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What to watch: Soul tortures Rebs as to why Xiaomi tore off its Internet cloak eight years later.
On February 11th, Canalys, an international research agency, released a set of latest data, which shows that Xiaomi won the first ranking in the Ukrainian market in the fourth quarter of 2018, and successfully ranked among the top five in the Western European market. Xiaomi has become the fastest growing mobile phone brand in the Western European market with a year-on-year growth rate of 415.1%. This marks another outstanding achievement in Xiaomi’s international business.
In the first month of 2019, Lei Jun and his Xiaomi empire made frequent moves, from structural adjustments, strategic adjustments, investment, personnel changes… Lei Jun carried out drastic reforms within Xiaomi.
At the beginning of 2019, Lei Jun, who has always shown the image of "gentle and elegant" and "humble gentleman", made a gaffe for the first time. He berated friends and businesspeople at the press conference, and even released the "lofty words" of "life and death are bearish, just do it if you don’t accept it". However, Lei Jun’s gaffe also caused Xiaomi’s share price to fall, falling by more than 7% on the day. So far, compared with Xiaomi’s issue price of HK $17/share, Xiaomi’s listing price has fallen by more than 39% in only half a year.
Although the growth momentum in overseas markets has soared, Xiaomi has lost ground in the domestic market. According to data from well-known market survey agency Strategy Analytics, Xiaomi mobile phone shipments in the Chinese market in the fourth quarter of 2018 fell by 35% year-on-year.
Years ago, a war of words with flexible screen supply chain company Rouyu about flexible screen mobile phones (Xiaomi Rouyu lost both! Who hurt more in the first war of words in the mobile phone circle in 2019?), Xiaomi finally ended up being accused of not having core technology but singing a high-profile song.
On the other hand, the industry still questions whether Xiaomi is an Internet company or a hardware company.
Xiaomi, which has been established for 8 years, has not been fully recognized by the industry. What are the reasons for this?
After 8 years, Xiaomi has torn off the cloak of the Internet
Founded one afternoon eight years ago after a bowl of millet porridge, Lei Jun, in his prime, defined Xiaomi as an internet company in the early days of China’s booming internet industry. From its inception until now, despite constant skepticism, Lei Jun has always believed that Xiaomi is an internet company.
"Eight years ago, I had a crazy idea: to use the Internet as a way to make a mobile phone…" Lei Jun began his listing speech.
The industry has always questioned the positioning of Xiaomi Internet Company. Another typical difference between Xiaomi and other Internet companies is that Internet companies use Internet products to acquire users, while Xiaomi uses mobile phones to acquire users.
So, what exactly does the coat of Xiaomi Internet Company bring to Xiaomi?
1. Missed CDR opportunity, questioned by Securities Supervision Commission
Xiaomi’s positioning as an internet company has also kept it out of CDRs, which allow domestic investors to buy and sell some of the outstanding shares of companies listed overseas and in Hong Kong.
On June 14, 2018, on the third day after Xiaomi officially submitted the CDR prospectus, the Securities Supervision Commission issued the "Feedback on the Application Documents for the Co-issuance of Depositary Receipts by Xiaomi Group", which raised 84 questions in the document and required Xiaomi to officially reply within 30 days. Among these 84 questions, the Securities Supervision Commission reasonably questioned the identity of Xiaomi Internet Company.
"The company is an Internet company with mobile phones, smart hardware and IOT platforms as its core. During the reporting period, the proportion of internet service business to operating income was 4.8%, 9.6% and 8.6% respectively, mainly from advertising promotion and mobile game business. During the reporting period, the company’s sales revenue from smartphones were 53.715 billion yuan, 48.764 billion yuan and 80.564 billion yuan respectively, accounting for 80.40%, 71.26% and 70.28% of the main business income respectively. Please explain whether the company’s positioning as an Internet company rather than a hardware company is accurate at this stage based on the company’s main products, business substance, revenue share, profit source, etc."
2. "Mobile + AIoT" two major strategies
After the failure of Xiaomi’s CDR listing and its listing on the Hong Kong Stock Exchange, Xiaomi made a drastic reform to its overall business, but it did not move its mobile phone business! At the beginning of 2019, Lei Jun began to rebuild Xiaomi’s mobile phone business.
