Author(s): Marina Koytcheva
Chinese smartphone maker Xiaomi has filed for an initial public offering (IPO) on the Hong Kong stock market. Financial analysts estimate the company will raise about $10 billion, giving the company a valuation of about $100 billion.
In 2017, Xiaomi was the sixth biggest smartphone maker in the world, having sold 91 million smartphones, or 6 percent of the global smartphone market.
The IPO filing provides a whole new level of understanding Xaomi's financials, something the company has fiercely guarded until now.
Xiaomi has been on a fascinating journey since its birth in 2010. It quickly rose to prominence in China, establishing itself as a cool brand, selling highly specified, beautifully designed smartphones with much lower price tags than established rivals such as Apple and Samsung. It kept prices low by selling exclusively online, direct to consumers in small batches, avoiding the expense of excess inventory. Dubbed the "Apple of China", Xiaomi was never shy of borrowing design ideas, product naming conventions and strategies from its competitors — until it was beaten at its own game.
Eager to grow, Xiaomi tried to expand rapidly outside China. In doing so, it took its eyes off local competitors. Oppo and Vivo, both part of BBK Electronics, copied elements of its business model and grabbed share from Xiaomi in its home market. Xiaomi's growth stalled in the second half of 2015, and sales fell in 2016. Many wrote Xiaomi off. After all, no one had previously managed to pull out of a nosedive in the mobile phone market.
But Xiaomi regrouped and carried off an astonishing turnaround in 2017. Firstly, it realized the need for physical stores. By the end of March 2018, Xiaomi had opened 331 of its own stores in mainland China, claiming it was pulling in the second highest revenue per square metre for a store chain in the world. (Interestingly, Apple tops this table, and Tiffany is in the top five). Xiaomi also signed deals with more than 1,100 offline distributors and over 100 online distributors.
Secondly, rather than spreading itself too thinly, Xiaomi put some of its plans for international expansion on hold. It chose to focus on India, where smartphone sales were on a steep growth curve and where low-priced devices were extremely popular. It claimed the number-one spot in the Indian market in the last quarter of 2017. To date, success elsewhere has been limited, but Xiaomi claims it is a top-five smartphone player in a further 15 markets around the world. International sales contributed 28 percent of Xiaomi's $17 billion revenue in 2017.
Thirdly, Xiaomi has continued to build a supporting range of other devices and services. Xiaomi also makes laptops, smart TVs, smart speakers and routers. It has invested in or formed partnerships with 90 suppliers of different smartphone accessories and other smart products.
A good example of how effective this strategy has been is Xiaomi's disruption of the fitness band market with its $15 Mi band, which is made by Huami. Xiaomi claims it is the world biggest supplier of electric scooters, and it also sells drones, smart air and water purifiers, advanced rice cookers, quirky suitcases and more. Most recently, Facebook signed an agreement with Xiaomi to manufacture and distribute the Oculus Go virtual reality headset.
In addition to its focus on hardware, Xiaomi's Android-based MIUI operating system now has 190 million monthly active users, to whom Xiaomi sells a variety of Internet services including cloud storage, music services, video content, live streaming, financial services and more.
Xiaomi doesn't think of itself as a hardware company, but as an Internet company. This is not just an aspiration. Xiaomi may have copied many things from Apple, but one part of its strategy is very different: Xiaomi doesn't aim to make much money on hardware. In fact, it has pledged to never make more than 5 percent net margin on smartphones, and if it does, it will return the surplus to customers. It is worth noting that smartphones accounted for 70 percent of Xiaomi's revenue in 2017; Internet services contributed a mere 9 percent of revenue, but achieved 60 percent gross margin and accounted for 39 percent of Xiaomi's gross profit for the year. Despite some differences, Xiaomi, like Apple, has built a solid ecosystem of connected devices and services.
So, what's next for Xiaomi? We believe it has learnt from its past mistakes. Although international expansion is still on the cards, the IPO filing states that only 30 percent of the money raised will go toward that. Another 30 percent will be put into in-house research and development, and a further 30 percent to developing its ecosystem.
Companies that currently dominate markets that Xiaomi has in its sights should brace themselves for the arrival of a tough new competitor that won't be afraid to grab market share by engaging in a price war.
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