significant market share from them? It could happen. Yeah, who knows? I mean, maybe it's not us, maybe it's somebody else. But what I do know is that no company survives forever. There's always a beginning and an end. And sometimes change happens faster than we can imagine. Because I remember, like for our industry, when I was younger, I thought, you know, I interned at Nokia. and back then Nokia had 40 % of global market share for phones and I couldn't see a future where they wouldn't be the biggest phone company in the world and I guess for the North American friends it was Blackberry and now they're just gone so I think similar to that today we see bigger companies like Apple and Samsung who knows I think history also teaches us that when there's a big technological shift, the cards will shuffle.

18:51Sometimes the incumbents, I think more often than not, the incumbents cannot keep up with the change. And we're seeing that with AI? I don't think we've seen that yet because I think Apple is still in a very strong position and they can, whatever perceived slowness or delay they have is it doesn't really matter because they have so many users and so much data and such a strong brand that they can be super late movers to this strategy and still be relatively successful. What does a company like nothing need to do right or what do you think a company like Apple needs to do wrong to you know turn the tables for Apple to to go the way of Nokia?

19:40Yeah it's a great question because i think it's like a business is like uh the accumulation of all the good or good and bad decisions so for somebody like us to win we have to make a lot of good decisions and a few bad decisions whilst our competitors make more bad decisions than we do um i think ultimately it's about the product um if we look at successful products and successful technologies over history, it's always served humans. Technology has always enabled us to do more stuff that we couldn't do before. Even ancient technology like the wheel. We could move things around more efficiently or the steam engine or the internet.

20:24It's always an enabler. So I think whoever can build products and technologies that enable humans the best will eventually win. and then if we take it kind of more tactical um it's it's stuff i said earlier about you know now we're moving from the known to the unknown with new potentially new form factors in the horizon not just for us but for the entire industry so we're all on this journey to find product market fit for what's next speed is important um being close to real users consumers is very important and controlling the cost of experimentation is important. But I also think beauty is quite important because if a product is more beautiful and if it's easy to use, that increases its chances of being successful.

21:19Are there particular markets, products, demographics where you think nothing has a good chance of becoming a leader or becoming one of the market leaders? Yeah, I think... So currently we have two product categories, audio with earbuds and headphones and also smartphones. The audio business is growing really well. Like the growth rate is high. The margins are also growing very healthily. And there's a lot of stuff we can do there. smartphones is more tricky because you know we we sell a couple of million of uh headphones and earbuds a year and we're already considered not that small because our competitors are like bose and bang olivson sonos they're big but also not that big so we're it's like from a supplier perspective i can make money supplying nothing but i can also make money supplying a bigger company.

22:24So that's what's, you know, gives us a price, a good price for making these products and healthy margins. Now on the smartphone side, the supply chain is way more challenging because you don't have Sonos and Bose anymore. You have Apple and Samsung who sell 200 million phones a year. So now our volume looks like a speck of dust next to their volume and therefore it's very hard to get the same cost for the product. So that's one challenge. I think the second challenge is the consumer challenge around Apple. So for our audio products, about half or more than half are connected to Apple products because why not?

23:06They look good and Apple users also appreciate good design and good technology. But for our phones, perhaps only 12 % of our users had an iPhone previously. So Apple's ecosystem is very locked down. Like the computer works well with the phone and there are services that only work between their devices. So it's really hard to switch. But I think the percentage differences between like 50 and 12, it goes to show that if it weren't for these restrictions for iPhone users, we would have half of our smartphone users also come from Apple. So for these traditional products, traditional, like already existing form factors, I think audio, it's quite easy.

23:53We have a plan. For phones, it will be very hard to capture share from Apple with the current status quo of the lockdown nature of their ecosystem. So on that side, the only way we would be effectively competing with Apple is if something changed on the policy side. And we've seen that on the software side with, I think, the App Store, with Spotify and Epic. And maybe it's time to think about it on the device side as well. Is that something you're actively speaking to governments or policymakers about? It's a wish, but I haven't actioned it yet. But maybe I should do that. So it might be something in the future on the competition side.