In November 2018, Xiaomi took over the Meitu mobile phone business and signed a 30-year licensing agreement. Before that, there were rumors that Xiaomi would take over the hammer mobile phone. At this time, Lei Jun’s idea of changing Xiaomi’s mobile phone business began to take shape.
In order to further consolidate its voice over the supply chain, Xiaomi invested in the newly spun-off TCL (only the screen manufacturer Huaxing Optoelectronics was left in the entity). Subsequently, Lei Jun operated the Redmi brand with the largest shipment volume in Xiaomi mobile phones independently, and invited Lu Weibing, the former vice president of Gionee, to be responsible for the operation of the Redmi brand.
At Xiaomi’s annual meeting, Lei Jun was even more excited. After self-affirming Xiaomi’s achievements in 2018, Lei Jun announced the strategy that has always been crucial to Xiaomi. "Xiaomi’s core strategy for the next five years will focus on the two strategies of’mobile phone + AIoT ‘."
This can’t help but make people confused. Isn’t Lei Jun always proud of Xiaomi’s "triathlon" business model? Why is the core strategy only left with mobile phones and AIoT?
3. Former triathlon
Lei Jun has said that Xiaomi’s business model uses a so-called "triathlon", which refers to hardware, internet services and new retail. Xiaomi also released such a business model diagram.
Industry insiders believe that Xiaomi’s triathlon model cannot withstand scrutiny and in-depth thinking, and is more like a public relations rhetoric. What’s more interesting is that Xiaomi’s triathlon statement has a clear sense of de-mobile.
The mobile phone business is the foundation of Xiaomi. The importance of Xiaomi’s mobile phone business, we can also clearly see in the prospectus that Xiaomi has also invested most of its funds in mobile phones.
"According to Xiaomi’s offering document, Xiaomi plans to use 30% of the IPO proceeds raised for research and development of core products such as smartphones, TVs, laptops, and artificial intelligence audio; 30% for global expansion; 30% for expanding investment and strengthening consumer goods and mobile Internet industry chains; and 10% for general operating purposes."
4. Wake up or have a different heart
From the de-mobile of the "triathlon" to the two core strategies of "mobile phone + AIoT", did "Rebs" finally come to an understanding or was it inconsistent from beginning to end?
What’s more interesting is that in Lei Jun’s announcement of "mobile phone + AIoT" two core strategies, mobile phones are naturally easy to understand, which refers to smartphones. Xiaomi is now a leading player in the global smartphone market. What is this "AIoT"?
In the past two years, the Internet of Things (IoT) has naturally been a very popular field. AIoT is also a new concept that has been constantly being hyped in the industry recently. From BAT to AI industry unicorns, AIoT strategies have been announced. Interestingly, whether it is a start-up company or a traditional Internet company, the entrants are all giants with a certain size and leaders in their respective fields.
However, what Lei Jun said about AIoT seems to be slightly different from everyone else. Lei Jun explained it this way: The AI + IoT we talk about externally is an artificial intelligence + IoT platform. But for Xiaomi, AIoT is "All in IoT". If this is the case, why does Xiaomi release the slogan of AI + IoT externally?
The stock price is volatile, what is Xiaomi’s destiny?
Since Xiaomi went public, there seemed to be a mysterious force controlling the share price of Xiaomi. When Lei Jun was boiling with blood and talking passionately about his feelings and conscience at the press conference, the share price that should have gone up actually fell. This strange phenomenon did not just happen by chance, but every press conference after Xiaomi went public.
Xiaomi was listed on the Hong Kong Stock Exchange on July 6, and the stock price rose after the first day, exceeding 22 Hong Kong dollars. But the good times did not last long, and it fell below the issue price again on August 2. On the occasion of listing, Lei Jun said that Xiaomi is the first stock for young people, hoping that more young people can buy Xiaomi shares, and will give double the promise. After Xiaomi’s share price fell again and again, some netizens couldn’t help but joke that Xiaomi is the first stock for young people to be trapped.
Xiaomi is the first company to list after the Hong Kong Stock Exchange changed the "same shares, same rights" rule, which guarantees Xiaomi’s management control over the listed Xiaomi, especially Lei Jun’s one-person voting rights of up to 58%. So who is selling Xiaomi’s shares?
