the final case study on XIAOMI

1. Xiaomi: the future of China’s
hottest hardware company
__________________________
Xiaomi Corporation wasfounded in April2010and listed on the Main Board
of the HongKongStock Exchange on July 9, 2018 (1810.HK).
Xiaomi is an internetcompany with smartphonesand smart hardware
connected by an IoT platform at its core.
With the vision of being friendswith its usersand being the “coolest
company” in the hearts of its users,
Xiaomi is committed to continuousinnovation, withan unwaveringfocuson
quality and efficiency.
The company relentlessly buildsamazingproductswith honest prices to let
everyonein the world enjoy a better life through innovativetechnology.
Xiaomi is currently the world'sfourth-largest smartphonebrand, and has
established the world'slargest consumer IoTplatform,
with more than 150.9 million smartdevices(excludingsmartphonesand
laptops)connected to its platform.
Currently, Xiaomiproductsarepresentin morethan 80 countriesand regions
around the world and have a leadingfoothold in many markets.
About logo {MI}
The "MI" in our logo stands for “Mobile Internet”. It also has other
meanings, including "Mission Impossible", because Xiaomi faced many
challenges that
had seemed impossible to defy in our early days.

2. Overview
Xiaomi is a Chinese electronics company founded in 2010 by Lei Jun.
The company creates a wide range of products including hardware,
software and Internet services. Xiaomi is already distributing its
products in numerous countries such as Singapore, Philippines,
India, and Brazil.
Xiaomi grew at a rather quick pace, already in 2012, Xiaomi
generated more than 1 billion annual revenue and in 2017 it became
the world’s largest IoT (Internet of Things) platform (in terms of the
number of connecting devices).
Furthermore, its annual revenue has also been increasing at notable
speed:
Despite the company’s meaningful growth in revenue over the past
years, the company struggled in smartphones sell during 2015 and
2016: according to Lei Jun, the founder of Xiaomi, organizational
problems and issues in the supply chain were at the source of the
decrease in smartphones sales. This incident has even forced Xiaomi
to retreat from several overseas markets.

3. This downfall can be noticed through the insignificant increase of
revenue in 2016; however, Xiaomi has managed to rebound: revenue
boomed by +67.5% in 2017.
Xiaomi’s Triathlon business model
Xiaomi has a particular business model, the company created an ecosystem of
internet-connected homeand tech productsby partneringup with around one
hundred start-ups. Xiaomi has often been criticized as an unfocused company
that sells everything. But the strategy seems to work.
Xiaomi describes their business modelas atriathlonmodel composed of:
Hardware + Internet Services + New Retail
Hardware: Innovative, high quality, well designed and customer
experience focused hardware
Internet Services: Abundant Internet services
New Retail: Efficient new retail based on reasonable pricing
Three major business units were developed under this business
model:
 Smartphones
 Internet of Things (IoT) and lifestyle products
 Internet Services

4. Despite the intention to reduce the reliance on smartphone
sales, the smartphone business still generates most of Xiaomi’s
revenue and accounts for 67.5% of the company’s total revenue
in 2018 first quarter:
Xiaomi’s smartphone business is, however, becoming over the years
a smaller and smaller contributor to Xiaomi’s revenue (from 80.4%
of revenue to 67.5% between 2015 and 2018Q1) while Internet
Services are growing (from 4.9% of revenue in 2015 to 9.4% in
2018Q1).

5. But is Xiaomi really that special in this regard? Lei Jun as repeatedly
stated that Xiamo was closer to Amazon than to Apple: making
money on services after selling affordable hardware.
The data, however, paints a different picture: although Xiaomi makes
9.4% of its revenue from Internet Services, the figure reached 13%
for Apple in 2017.
Even in terms of smartphone sales, the iconic iPhone only makes up
for 61.6% of Apple revenue: 6 points less than the contribution of
smartphones to Xiaomi’s income.
Xiaomi’s performance in the domestic market
There are 4 main mobile phone vendors in China, together they
accounted for 73% of the market share in the first quarter of 2018:
 Huawei: 21.2 million units, representing 24% of the market share
 OPPO: 16.5 million units, 19% of the market share
 Vivo: 14.2 million units, 17% of the market share
 Xiaomi: 13.2 million units, 13% of the market share

6. Although the market got more concentrated overall, Xiaomi saw one
of the fastest increase, gaining 5 points of market share in 1 short
year.
Xiaomi’s influence is not limited to China either. As
already mentioned, Xiaomi has a clear intention to
expand foreign market:

7. With 28% of its revenue coming from overseas markets and a share
of oversea profits doubling every year, Xiaomi is well on its way to
becoming a truly global company.
For example, India is one of Xiaomi’s strongest growth markets; in
fact, the company led the Indian market by smartphone unit
shipment in the fourth quarter 2017 accounting for 26.8% of the
total market share.
Allocation of IPO raised according to the prospectus
According to Lei Jun, Xiaomi aims to deepen Internet services,
enlarge popular products categories, maintain efficiency, invest in
expanding its ecosystem and further expand the “global Triathlon”
business model.
Based on Xiaomi’s prospectus, the IPO raised will be mainly used for
the following purposes:
 Investment in in-house products research and development,
including smartphones, smart TVs, laptops, AI speakers and smart
routers
 Investment in ecosystem expansion, especially in IoT and lifestyle
products
 Investment to expand global influence
 Reserve for working capital and general corporate purposes

8. Risks
Xiaomi’s also laid out the potential risks that the company will
be facing; the main ones are:
 Risk of over-reliance on smartphone sales: Xiaomi’s revenue is
largely dependent on smartphones sales, therefore a decrease in
sales or an increase in the cost of making smartphones could
materially and adversely affect the business. This is a particular
concern as the Chinese market is getting saturated in terms of
new smartphone users.
 Risk of replication and replacement: Xiaomi lacks intellectual
property (IP), without IPs Xiaomi can be easily imitated and
replaced; which also poses a risk for investors.

9. Conclusion
“In the future, Xiaomi has huge potential for growth,”
CEO Lei Jun said at a news conference in Hong Kong.
“We’re a very rare company that can do hardware, e-
commerce and internet services.”
Because of the highly saturated Chinese mobile phone
market, Xiaomi is reaching the stage where it must seek
for global expansion and enlargement of its ecosystem. It
is said to have huge potential for growth because it is a
rare company that can do hardware, e-commerce and
internet services. However, the claim to monetize
services over hardware seems unwarranted at this stage.
It remains unclear to which extent Xiaomi will stand out
in terms of its business model. The misuse of its
unfocused business model and delay in diversification
can cause fatal consequences. Xiaomi will have to find a
way to become a truly unique company in the
competitive industry of Chinese electronics
manufacturers.