24:40Yeah, so these are like the current products. And then for new products, the playing field is way more even. Let's see who's the most creative and who can capture the needs of the consumers the best. Because it's brand new for everybody. Nobody has a head start. Sure, some companies have more resource, but we all come with different trade-offs. and then on the demographic side i think we definitely should focus on the youth um simply because like when i grew up apple was like the coolest company um so even now when they're not that cool i still remember them for being cool so in my mind they have a brand halo whereas kids who grew up today maybe they see apple as just like a great choice but the default choice kind of like how Microsoft was when I was younger so they don't have the same love for the like for the brand so I think for us it's way more it's way easier to target that user base and which we're already seeing like we are the youngest in our industry by user base our the average age of our users is 26.

25:49And so is that one of the reasons why you are still going with the phones because I I could imagine some investors or advisors might turn to you and say, this is an uphill battle for you because for all of the reasons you just outlined, whereas if you focus on some of these other devices, the market's much more open for you. What's your pushback to that? The phone is the most important device we have today. Maybe the second most important is the personal vehicle, like cars. but it's not going to go away anytime soon so if we want to have a credible play in building a new type of software experience a new type of operating system it cannot be built without a phone

26:38and maybe it's very hard today to compete with Apple because of some of these issues but if we're able to deliver the operating system that we kind of were envisioning earlier on in this conversation if we make it better than the current way of using operating systems i think that will make things a lot easier for us as well so it's very strategic we have to keep it and we've spoken a lot about apple but as you mentioned earlier you've also spent a lot of time working in in china how much time do you spend kind of looking at what's going on over there because i think we as Europe we spend so much time paying attention to what's going on in um American tech and you know when it comes to supply chains when it comes to different kinds of innovation there's so much to be learned from China that I think lots of companies are just paying no attention to yeah I spend one week every two months in China because we have our some of our supply chain there some of our engineers there.

27:44Because like Shenzhen is very good at hardware. So we, it's a great place to be. Actually, I had a friend who was making like mechanical keyboards in the US, like very cool looking ones for gamers. And he asked me for business advice. I said, you should travel to Shenzhen. And he just texted me this morning saying, you're right, I'm here now. I realized I got scammed by my suppliers and I got scammed on my team here when I wasn't on the ground. He had a lot of margin challenges with his business. So I think it's definitely helpful to spend time there because over the past, I don't know, 30 years, the hardware supply chain has really matured.

28:30Apple has played a big role in it, like training people up and up the ecosystem and um it's faster than the u.s and it's cheaper and it's good quality um it'll be yeah if you're if people are serious about business they should spend some time in do you see any sort of concerns around the geopolitical risk uh i think being there and making products there and leveraging the supply chain should be fine. I think where there's risk is on the user data. I think it's pretty sensitive like with the TikTok situation between US and China where it's all about where the data is housed whether it's on US servers or Chinese servers and who can access the data.

29:25If it's US employees or Chinese employees. I think hardware side it's pretty fine Apple makes hardware in China, Amazon everybody does but on the software especially relating to data side, it's really important to be careful there and in the future with AI needing more and more data, I think companies, we will and other companies should also be way more careful about privacy and way more transparent about privacy issues with consumers. And where's your team based? I think you've got around 800 employees. Where are the different offices and what's kind of focused where I'm guessing it's lots of supply chain manufacturing in China?

30:14What happens elsewhere? HQ here, so the central functional teams, but In particular, our industrial design and brand comes out of here. Our AI team is being built here. My logic is pretty simple. Where can we find the best people for different jobs? And if Apple has already kind of trained the ecosystem for hardware in China for 30 years, there's a lot of great talent and we should do that part of the job there. If there's DeepMind here and other AI companies, we should do AI here. Industrial design is great here. So that's kind of how we think about it. So apart from UK, China, we also have India as one of our biggest offices.

30:57We do a lot of our manufacturing in India as well. So there we have supply chain and quality control, but also sales and marketing, because also on the consumer side, it's a big market for us. Beyond that, the rest of the offices are more satellites for sales and marketing. So we have an office in Tokyo, in Dubai, and we're setting one up in San Francisco. In which country do you sell most devices? For smartphones, it's India. For earbuds and audio, it's US. So it's kind of a, we're not selling to the same people. Interesting. And you went recently with the UK government to India on a trade mission of sorts.