On January 16, according to Bloomberg News, after the 6-month lock-up period was lifted, undisclosed investors sold 231 million Class B shares at a price of HK $9.45 per share. It is calculated that the shareholder cashed out about 2.18 billion Hong Kong dollars, which is also the first time that Xiaomi’s early shareholders sold Xiaomi shares. According to the rhythm of the press conference, whether it is Xiaomi MIX 3 or Redmi Note 7, Xiaomi failed to stop the small and medium shareholders from selling.
Lei Jun is Lei Jun after all, confident, calm and experienced. After Xiaomi’s annual meeting in early 2019, Xiaomi’s share price fell again. This time Lei Jun couldn’t sit still. After Xiaomi went public for half a year, Lei Jun finally led Xiaomi to start a self-help operation, and a big rescue operation began.
On January 17, Xiaomi Group announced that it would buy back 6.14 million Class B shares at the price of HK $9.7625 per share of B shares in the market. This is the first repurchase after Xiaomi’s listing. Any further repurchase in the future will be further disclosed according to the rules. According to the disclosure information of the Hong Kong Stock Exchange, the amount spent on repurchasing Xiaomi Group was HK $59.94 million, and the repurchased shares accounted for 0.027% of the issued shares of Xiaomi Group.
On the evening of January 22, Xiaomi Group announced that it would repurchase 3.9826 million shares again. The funds involved 39.9893 million Hong Kong dollars. This is also the third time Xiaomi Group has repurchased shares. As of the close of January 22, Xiaomi Group fell 2.91% to HK $10.
Xiaomi’s share price has been volatile since its listing. Although the official rhetoric of Xiaomi is clear, it is still confusing. What is the fate of Xiaomi, which seems to be tenacious growth and strong momentum?
Last July, on the occasion of Xiaomi’s listing, Smart Things visited the industry up and down, and had in-depth contact with the person in charge of the industry chain and investors who came into contact with the first line of Xiaomi’s ecological chain. They restored a most authentic Xiaomi from three business models, technical reserves, ecological chain worries, stock price valuation, and other dimensions, and restored the fatal weakness behind Xiaomi’s layers of armor. (Great Moment: Xiaomi’s Life Gate) In this article, Smart Things has clearly pointed out that Xiaomi’s mobile phone business is the core lifeblood "big bamboo" in Xiaomi’s ecological "bamboo forest theory", and Xiaomi’s life gate lies in its mobile phone business.
The mobile phone business is both Xiaomi’s armor and its weakness. In terms of how Xiaomi emphasizes its IoT business and Internet attributes, the company is still extremely dependent on the mobile phone business. Once the "big bamboo" of Xiaomi’s mobile phone is unplugged, Xiaomi will be in a very dangerous situation, and the story of its closed-loop business is completely unreasonable.
In the Xiaomi prospectus, we can see that since its establishment, the low-end Redmi series of mobile phones (1200 yuan and less than 800 yuan) have accounted for 75% of the overall sales of Xiaomi mobile phones, while the flagship + high-end flagship mobile phone products (more than 2000 yuan) The proportion window is further narrowing, from 18.8% in 2015 to 6.2% in Q1 2018.
That is to say, although the proportion of Redmi revenue in Xiaomi’s revenue has declined in the past two years, the Redmi brand still accounts for more than half of Xiaomi’s revenue. Although Xiaomi has currently built a smart home hardware ecosystem, if Xiaomi does not have a mobile phone business, other smart home products will lose their access to users and lose their foundation for development.
At present, Xiaomi’s mobile phone business is the lifeblood of Xiaomi. In the end, it is still "a mobile phone for success, and a mobile phone for failure".
As the domestic smartphone market began to shrink, Xiaomi’s brand tone and user impression in the Chinese market began to solidify, and its market share was gradually shrinking. As mentioned at the beginning of this article, Xiaomi’s mobile phone shipments in the fourth quarter of 2018 fell by 35% year-on-year in the domestic market.
And Xiaomi does not seem to be torn in the domestic market, but opens its arms to embrace the broader global market.
What are the opportunities for globalization for Xiaomi?
At the beginning of this article, we mentioned that Xiaomi ranked first in the Ukrainian market in Q4 2018 for the first time. Xiaomi successfully broke into the top five in the Western European market and became the fastest growing mobile phone brand in the Western European market with a year-on-year growth rate of 415.1%. Among them, in the Spanish market, Xiaomi grew by 273.4% year-on-year and has already ranked among the top three in the Spanish market.
