The Xiaomi ecologic chain is a significant part of Xiaomi’s “smartphone + AIoT” strategy. After the publication of the Science and Technology Innovation Board (STIB), companies can be listed in China’s secondary market in a Chinese Depository Receipt version, which offers an excellent listing opportunity for the companies belong to the Xiaomi ecological chain. Roborock and Ninebot, two of Xiaomi ecological chain companies, uploaded the prospectus to the Shanghai Stock Exchange in April, 2019, and planned to be listed in STIB. In addition, Ninebot will become the first company that would be listed in STIB in CDR version. However, both of the company mentioned the operating risk in its prospectus, and it is thought-provoking that Xiaomi, which is the most important partner of these two company, became the factor that may badly affect the development and operation of the companies. According to the prospectus of Ninebot and Roborock, Xiaomi is the significant customer and selling-channel in the company’s operation. Once the relationship between the company and Xiaomi become bad, or the sales volume of Xiaomi’s products decline, the business performance of the company might be significantly affected.

Not only Ninebot and Roborock’s prospectuses showed this kind of reminding words. Huami, Yunmi, and Qingmi, which are companies that have already successfully listed, all mentioned these risks in their prospectuses. LIU De (刘德), the man who’s in charge of Xiaomi ecological chain, used to point the problems that emerged during the cooperation between Xiaomi and the ecological chain companies.

Xiaomi’s system could help a company to grow into a middle scale in a short time. However, when the company plans to be independent, it has to make efforts to build its own brand. The previous developing speed can neither judge the company’s ability correctly, nor be regarded as the company’s own developing speed .

While providing the ecological chain companies with resources and supports, Xiaomi controlled these companies strictly and makes it harder for them to be independent. Relying on Xiaomi too much becomes the biggest problem for the Xiaomi ecological chain companies, and generated lots of challenges in the listing and operation of the ecological chain companies. EqualOcean wants to analyze the developing process of the Xiaomi ecological chain companies and predict the possible future of both the ecological chain companies and the Xiao’i's “smartphone + AIoT” strategy.

The Xiaomi ecological chain is the base of Xiaomi’s AIoT strategy

Xiaomi keeps an opening attitude while investing the ecological chain companies and states that the most important investment theme is "not control the company”. Taking the shareholder structure of Huami, Yunmi and Roborock, the shares of Xiaomi system are less than 50%, which makes it unable to fully control the company.

Xiaomi’s investment theory is relatively same. With the 1:1 combination of the financial investment from Shunwei Capital, and the strategic investment offered by Xiaomi, Xiaomi could join the ecological company smoothly, and enjoy the benefits from the company’s development. For one thing, Xiaomi could receive high financial return when the enterprise go listing. For another, Xiaomi could use its resources to support the development of the ecological company, and better strengthen its position in the IoT industry. Xiaomi’s shares are no more than 50% which guarantees the independence of the company while leaving Xiaomi enough investment returns.

LIU De, when he was talking about Xiaomi’s investment in the ecological chain companies, said that

We do not control the company, which means that we leave the largest benefits to the founding team of the enterprise. When you build a team with this logic, you will find that the team become quite enthusiastic, and they will be willing to go to the front to operate the business.

Xiaomi may have a relatively weak influence on the ecologic companies in terms of the shareholder structure, but actually, the resources offered by Xiaomi almost decide the developing direction of the ecological companies. Once a company join the Xiaomi ecological chain, Xiaomi would provide all-round supports in supply chain, brand building and sales channels. All of these resources could improve a company’s development and reputation rapidly, and occupy more market shares. Taking Roborock as an example. Roborock was established in 2014 and its main business is producing the Mi home floor-cleaning robot for Xiaomi. As a Xiaomi’s ecological chain company, the branding, pricing, and sales channels of Roborock were directly managed by Xiaomi, in order to occupy more market shares. Until 2017, Roborock began to publish its own brand, Xiaowa and Roborock, in stead of Mi home, which is Xiaomi’s sub-brand. During the past 3 years, Roborock’s revenue that related to Xiaomi occupied 100.0%, 90.4% and 50.2% of the company’s total revenue.

It is a good trend for Roborock that its reliance on Xiaomi is decreasing. However, not all of the companies that belong to Xiaomi ecological chain has the same development. Ninerobot, which is a balanced vehicle manufacturer, published its revenue ratio that was related to Xiaomi. During the past 3 years, the revenue that related to Xiaomi, occupied 55.6%, 73.7% and 57.3% of its gross revenue, which showed a fluctuating trend. Honestly, for a company that more than half of its revenue were generated by Xiaomi, the reliance would be the largest bottle neck that limited its own development.

For companies belong to Xiaomi ecological chain, the previous strategic partner, Xiaomi, can be the resources provider which helped the company to be successful in the market, but could also be the one who makes use of the ecological chain companies to achieve its own AIoT strategy. Xiaomi published Mi home brand in Mar 2016, and Mi home became the only brand for the ecological chain companies that wish to cooperate with Xiaomi. In a word, lots of the ecological chain companies became Xiaomi’s OEMs that could only offer products for Xiaomi’s targeting customers. The related trading became the core of the cooperation between Xiaomi and the ecological chain companies. However, with Xiaomi’s great reputation and strong sales channels, Mi home has a great advantages in terms of marketing and selling.

