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Xiaomi: A Chinese start-up out to challenge Google, Amazon

June 22, 2018 4:25 AM
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Xiaomi: A Chinese start-up out to challenge Google, Amazon

Xiaomi, a Chinese cell phone maker that helped pioneer the trend towards ultra-low-priced smartphones, is preparing for what would possibly be the biggest tech initial public offering since e-commerce giant Alibaba's in 2014.

The eight-year-old is a star among Chinese unicorns, a term that refers to start-up companies that are valued at more than US$1 billion. It has a dedicated Chinese fan base and its media-savvy leader is an Asian celebrity. But it is untested outside the region.

Xiaomi was founded in 2010 by CEO Jun Lei and seven colleagues who included veterans of Alphabet Inc's Google, Microsoft Corp and Motorola Inc.

Their first smartphone, the Mi1 released in 2011, was an instant hit with little marketing. Consumers buzzed about its low price of 1,999 yuan (US$305) and competitive quality.

It helped to ignite an unusual fan culture on which Xiaomi has built its product development. Customers take part in design decisions by sending suggestions over social media.

In 2013, Xiaomi sold more handsets in China than Apple. The next year, it became China's top-selling smartphone.

The company later was surpassed in sales volume by local rivals Huawei, Oppo and Vivo. But after a slump in 2016, Xiaomi's growth rate outpaced other smartphone makers in the following year. While Samsung, Apple and Huawei saw flat or 10 per cent growth or less in 2017, Xiaomi sales jumped 58 per cent, according to IHS.

Last year, the company had a six per cent share of the global smartphone market, despite minimal presence in Europe and the United States.

The company reported a loss of 43.9 billion yuan (US$6.8 billion) on revenue of 114.6 billion yuan.

Even if the company turns that around, CEO Lei has promised to keep prices low for consumers by holding profit margins on hardware sales to five per cent, a stance that might rattle investors.

"Xiaomi is more than a hardware company," said Lei in an open letter to investors. "Although our hardware business is essential to building our user base, we do not expect it to be the main source of our profits."

Xiaomi makes 90 per cent of its revenue from hardware sales but calls itself an Internet content company. It wants to make money by delivering services to the more than 100 million users of its connected devices and 190 million people who use its software MIUI.

The IPO is expected to raise billions of dollars - possibly the biggest haul in the tech sector since Alibaba raised US$22 billion in 2014 - though forecasts of how much have declined. It aims to raise as much as US$6.1 billion in the IPO, Bloomberg and the South China Morning Post said, citing anonymous sources familiar with the matter.

Investors are likely to value Xiaomi at US$63 billion to US$68 billion, down from earlier expectations of as much as US$100 billion due to its "low profitability," Choi Won-seok of Shinhan Investment Corp said in a report.

"Compared to other Chinese tech companies, it will be an attractive price point for investors," wrote Choi.

"Xiaomi is probably one of the few Chinese companies that have got enough international attention not in a negative way," said Melissa Chau, associate research director at research firm IDC.

In India, it unseated Samsung as No. 1 in smartphone sales. This is a bright spot because India is one of the few remaining handset markets with big growth, said Chau.

Admirers compare Xiaomi's minimalist design to Apple or Japan's Balmuda, known for its sleek beauty.

It is also one of the few hardware manufacturers that have been able to use their hardware products as an entry point to selling services and software.

"If you think of other hardware makers who do that, you can only think of Apple," Chau said.

A key challenge for Xiaomi will be showing investors that, like Google or Inc, it can make a profit from services, reducing reliance on handset sales.


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