Four years ago, Xiaomi began to globalize. By the second quarter of last year, its international business had grown by 150%, and it had entered 82 overseas markets, making it the top five in 25 markets.
In the overseas market, the most worthy of recognition is Xiaomi’s success in the Indian market. Leaving aside profits, Xiaomi’s sales in the Indian market have indeed exceeded Samsung, which has been the leader in the Indian smartphone market for five years. This is indeed something that Chinese smartphone companies should be proud of.
At Xiaomi’s 2019 annual meeting, Lei Jun took the stage to give a speech and summarized Xiaomi’s achievements in 2018 into eight points:
Achievement 1: Successfully listed on the main board of Hong Kong.
Achievement 2: Mobile phone shipments exceeded the target of 100 million units two months in advance.
Achievement 3: The major appliance business achieved a breakthrough, and Xiaomi TV topped the Chinese market in five years.
Achievement 4: AIoT business ushered in a bumper harvest, connecting 132 million devices (excluding mobile phones and laptops), and the number of device activations with built-in Xiao Ai students exceeded 100 million.
Achievement 5: Internationalization has accelerated, and Xiaomi has entered more than 80 countries and regions around the world, of which more than 30 countries and regions have entered the top 5 mobile phone markets.
Achievement 6: Internet services and financial business ushered in a new situation.
Achievement 7: In 2018, Xiaomi Group held 245 quality seminars and won the 2018 China Quality Association "Quality Technology First Prize".
Achievement 8: Organizational construction began to achieve results. In 2018, Xiaomi made the most important organizational restructuring, transforming from guerrilla warfare to a regular army.
Among the eight results announced by Lei Jun, the overseas market data of the fifth achievement is the most eye-catching. Since 2018, Xiaomi has been slightly aggressive in entering overseas markets. After tasting the sweetness in the Indian market, Xiaomi began to extend its tentacles to other overseas markets. Previously, Lei Jun said when deploying Xiaomi’s global development, "First take India as a pilot, then South East Asia, then Russia and the Commonwealth of Independent States, and now Europe."
In November 2018, Xiaomi officially announced its entry into the UK market. It is reported that the product that will be launched in the UK market in 2019 is Xiaomi MIX3, and the first batch of products will be discounted by about 500 yuan, and Xiaomi also promises a 5G version. It can be seen that Xiaomi attaches great importance to this launch in the UK, and Xiaomi also hopes that the UK market can become its own incremental market ambition.
However, as soon as Xiaomi entered the UK market with one foot, it was complained by some overseas consumers and the media. In order to mobilize the enthusiasm of British consumers, Xiaomi launched a marketing strategy of snapping up Xiaomi mobile phones with a one-pound limited-time promotion, but in the end, it was sold out immediately after the sale, which caused dissatisfaction among British consumers and was blamed by the BBC and other foreign media.
Xiaomi, which tasted the sweetness in the Indian market, announced the establishment of the African regional department on January 18 and officially entered the African market. At the same time, Xiaomi also announced that it will integrate resources, improve efficiency, and promote the continued rapid growth of Xiaomi’s South East Asia business in 2019. The former Indonesia, South Asia and South East Asia regions will be integrated into the new South East Asia regional department.
The African market and the Indian market itself are very similar. First of all, the population of the two regions is large and the consumption level is low, which is very suitable for Xiaomi to mainly adopt a low-price strategy. However, to enter the Indian market, in addition to facing competition from other international brands, Xiaomi will also face the obstacle of earlier entry into the market and higher market share of Transsion. Transsion has more than 200 million global shipments and occupies 40% of the market share in Africa.
Therefore, Xiaomi still relies on a low-price model in overseas markets. This model will certainly bring about a surge in shipments in a short period of time, but compared with high-end positioning brands such as Apple and Samsung, Xiaomi’s profits are insufficient.
This year, Xiaomi is also frenzied on its own. At present, Xiaomi has five smartphone brands: Xiaomi, Redmi, POCO, Black Shark and Meitu, attempting to reverse Xiaomi’s perception as a low-priced brand in the hearts of users with a multi-brand strategy. But is it really so easy to reverse the brand impression and user perception? Can one or two popular products really break the user’s perception of Xiaomi as a low-priced brand? How can Xiaomi be upgraded?
