Selling Smartphones and Connected Devices

Smartphone maker Xiaomi Corp. filed for its initial public offering (IPO) in early May of 2018. The Beijing-based company, headed by co-founder and chief executive officer Lei Jun, generates revenue through four primary business segments: smartphones, Internet of Things (IoT) and lifestyle products, internet services, and miscellaneous additional services and products. The company ambitiously anticipated an enterprise value of as much as $100 billion during its IPO. On July 9, 2018, Xiaomi made its debut on the Hong Kong Stock Exchange—closing at 16.80 yuan (or $2.14)—thus yielding a market capitalization of about $50 billion, which is half of what Jun had hoped for when the listing was announced. As of July 19, 2019, that market cap figure has fallen further, down to under $28 billion. The company’s P/E ratio is 9.53.

Xiaomi was founded in 2010, launching its own operating system later that year and releasing its first smartphones in 2011. Xiaomi’s CEO, Lei Jun, founded the company after selling his software provider Kingsoft Corp. to Amazon.com Inc. (AMZN). The serial entrepreneur told Bloomberg that what drives him the most in his role at the helm of the smartphone manufacturer is not the money his firm stands to make but rather the opportunity to serve at the helm of a Chinese company and “to become No. 1 in the world,” alongside national tech titans like Jack Ma’s Alibaba Group (BABA), Pony Ma’s Tencent Holdings, and Robin Li’s Baidu Inc. (BIDU), as well as international behemoths like Apple Inc. (AAPL). In just a few years, Xiaomi had grown into the largest smartphone maker in China. However, sales plummeted in 2016, and the company fell in the rankings. Many in the fast-moving tech world assumed that Xiaomi would collapse entirely. Against all odds, the company surged beginning in 2017, and sales figures and revenue has risen since that time.

Xiaomi originally filed to list in Hong Kong and later hoped to split the offering by selling half of the IPO shares to investors in Shanghai through Chinese Depository Receipts. The plan to list on mainland China was later put on hold and the company gave no indication of a timeline of when that would happen. Bloomberg reported that regulatory hurdles caused Xiaomi to ditch its mainland listing while moving ahead with its Hong Kong debut.

According to its annual results for 2018, Xiaomi generated about $25.4 billion in revenue last year, up by a whopping 52.6% over 2017. About two-thirds of the company’s revenue comes from its smartphone segment.

At its low point in 2016, Xiaomi saw smartphone sales decline to 41 million, down from a reported 70 million in 2016, according to the IDC. Its billionaire founder, who has been dubbed “the Steve Jobs of China,” decided his company would sell much more than smartphones.

Initially, Xiaomi had funded itself on selling hardware products and online services, like many of its peers in the internet age. The company generated a bulk of its revenue from lower-margin device sales, while the majority of its profits came from its online service business. Its hundreds of products—such as branded scooters, chargers, air purifiers, suitcases, and smartphones—work as platforms for services such as cloud storage, while also providing a monthly subscription for thousands of hours of TV shows, movies, games, and other offerings. Other services include a profitable online service providing small loans to Xiaomi phone users powered by a next-gen artificial intelligence engine that assesses credit worthiness, according to Wired.

Amid Xiaomi’s roughest times, management decided to add a third leg to create the company’s unique business model. The smartphone maker began to play on the offensive with investments in hundreds of startups, aiming to build out a physical retail presence well beyond the scope of smartphone sales. The goal was to create an ecosystem of partner startups offering a diverse range of internet-connected home and tech products, working to drive foot traffic at brick-and-mortar locations. 

“Buying a phone or TV is a low-frequency event. How many times do you need to go back to the store?” said Wang Xiang—Xiaomi’s senior vice president—in an interview with Wired. “But what if you also need a Bluetooth speaker, an internet-enabled rice cooker, or the first affordable air purifier in China—and each one of those products is not only best-in-class, but costs less than the existing products in that category? Our ecosystem even gives customers unusual new products that they never knew existed. So they keep coming back to Xiaomi’s Mi Home Store to see what we’ve got.”

Xiaomi continues to make a bulk of its revenues on phones, which generate about $2 in revenue per unit and account for 65% of total revenue. Smartphone revenue increased by about 41% from 2017 to 2018; in 2018, the company sold just under 119 million smartphone units. While the large majority of these phones are still sold in China, the company’s international smartphone sales figures have continued to grow as well.

Sales of other gadgets made up about 25% of revenue in 2018, or about $6.4 billion. This segment includes a wide variety of Internet-capable products such as smart TVs, electric scooters, vacuum cleaners, cameras, rear view mirrors, and more. Revenue from the sale of smart TVs and laptops was particularly strong; it nearly doubled from 2017 to 2018.

Preloaded apps and services accounted for about 9.1% of revenues, or about $2.3 billion, in 2018. Xiaomi’s Internet Services segment also includes advertisements and other services as well.

Moving forward, Xiaomi seeks to shift its reliance off its increasingly saturated domestic market and toward international customers. The company has invested $4 billion in its Chinese partner ecosystem and has also stated a goal of investing another $1 billion in similar partnerships with 100 startups in India, its largest market outside of China. The firm continues to establish new strategic partnerships to bolster customer usage of its IoT devices; as of Dec. 31, 2018, there were close to 151 million Xiaomi IoT devices in use. With the company’s Dec. 2018 partnership with Swedish homegoods and furniture titan IKEA, it’s likely that this number will only continue to grow.

Xiaomi has also focused its efforts on expanding its AI capabilities with regard to its IoT devices as well in an effort to enhance the user experience.

Although Xiaomi has already overcome significant challenges in recent years as it has essentially resurrected its phone sales and other business, there are always new threats. The Chinese tech market is increasingly saturated, and Xiaomi’s affordable phones, once a standout for their quality and price point, now face stiff competition. The company also must continue to provide stellar product variety and quality to customers both domestically and abroad, or else those customers may very well take their business elsewhere.

Besides issues related to competition and keeping up with the fast pace of technological advancement, Xiaomi faces other threats including cybersecurity concerns for its customers, dangers regarding the supply of components necessary to construct its products, and more.