Xiaomi’s Sales Grow, Margins Contract
Smartphone sensation Xiaomi is wowing the world with impressive sales figures for the first half of the year that show it is well on the way to meeting its ambitious 2014 target, as it seeks to become the China version of Apple (Nasdaq: AAPL). But hidden in the latest figures are the less encouraging news that Xiaomi’s revenue grew far more slowly than unit sales of its flagship smartphones, meaning its prices fell sharply and probably so did its margins. That’s not too surprising considering the stiff competition in China’s smartphone market, where Xiaomi has to compete with well-funded homegrown rivals like Lenovo (HKEx: 992), Huawei, ZTE (HKEx: 763; Shenzhen: 000063) and Coolpad.
According to its newly announced half-year results, Xiaomi’s smartphone sales nearly quadrupled in the first 6 months of the year to 26 million units, surpassing the total of 18.7 million unit sales for all of last year. (English article) Revenue also grew sharply to 33 billion yuan ($5.3 billion) in the first half of the year. But the revenue growth rate was a more modest 150 percent, compared with growth of 270 percent for unit phone sales.
Some simple math will show that Xiaomi’s average phone probably sold for about 1,270 yuan in the first half of the year, based on the assumption that nearly all of its revenue came from smartphone sales. That would be down a third from an average of 1,891 yuan per phone in the first half of last year.
There are probably several reasons for the sharp drop in price. One of the biggest is Xiaomi’s decision to enter the lower end of the market with the introduction last year of its Redmi models that sell for about 800 yuan each, far less than its more mid-range earlier models that cost in the 1,500 yuan to 3,000 yuan range. The company may have also offered aggressive promotions overseas as it launched a global expansion starting in Singapore back in February.
But a more fundamental reason behind the tumbling prices is almost certainly the stiff competition that has emerged in the domestic Chinese market, which still accounts for the vast majority of Xiaomi’s sales. The situation came into focus just a few weeks ago when Xiaomi cut the price for its mainstream third-generation model by 25 percent to 1,499 yuan. (previous post)
Netizens were speculating at the time that Xiaomi’s inventory was building up, and the price cuts were needed to help it meet its target of selling 60 million smartphones this year. The company’s talkative and marketing savvy co-founder Lei Jun brushed off the speculation with some online expressions of amusement, though he didn’t specifically deny anything.
As a private company, Xiaomi is in the envious position of not having to publicly announce any financial data and can simply release information that shows the firm in a positive light. That’s why we rarely see any mention of profits or margins for the company. Xiaomi may have been marginally profitable early last year before the latest competition really started to heat up. But I strongly suspect the company has now sunk solidly into the loss column, and its margins have also probably fallen at least 2-3 percentage points from year-ago levels.
Losing money isn’t necessarily a bad thing for a company of Xiaomi’s youth, and its raising of $2 billion in new funds a year ago means it probably won’t run out of cash anytime soon. Still, the company is facing some formidable competition from much larger rivals that have even bigger piles of cash to burn and are determined to become major players in the smartphone market. All that said, look for the intense competition to continue for at least the next year, meaning Xiaomi’s prices and margins are likely to keep dropping as it tries to meet its ambitious sales targets.
Bottom line: Xiaomi is likely to meet its 2014 target of selling 60 million smartphones, but will see its prices and margins drop sharply in that process due to stiff competition.
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