Xiaomi’s Journey to the West: A Road Littered With Land Mines
Smartphone maker Xiaomi Inc. has launched the company’s biggest charm offensive to date with the release of its IPO prospectus, ahead of what could well become the world’s biggest new listing this year. Much has been said about the company’s finances, including the money-burning black hole in its bottom line, since this was the first true picture we’ve gotten of a colorful firm that was previously quite private about such personal matters.
I’ll recap some of those financial highlights shortly. But rather than focusing too much on the past, I’ll use my space this week to take a closer look at Xiaomi’s global expansion and whether the company has what it takes to make it in the West. Such expansion will be critical to Xiaomi’s longer-term success, and thus should be central for anyone considering its IPO shares.
Xiaomi has already carved out quite a large footprint in developing markets like India, which it points out time and again in its promotional materials. But it’s far more low-key when talking about what it actually sells in those markets — namely, low-end models with super-thin profit margins. The prospectus released last week revealed that the company’s average phone sold for just 880 yuan last year, or around $140 — hardly a trendy, high-end product that Xiaomi would like investors to believe lies at the heart of its corporate story.
That said, Rome certainly wasn’t built in a day, and Xiaomi realizes it needs to move up the value chain if it wants to become a serious global player that can compete with world leaders Apple, Samsung and increasingly credible hometown rival Huawei. To do that, it really needs to move into Western markets, since its small stable of higher-end offerings is unlikely to find much of an audience in price-sensitive countries like India and Brazil.
The company is now in 74 countries and regions, according to its prospectus, and third-party research points out Xiaomi is one of China’s first major brands to get more than half of its smartphone sales from outside its home market. But the heavy reliance on developing markets has eaten a huge hole in Xiaomi’s bottom line, to the tune of a 44 billion yuan ($6.9 billion) loss last year, even as revenue grew by a more-attractive 67.5%.
Xiaomi knows it needs to boost its margins by selling more higher-end products if it wants to ever reach sustainable profitability, and is making recent moves in that directly. It entered Western Europe by launching in Spain in November, and just this week announced it will launch later this month in France and Italy.
But the big prize on Xiaomi’s global road map is the U.S., which may have lost the smartphone crown to China in terms of number of phones sold but is still a major force due to its bigger spending power. Reports have circulated that Xiaomi may enter the U.S. this year, though one analyst sarcastically pointed out that similar reports have also circulated in each of the last two years.
As to whether Xiaomi actually has the right stuff to make it in the U.S., the analysts I polled were relatively downbeat for some reasons that were market-specific, and others that could also impede its broader progress in the West. In the latter category, its Chinese heritage and litigious landscapes were two of the biggest obstacles the company is likely to face in any major Western market.
In terms of its Chinese lineage, data privacy is probably the biggest issue that will bedevil Xiaomi. Barely a day goes by here in China without a new scandal involving a local tech company that did something unscrupulous with user data. Beijing’s reputation for meddling in the affairs of its young private sector is also an issue confronting globally minded tech firms like Xiaomi. Smartphone peer Huawei is learning that lesson almost daily as its products get banned or bad-mouthed one by one in the U.S. due to the company’s murky ownership and frequent unsubstantiated speculation of ties to Beijing.
The analysts I polled said Xiaomi could well face similar obstacles in the U.S. and possibly other Western markets. One of my good friends, a Singaporean, refuses to buy Huawei phones for that reason, and I imagine he might feel similarly about a Xiaomi. One analyst noted that Xiaomi could try keeping all its U.S. user data on servers outside of China to avoid the government snooping issue. But making such a decision and then publicizing it to ease consumers’ fears could ultimately backfire since it would just re-emphasize Xiaomi’s Chinese roots.
In terms of litigation, Xiaomi is almost guaranteed to get hit with at least one or two major patent lawsuits within a year of entering the U.S. After all, this is Apple’s home turf, and other big sellers like Samsung and LG are also unlikely to welcome a new kid like Xiaomi on their block.
After all those factors, there’s still the core issue of actual product. Most reviewers say the company makes decent midline phones, but that they’re nothing to write home about. One of my American colleagues seemed typical of the bigger consensus. He was one of many local fans who lined up to buy one of the company’s priciest MIX phones when they first came out here in China last year. But then he quickly switched to a Samsung after losing the Xiaomi just a few months after buying it.
At the end of the day, I wouldn’t completely write off Xiaomi’s chances of success in the West, especially in non-U.S. markets like Italy and Australia. But its lack of compelling offerings at the higher-end, the public and government mistrust, and the likelihood of lawsuits will create a mine field that even the most skilled business veterans would have difficulty navigating.
Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com
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