In early January this year, Xiaomi’s self-operated store officially opened on the Champs Elysees in Paris, France, also opened, which means that Xiaomi has opened the layout of offline experience stores in overseas markets. It is reported that the opening of Xiaomi’s self-operated store, many French rice noodles queued up overnight, alerting Lei Jun, who also posted Weibo, saying that French rice noodles are enthusiastic. It is understood that the team at the entrance of Xiaomi’s self-operated store is as grand as Apple’s iPhone back then, but it is understood that most of the people who came to the store actually came for Xiaomi’s smart home products.
So, will Xiaomi mobile phones really thrive in overseas markets?
"Rebs" of "honest and honest"
For a long time, Lei Jun had left people with a gentle image, and many rice fans even thought that Lei Jun was an honest and courteous man, and his friends and businessmen were bullying him. But there was a saying called "business in business", and business had its own rules of operation.
Behind "stupid people have stupid luck" and "people who love to laugh will not have bad luck", what we see is Lei Jun’s success as a businessperson, and behind his success is his familiarity with the operation of business laws.
1. Equity incentive worth 9.90 billion yuan
In August 2018, Xiaomi released its first financial report after listing. This financial report revealed that Lei Jun received equity incentives before listing (according to Xiaomi’s announcement, on April 2, 2018, Xiaomi’s board of directors granted Lei Jun no more than 639596190 Class B shares, accounting for 2% of Xiaomi’s total share capital at that time). If converted into cash, these stocks reached 9.90 billion yuan at that time, refreshing the previous record of JD.com rewarding Richard Liu 3.60 billion yuan, directly setting the largest equity incentive in history.
According to the financial report, Xiaomi’s revenue in the second quarter of 2018 was 45.20 billion yuan, an increase of 68.3% year-on-year, and the operating loss was 7.592 billion yuan. At the financial report conference, Shou Zi Chew, CFO of Xiaomi Group, explained that it was mainly because Xiaomi paid Lei Jun up to 9.90 billion yuan in equity incentive expenses before going public.
As soon as the matter came out, some netizens said, "Xiaomi is indeed a good company, but 9.90 billion the bonus made me give up the idea of buying Xiaomi".
In a forum, it is said that Xiaomi’s internal employees also complained about the matter, giving Lei Jun 9.90 billion reward, but insulting the salary increase of 5% to force us to work overtime. "After working hard at Xiaomi for a year and a half, 24 hours online, with an average of 9:30 small class, you will give me an insulting salary increase of 5%, very good, this is very Xiaomi, I will leave after taking the annual bonus", "In order to rush the listing performance, I will not increase the salary of R & D personnel for a long time (two or three years), and reduce R & D expenses, and use the method of share payment to pay the actual salary, so as to achieve the goal of whitewashing profits".
On January 9 this year, the six-month lock-up period for Xiaomi’s shares was officially expired. Xiaomi continued to announce that Lei Jun and other controlling shareholders would continue to lock up all the shares they promised to hold for 365 days, and Xiaomi CFO Shou Zi Chew also made the same commitment. To put it simply, Lei Jun promised not to reduce his holdings of Xiaomi Group shares in the next 365 days, which shows that he is very optimistic about the development of Xiaomi. At present, Lei Jun’s shareholding ratio in Xiaomi Group is 31.41%, and his voting rights exceed 50% through the AB share dual equity structure. He is the controlling shareholder of Xiaomi Group.
At the same time, before Lei Jun received a huge equity incentive of 9.90 billion yuan has come to an end, millet announced that all these equity incentives will be donated to charity funds for charitable purposes. I don’t know if this is a helpless move after Lei Jun’s rights.
2. Love and hate with Meizu Huang Zhang
On October 25, 2018, Xiaomi released MIX3 in the Forbidden City, and it was on this day that Meizu’s NOTE8 was also released. Interestingly, the slogans of the two companies were very similar to "See you in the Forbidden City" and "See you in the dance room", which made people speculate about the relationship between Meizu and Xiaomi.