31:42Yeah, we did. How was that? I think it was great to see how things like this work. I was really curious. there was a charter plane and everybody took the same flight there. I'm not going to lie. I was pretty tired because it was a red eye there. And then we had a, like we left in the afternoon from the UK or evening red eye morning there full day. And then one, one hotel night there and then the next full day and then red eye back. It took some time to recover. I, I don't typically do that. I don't typically, typically travel like that. And how big do you think nothing could be in India? Why is it so popular in India at the moment?

32:28What's unique about consumers in India? Yeah, I think the two biggest opportunities of our lifetime is AI and India. So there's something happening in India right now with the consumers because the economy is growing very fast, 6-7 % a year. The middle class is really rising. And when the middle class grows and gets more affluent than before, they have different needs from the past. If you think about Maslow's higher care of needs, first it's like food and shelter, and you have higher and higher aspirations over time. But the same thing happens on the products you buy. So when you have less money to spend, you just think about the pure functional value.

33:19Hey, it's really hot in my flat. I have an AC. You don't have an AC. It's cool. I have an AC. But when everybody has an AC, then you need something else to to showcase that you're different um so i think the the consumers are going on a journey right now from evolving from pure functional needs of a product to emotional needs for a product and so the the disadvantage we have is our lack of scale and our lack of cost competitiveness but the tailwind that we're riding is that people actually care about costs a little bit less than before and they care about softer values like software and design and brand more and that's playing to our strengths so in india they call it premiumization like the country's going through premiumization it's happening across all consumer categories right now um i think the government there is also very progressive there's a lot of policies to support their industrial policy and there's actual it's not just like policy but there's actually actual budgets to deploy the policies.

34:26And so we've seen India become a huge hub for manufacturing of electronics, a big partner for Apple now. And I think all the iPhones, even the most expensive ones sold in the US, are now made and exported from India. And then I'm also really excited about the capital markets in India. I don't know if you've been looking at it, but the multiples are very different from what we're used to seeing. just as an example Foxconn manufactures electronics depending on the day the p is around 10 there's a company called Dixon in India who's a competitor to Foxconn I think they're at 100 for like the same industry if your cost of capital is 10 times lower than your competitor then there's a lot of things you can do and is there anything we spoke a bit about the kind of competition side of things and the government policy.

35:18Is there anything else you would love to see the UK government implement that would help a company like yours grow more faster? I know it's quite tough because I think there's not a lot of money, right? And the budget isn't balanced yet. So they're still looking for ways, places to increase the tax to balance the budget. So I'm not sure But I think maybe we're in this situation because there wasn't enough foresight into pre-investing into the future. So now when we're in this situation, I don't really know how to get out of this situation.

36:02But I think if you look at wealth creation, it's kind of always been through technology. Maybe we don't see it as technology anymore, but I visited Malaysia a couple of years ago and one of the richest people there, they traded oil, like cooking oil. Maybe that was high tech in our grandparents' generation. And I think Europe kind of missed on the mobile internet, consumer internet, mobile internet era, and now are on track of missing on AI and robotics and advanced manufacturing. I think winning a couple of those industries will create wealth for sure. But it's tough because you need money and you need like a solid policy that doesn't change.

36:52And on the hardware side of things in Europe, there's nothing, there's the smart ring company, Aura, but I struggled to think of that many other sort of successful or at least, you know, billion dollar valuation, at least companies. Why do you think Europe struggles to produce globally successful hardware companies? So on that trip to India, I got to meet other UK-based entrepreneurs, and I was surprised how hard it was for them to raise money. they had solid businesses and I think if they were based in other parts of the world particularly in the US it will be a lot easier for them to raise capital to generalize everybody's different but I think on average the European investor ecosystem is more pragmatic more focused on your P &L statement whereas the American ones are more moonshots, looking for moonshots.

37:59One successful company can return the fund, whereas Europe is more conservative. And if you don't make as many bets, then there's not going to be as many companies. And what do you think you did right that meant big investors like Google Ventures took a punt on you? I think it's like, so this is not the first time we do this, or I do this. So having prior experience really helped. And we're really pragmatic about how we operate the business. We have a big dream, we have a big vision, but we also need to be extremely pragmatic because in hardware it's very easy to fail. And when you fail, the capex, the investment is pretty significant.