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    TechCentralTechCentral
    Home » Electronics and hardware » It took a pandemic for Xiaomi to realise its vision

    It took a pandemic for Xiaomi to realise its vision

    By Agency Staff27 August 2020
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    A Xiaomi store in Beijing, China

    For at least two years, I’ve been calling out Xiaomi for pretending be an Internet player when it really just makes smartphones. It took a global pandemic and economic meltdown for the Chinese company to finally realise its vision, sort of.

    A heady start-up valuation and an initial public offering in 2018 were predicated on the idea that Xiaomi’s ecosystem of devices, sold at minimal profit, would drive demand for a more lucrative array of Internet services, such as games and advertising.

    This didn’t bear fruit. Smartphones consistently contribute more than half the company’s revenue, while gross profit has primarily been driven by the devices catalogue — including phones, smart speakers and TVs.

    Smartphones consistently contribute more than half the company’s revenue, while gross profit has primarily been driven by the devices catalogue

    With the Covid-19 outbreak and resultant economic downturn crimping demand for its namesake handsets, Xioami’s Internet services business has now become the chief contributor to growth for the first time. It’s finally looking like the company founder Lei Jun claimed, but it took a major global upheaval to get there.

    Overall, second quarter revenue climbed 3.1%, Xiaomi reported late on Wednesday, the slowest on record. The smartphone division dropped 1.2%, while Internet of things and lifestyle products added 2.1%. Internet services climbed 29%; within that category, advertising delivered more than a third of the company’s incremental sales compared to the previous year.

    Internet advertising

    My analysis on a range of companies, including Netease, Baidu, Tencent, Alibaba Group and even Lenovo Group, shows that those reliant on selling a product directly to Chinese consumers fared comparatively well in the second quarter, while those dependent on the marketing budgets of other companies struggled.

    On the surface, it would appear that Xiaomi’s charge-leading advertising business bucks this trend. But that’s not quite the case. According to management, the 23.2% increase in revenue from that category came primarily from outside mainland China — chiefly India and Europe — though a “gradual recovery” in home-market ad budgets was noted. (In an investor call, president Wang Xiang declined to answer a question about any possible impact from India’s ban on Chinese apps following a border clash.)

    The broader picture is that for the third time in the past four quarters, Xiaomi’s China sales fell while overseas revenue rose. This growth means that foreign markets account for 45% of business, a rare phenomenon for Chinese companies that generally get more than 80% of sales from their home market.

    Prior to its IPO, a belief among venture capital investors that Xiaomi wasn’t really a hardware maker (suffering from the vagaries of tight margins and brutal competition), but an Internet services company (enjoying the spoils of scale and reach) pushed its value toward $100-billion. Reality struck when investors saw the truth and the stock debuted at half that price.

    Two years and one pandemic later, the company is finally being proven right. But like the viral outbreak, this might not last.  — By Tim Culpan, (c) 2020 Bloomberg LP



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