In fact, the relationship between Meizu and Xiaomi was strictly an entanglement between Huang Zhang and Lei Jun. To put it simply, it was Huang Zhang who taught Lei Jun how to make mobile phones, and then Lei Jun founded Xiaomi to make Huang Zhang. Huang Zhang once scolded, "I didn’t teach him how to make mobile phones, he knows shit about mobile phones."
The story goes back to 2013, when Lei Jun decided to switch to the mobile phone industry, specially inspected Meizu and planned to invest in it. Therefore, Lei Jun and Huang Zhang got along for a long time, but eventually broke up due to disagreement between the two. And Huang Zhang believes that Lei Jun is in the name of investing in shares. He learned the way to make mobile phones from himself.
Xiaomi’s low-price marketing, hunger marketing, and fan marketing were not actually initiated by Xiaomi, but originated from Meizu.
The real hunger marketing was started by Meizu first. In 2007, Meizu released the Meizu M8, organizing panic buying activities every once in a while. Although the price was very low, it was difficult for users to grab it. Then it was officially sold in October 2008, and the cost was not as high as it was then.
Fan marketing was also started by Huang Zhang. When Huang Zhang was still making MP3s, he called on fans to post on other large forums. With the link of the post, they could get discounts when buying MP3s.
It can be said that almost all the routines used by Xiaomi originated from the Meizu, and Huang Zhang’s anger was understandable.
3. The anti-human design of the Mi MIX series
In October 2016, when Xiaomi released the Note2, it simultaneously launched the full-screen concept mobile phone Xiaomi MIX, which narrowed the upper and lower borders of the smartphone, making the screen ratio reach 91.3%. However, it went against user habits and moved the front-facing camera to the lower right corner.
If the first generation of MIX is just a preliminary test of the Xiaomi market, it is unexpected that in September 2017, Xiaomi officially released MIX2, still using the bottom camera design, which was complained by users.
Users need to put their little fingers up when taking selfies, otherwise it will block the screen, and because of the design of the bottom camera, the angle of the user’s selfie has also changed, with big nostrils and double chins coming out. For users who are used to live streaming with their mobile phones, Xiaomi MIX2 is even more of a nightmare. After turning the phone upside down, the screen will not rotate, and all the text is upside down, resulting in a very poor user experience.
If someone wants to correct Xiaomi’s name, although this design has flaws, at least Xiaomi MIX provides a new solution to the full screen, which is worthy of recognition. Then, sorry, the design of the bottom camera is not the first of Xiaomi.
As early as 2014, Sharp released a smartphone with a very narrow bezel design, AQUOS Crystal, which eliminated the receiver and equipped a bone conduction solution to minimize the opening on the front of the phone. However, this phone did not cause much response at the time. This was learned by Xiaomi, and it also used it to play the concept of full screen.
4. Redmi is independent. Is Lei Jun really at ease?
Redmi has an important position in the Xiaomi mobile phone product line and is a major guarantee for Xiaomi’s revenue. On January 10, Xiaomi announced the independence of the Redmi brand and officially appointed Lu Weibing, former vice president of Gionee, as vice president of Xiaomi Group and general manager of the Redmi brand. He is responsible for the brand building, product design, production and sales of Redmi, and reports to Lin Bin, president of Xiaomi mobile phone line.
Interestingly, the way Lei Jun introduced Lu Weibing was rather like the head teacher asking the primary school students to introduce themselves on stage and express their determination on the spot. Originally, Lu Weibing, who had just taken office and should have been in high spirits, was slightly embarrassed after taking the stage. In front of hundreds of spectators and the rice fans watching the live broadcast, he made a promise to Lei Jun, "From today on, I will serve the rice noodles full-time."
Lu Weibing is a veteran of the mobile phone industry and has been engaged in the mobile phone and communication industry for more than 20 years. Lu Weibing joined Gionee in 2010 and was responsible for Gionee’s overseas market. He worked at Gionee for 7 years and was the second-in-command of Gionee’s mobile phone business before leaving. According to Lei Jun, it took two years to hire Lu Weibing to Xiaomi, and according to public information, Lu Weibing only left Gionee in July 2017. So, is it possible that Lei Jun dug a corner of Gionee?
Logically speaking, on the day of the press conference, Lu Weibing had officially taken office, so this press conference should be released by Lu Weibing, but Lei Jun still personally stood at the press conference from beginning to end, personally released the first product after the independence of Redmi – Redmi Note 7, and quite gaffe jumped up and down, crazy against friends.
