XIAOMI INC

15 January 2015



A roaring Chinese Dragon or the next big high-tech “damp squib?”

Who are Xiaomi?
Xiaomi Inc. (Xiaomi) is a privately owned firm founded in April 2010 and based in Beijing, China. It manufactures and distributes mobile phones and consumer electronics. Xiaomi also develops mobile applications.

Xiaomi targets the lower-middle market for smartphones and has gained a loyal fan base by incorporating user feedback (through active and engaged internet forums with end users) into the design of its latest devices and also for its Android skins. It offers value-added products including TV boxes, backpacks, phone screen protectors, earphones sold directly to the end consumer over the internet

 

Why the world should take notice of Xiaomi – the world’s largest tech start-up? 
Xiaomi recorded pre-tax sales of $11.97 billion in 2014 an increase of 135% over the previous year. In total it sold 61 million smartphones primarily into the Chinese market but there are plans to expand into other emerging markets shortly.In a recent funding drive with international lending institutions the company raised an additional US$1 billion in funding. As a result the Wall Street Journal valued the company at over US$45 billion.
Comparatively Xiaomi is therefore more valuable than the likes of UBER (on-line taxi service), Netflix and Twitter.

At some stage in the not too distant future it is very likely that Xiaomi will follow the path of Alibaba and seek a public listing on one of the worlds established stock exchanges. Something to watch for if you are interested in investment in companies operating in emerging markets.

Why Apple and Samsung should take notice of Xiaomi
  • In theory Xiaomi is able to produce high-tech smartphones that are able to take on the likes of Apple and Samsung, the two players who currently dominate smartphone markets worldwide.
    In China they have successfully leveraged the benefit of online selling by creating a user forum whereby end users and developers within the company can chat online and in real time. This has allowed the company to act quickly on consumer feedback leading to regular updates of the software used on their phone products (on average updates appear every fortnight).
    Xiaomi have a clear and defined market plan for the immediate future. Having strengthened their marketing team by hiring Hugo Barra – a former executive at google – as vice president for global operations they have set their immediate site on emerging markets.
    The plan is a simple one.
    Enter and dominate the large up and coming markets with huge growth potential (the emerging markets of India have already been penetrated by Xiaomi and ten additional markets have been identified for penetration including Russia and Brazil). Sell consumers within those markets a cheap phone packed with functionality and build a relationship with the consumer so promoting future brand loyalty.
    Having obtained these markets in the short term use the economic resources generated to compete with the industry giants (currently Apple and Samsung) in their own backyard.
    As plans go it sounds achievable but in reality is it really going to be that simple

Clouds on the immediate horizon – too focused on the top-line?

Xiaomi’s success has been driven by success in the Chinese market. It currently sells 90% of its smartphones in that market alone. In the first half of 2014 the company sold 26.1 million smartphones in China against 18.7 million in the same period for 2013. Nearly all of these sales were made online.
In India the first market the company has chosen to enter outside of China a similar marketing strategy is employed with Xiaomi smartphones being sold through the online trading platform Flipkart.
There are though real reasons to be concerned for the future.First Xiaomi will almost certainly face increased competition in emerging markets in the near future with Lenovo, Coolpad, and Huawei all planning to introduce low cost smartphone models.

Second its marketing strategy of selling online is highly restrictive and unfortunately Xiaomi may not be in a position to bolster this in the immediate future.  In 2013 (the last year for which reliable data is in the public domain) Xiaomi logged an operating margin of only 1.8% primarily because it concentrates on selling a low cost phone in high volumes. This does not compare favourably with Apple and Samsung who recorded operating margins of 28.7% and 18.7% respectively in the same period. Moreover it provides little scope for spending additional sums on alternative methods of marketing its products and of equal importance little is left in reserve for future research and development.

Third the company is trying to position itself as an internet firm rather than just a handset maker. Consequently Xiaomi’s own literature defines the company as being heavily focused on content. Therefore it has attempted to bring established content providers into its eco-system. So far this has included the game-maker Gameloft as well as the video sites Youku, Tudou and Iqiyi.
This is a plan that has been tried before. Some succeeded (Apple in particular) but other like Blackberry ultimately have failed. Xiaomi has a long way to go with over 94% of its revenue coming from pure handset sales.

Fourth Xiaomi will not succeed in emerging markets without a tough fight. Witness the recent but albeit temporary injunction on the sale of its products in India as a result of a claim by Ericsson who claim that Xiaomi are infringing on at least eight of their patents. Ericsson’s position is that Xiaomi should not benefit from the investment it makes in research and development without paying a suitable license fee.

The markets of the United States and Europe – A dragon gone too far?

The markets of the United States and Europe will almost certainly remain out of the reach of Xiaomi since the majority of consumers in those markets buy their smartphones packaged into a mobile contract at heavily subsidised costs.

Fickle Consumers?

In the final analysis there is very little evidence of brand loyalty in the smartphone market. The road is littered with dead and dying dragons from other countries. Palm, Blackberry, Nokia, and Motorola have all either come and gone or are simply hanging on by their fingertips (or is that claws?).
If you don’t believe me then consider this. Ten years ago nearly all businessmen owned a Palm Pilot. Five years ago those same businessmen almost certainly owned a Blackberry.  Nowadays they might have a Samsung or an iPhone or a Sony (and yes a few might have a Blackberry because the only way Blackberry can unload phones these days is to give them away).

Closing Thoughts

2015 will almost certainly be another challenging year. New opportunities will come especially in emerging markets. Keep focused and continue to look at those opportunities with an open mind.
For the linguists amongst you Xiaomi is pronounced “shao-mee”. Listen out for that company name because whether they are successful or not they will challenge the established brands especially in emerging markets. It is a company that you will therefore hear a lot about in the next 12 months.
Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@firstlinesecurities.com or at 868.628.1175,we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

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