Currently, Xiaomi Youpin is the only platform which offers traffics for non-Mi home brands. However, Xiaomi’s most important channels, including Taobao, JD.com, Xiaomi official website and Xiaomi home, are only open for products with Mi home brand. This marketing strategy makes the ecological chain companies’ own brands lost their competitiveness in the market. In this way, the so-called Xiaomi’s resources are only open for the Mi home brands and its OEM products. In order to be independent from Xiaomi, the companies belong to Xiaomi ecological chain have to build its own brands and sales channels. Even for Mi home products that have cooperation with Xiaomi, the ecological companies were affected by the Xiaomi strategy. For one thing, there are lots of companies belong to Xiaomi ecological chain, and no company could be the sole product provider. For another, Xiaomi has been famous for its high price-performance ratio, and the gross profit ratio of the ecological companies would be further lower.

Ecological chain companies are struggling to be independent

With the increasing number of Xiaomi ecological chain companies, Xiaomi is trying to support several companies at the same time in order to prevent a sole company from controlling Xiaomi’s supply chain. This action is kind of similar for ecological chain companies which want to be independent from the Xiaomi’s control. The increasing scale of Xiaomi’s IoT hardware lead to a more violent competition within Xiaomi ecological chain, and there are more companies that produce the same device than before. The competition could promote Xiaomi’s operating efficiency but would lower the revenue scale of the ecological companies while increasing their operational risks. In addition, the extremely low gross profit margin of the Mi home products, makes it harder for the ecological chain companies to survive.

In order to achieve its “smartphone + AIoT” strategy, Xiaomi uses the high price-performance ratio as its strongest weapon. In Xiaomi’s marketing strategy, they wants to sell a 120-score product with a 80-score price.

This high price-performance ratio strategy lowers Xiaomi’s gross profit margin to a large degree. Currently, with the separation of Redmi brand, the group structure of Xiaomi group was changed. Xiaomi, as a relatively higher-end brand, aims to pursue extreme high-tech and better user experiences. On the other hand, Redmi, as well as the Mi home products, aim to occupy the market with an extremely low price and better performance. Once Xiaomi gained the market share that is large enough, Xiaomi group could make more financial benefits through the Internet service.

On the other hand, for ecological chain companies, the low gross profit margin directly affect its profits, which means its survival. These companies do not have a large-scale platform to support a weak profitability, and would gradually lose competitiveness in long term. Roborock, for example, its gross profit margin in the past 3 years were 19.2%, 21.6% and 28.8%. Ecovacs, which is another floor-cleaning robot manufacturer, keeps a gross profit margin of 36%, which makes it easier to make money and develop. Honestly, the gross profit margin for the self-owned brands, such as Roborock and Xiaowa, were 42.1%, which was higher than Ecovacs. However, the Mi home floor-cleaning robot’s gross profit margin was 15%, which greatly lower the overall business performance.

Mi home products, with its low price and good performance, occupied lots of market shares. Besides lowering the gross profit margin of the ecological chain companies, Mi home products seriously cut down the survival space for the ecological chain companies’ self-owned products. The branding power of ecological chain companies are way much weaker than Xiaomi, and they are lacking of related capital supports. They cannot gain a higher gross profit margin with a higher price, and they cannot use a lower price to gain more market shares. In this way, the ecological chain companies went into a dilemma, in which they have to rely on Xiaomi while trying to be independent.

Developing the high-end products may offer a solution for Xiaomi ecological chain companies. The high-end field has a relatively larger market space because Xiaomi hasn’t entered actively yet. With this strategy, the ecological chain companies could not only improve its profit margin but also promote the competitiveness of its self-owned brands. Yunding, the leading smart lock manufacturer, published LOOCK smart lock that targeting to the basic consumers, and keeps technology innovation to promote its products. As one f the ecological chain company, Yunding uses its own strategy to get ride of Xiaomi’s control. However, manufacturing higher-end products requires a more advanced technology to support the research and development.

Technology shortages of the ecological chain companies

In order to develop high-end products, the companies need not only a more advanced technology, but also a better branding strategies. However, for most of the Xiaomi ecological chain companies, they have shortages which makes it hard for them to develop. SU Jun (苏峻), the CEO of Zhimi, while being interviewed by a media, said that manufacturing OEM products could help a company to promote its production in a short time, and it’s the essential way for a early-stage company.

However, this developing model generates a natural barrier for a company to develop high-end products. With the OEM manufacturing mode, a company has almost no resources on the research and development of technology innovation. Meanwhile, for a company which products has a low technology level, its market position could be easily challenged by a new comer with strong marketing supports. In this case, the competitive pressure of Xiaomi ecological chain companies keeps increasing.

Most ecological chain companies are focusing on the development of IoT devices, such as floor-cleaning robots, balanced vehicles, and smart speakers. With Xiaomi’s resources and supports, lots of the ecological chain companies accumulated a lot of resources and even listed in the secondary market. However, without Xiaomi and its strong market dominance, whether the ecological companies could keep being successful is still unknown.

The technology development level would directly decide whether the company could totally be independent from Xiaomi’s system. Currently, the scale effect of the ecological chain belongs to Xiaomi, and with the increasing of the Xiaomi ecological chain’s scale, the ecological chain companies’ reliance to Xiaomi is strengthening as well. Although the companies developed rapidly with Xiaomi’s help, being independent still requires a stronger technology investment and hardworking.