Is it really kind of hardware profits to not exceed 5%?
In April 2018, Lei Jun released Xiaomi Mi 6X at his alma mater, Wuhan University. At the end of the press conference, Lei Jun took the stage here and after more than 10 minutes of sensationalism, Lei Jun announced a very significant decision for Xiaomi.
"From today onwards, Xiaomi promises to users that the annual comprehensive after-tax net profit rate of the overall hardware business (including mobile phones, IoT and consumer products) will not exceed 5%. If it exceeds, we will return more than 5% to Xiaomi users in a reasonable way." Lei Jun also claimed that the resolution was approved by Xiaomi’s board of directors on April 23, 2018. When announcing that the hardware profit should not exceed 5%, Lei Jun also attached another phrase: small profits are not small, large profits are not small, and large profits are not small profits.
As soon as Lei Jun’s words came out, a stone stirred up a thousand waves, many of which were skeptical voices, suspecting that the 5% Lei Jun said was a show and marketing. Is this really the case?
For a 5% profit margin, a common misconception is that it is simply equivalent to the profit margin of a single mobile phone product. This profit is also known as marginal profit, which reflects the increase in product sales for Xiaomi.
The profit Lei Jun mentioned is the comprehensive tax net profit, which is an overall concept. The total revenue of Xiaomi’s hardware business is deducted from various costs, including R & D, sales, advertising, etc. The concept is closer to the gross profit margin of Xiaomi’s hardware business.
So how low is this 5% comprehensive profit margin? According to China Entrepreneur Magazine, the overall profit margin of smartphones is still maintained at a relatively high level, Apple has reached 35%, Samsung is around 15%, and domestic mobile phones are a little lower, with an average net profit margin of about 10%. According to a pre-IPO financing promotion material previously exposed, Xiaomi’s net profit margin of hardware business in 2016 was only 2.8%.
At the world’s fourth Mobile Internet Conference, Honor President Zhao Ming said in an interview with the media: The comprehensive profit margin of hardware manufacturing companies can reach 5%, which is already rare. If we can reach this level, I will be very happy. The implication is that the comprehensive profit margin of Honor mobile phones is less than 5%.
So why did Xiaomi promise to make less than 5% of its hardware profits?
At the time, Xiaomi was on the eve of its IPO, and there were questions in the industry about whether Xiaomi was an Internet company or a hardware company. At the heart of the dispute was that if it were identified as an Internet company, Xiaomi would receive a higher price-to-earnings ratio and therefore a higher valuation.
Lei Jun’s intention is to shout to the capital markets that Xiaomi is not a company that relies on hardware to make money, but an Internet company. For IPO and valuation, Xiaomi needs to tell the story of Xiaomi as an Internet company and prove the profitability of its Internet business to the capital markets.
"We are not a pure hardware company, we are an Internet company." This may be what Lei Jun’s 5% wants to express. And "Rebs" ‘move is killing two birds with one stone, which not only makes many users mistakenly think that Xiaomi’s single product hardware profit is extremely low, but also makes Xiaomi’s higher valuation up the ante.
Conclusion: The confusion of Lei Jun, the dilemma of Xiaomi
Since its birth in the mobile Internet era, Xiaomi has gone through 8 years. On the surface, Xiaomi, which ranks fourth in global smartphone shipments, has become an important force in the global smartphone market, but in fact Xiaomi has ushered in an important test.
Since 2018, Xiaomi’s domestic market share has not increased but decreased, the low-price brand perception has been reversed, the lack of core technical competitiveness, the stock price has fallen again and again, and the industry’s doubts about the identity of Xiaomi Internet company are still there, which not only constitutes the difficult predicament of Xiaomi’s growth for 8 years, but also becomes the puzzled confusion of Lei Jun who has reached the age of incomprehension.
Entering 2019, Lei Jun and his Xiaomi empire have also opened a new chapter, with structural adjustments, strategic adjustments, and investment… Lei Jun is carrying out drastic reforms within Xiaomi. Can these really make a qualitative change in Xiaomi?
This article was first published on WeChat official account: Smart Things. The content of the article belongs to the author’s personal opinion and does not represent the position of Hexun.com. Investors operate accordingly, please bear the risk.