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Analysis EO
Jun 20, 2020
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Analysis EO
Jun 20, 2020

Xiaomi’s Next Leap in South Asia: Bangladesh

This article is an overview of Xiaomi's most important overseas market – Bangladesh. For Xiaomi's strategic layout in the country, please check the article Crouching Tiger: Xiaomi’s Strategic Layout in Bangladesh ► Bangladesh is a densely populated country with a fast-growing economy – it is likely to experience a major boost in the consumer electronics market over the next few years. ► The smartphone segment in the local handset market is providing new opportunities for Xiaomi and its peers. In the first quarter of 2020, Xiaomi (01810:HKEX) reached a milestone with its overseas revenue mounting to 50% of the company’s total. Xiaomi’s epic journey around the world is based on its strategy of extending and localizing the business internationally. “Overseas markets offer us tremendous room to grow and we will further boost our share in these markets,” said Lei Jun, the Chairman of Xiaomi Corporation. Having kept the No.1 position in the Indian smartphone market since 2018, Xiaomi’s success sets a role model for neighboring markets, where the mobile phone potential and customer traits are comparable. In 2016, Xiaomi stepped into Bangladesh, a market with a huge consumption potential empowered by the world's eighth largest population, as a strategic move intended to actively expand its international scale. Since becoming an independent country in 1971, Bangladesh has shaped a status as a special market with profound historical and cultural roots. Long ago a part of India, Bangladesh nowadays takes India as a benchmark for its economic and business development. Though the population size and the mobile phone market structure are not exactly the same, India can nevertheless serve as a ‘foreseeable future’ model regarding the consumer electronics market. Bangladesh embraced a noted spurt of GDP growth that surpassed that of India by 1% in 2018; still more impressively it came after violence that happened during a presidential election. From that until now, and looking forward to the next national election in 2023, the socio-political environment in the country shows signs of greater stability. Xiaomi, which secured a strong foothold in the Indian consumer electronics market, further stretched out to Bangladesh in 2016. Bangladesh is currently a rather primitive market for smart devices. In 2019 the smartphone only took 23% of total mobile phone shipments. The number is approximately half of India’s smartphone penetration, which indicates a considerable potential growth in smartphone shipments and the ecosystem products around smartphones, with around 60% of 4G coverage capable of supporting more smartphone users. Before Xiaomi broke into the promising market, the India-based company Symphony had over half of the total market share. Following their lead were Korean Samsung and local company Walton, which maintained significant shares in 2019, even with China-based vendors such as Transsion and OPPO wading into the pool. Though Xiaomi struggled with Bangladesh initially, as its market share did not show signs of predominance, the company is quite likely to hold onto this market and wait for a proper opportunity to grab a bigger market share. Why does the South Asian region present an important chance for the company? First, Bangladesh’s rocketing economy. As Lei Jun’s famous quote goes, “if a pig chooses the right spot to take off, it can fly successfully.” When the economy is soaring, it is almost certain that businesses rooted there will take free rides to sizable profits. The Asian Development Bank forecasted a well-above-Asian-average GDP growth for Bangladesh in 2020. Besides the macroeconomic environment, the rather low smartphone penetration provides fertile soil for the further shipments, since no matter how slow that process will go, the transition from 3G/4G feature phones to smartphones will definitely take place. Following the process through product iteration is how Xiaomi could break out of the siege. Second, geography is a clincher. Since India has become the second largest smartphone market after China, moving ahead of the USA in 2019, the killer products and sales channels will naturally radiate outward to the countries nearby, such as Bangladesh, Nepal and Sri Lanka (we will soon touch upon Xiaomi’s business in the latter two countries.) Except for the exchange and communications of products, cost reduction serves as another stimulus to have a strategic layout in these India-adjacent countries. As its financial announcement specifies, since 2015 when its first factory opened in India, till 2019, the number of Xiaomi’s factories grew to seven, producing an average of three mobile phones per second. More than 95% of Xiaomi's smartphones sold in India are assembled locally. Such production capacity could reasonably support demand from the Bangladesh market. In addition, if the orders of raw materials and the components such as chips initiated by Xiaomi India reach to a larger scale, a preferential price per unit will be offered and consequently show an advantage in price competition.

Analysis EO
Jun 20, 2020
report
Analysis EO
Jun 20, 2020

Crouching Tiger: Xiaomi’s Strategic Layout in Bangladesh

This article will touch upon Xiaomi's strategic layout in Bangladesh. For the market overview, please check Xiaomi’s Next Leap in South Asia: Bangladesh ► Though consistent in its layered dual-brand strategy globally, Xiaomi has been mainly targeting the premium smartphone segment in Bangladesh. ► Driven by the harsh import duties on finished smartphones, setting up local production lines is a certain move for Xiaomi Bangladesh. ► Since 2016, the company has been actively using both online and offline channels. Other value-added services, such as installment payment and free delivery, are poised to increase customer retention. ► The digital marketing and ‘fan’ culture of Xiaomi have successfully captured a younger group of customers. Product and Brand Xiaomi in China is showing consistency with its ‘dual-brand’ strategy, whereby the Mi brand is focused on pioneering advanced technologies while the Redmi brand is used to pursue the ultimate price-performance ratio. In Bangladesh there is an imbalance between Mi and Redmi. Apparently, Redmi is ‘redder’ (in Chinese ‘red’ sometimes refers to prevalence) than Mi, due to the local economic development and the brand management. In 2020, eight Redmi series models are currently presented on its official online store, while only one Mi series model is on show. The reasons behind this may be the following. First, under the former brand, the Redmi series and the Redmi Note series are calibrated differently, with Redmi Note aimed at looping in a wider range of customers across its large span of selling prices. There is also a narrowing-down of differences between Redmi note pro and Mi in specifications. Even though over 2/3 of the handset market in Bangladesh is composed of feature phones, which refers to cellphones with button-based input, small displays and operating systems not designed for apps, Xiaomi and other several China-based vendors (Transsion is an exception) do not seem to be interested in touching the segment. The first reason is that Xiaomi would face production problems, because it does not retain a feature phone production line, neither in China nor in India. The second is that the feature phone market is and will be declining even as competition intensifies as well. Lava, Transsion and Symphony has been practicing the feature phone production and sales in the Indian market as well as in Bangladesh for years. Since there’s quite limited room for innovations in feature phones, there is little room reserved for latecomers. As the prices of Mi phones significantly surpassed overall Redmi prices, Redmi seems to have comprehensive price points and is selling at prices that are accessible to the mass market. As the GNI (Gross National Income) per capita in Bangladesh is USD 1,750, a price over 15% of this statistic is hard to align with the strategy of making profits from driving the sales quantities. IDC recapped an average selling price (ASP) of smartphones in Bangladesh at USD 99 in 2019. Compared to the average, even low-end brands under Xiaomi Corp. are well-above it, making a picture of a trendy but rather high-end, business phone brand in the market. Local production To boost local production, since 2017 the government of Bangladesh has been offering some tax benefits to local assemblers and increased import duties. Later on, the import duty on imported handsets hit 32%, which is even higher than in India, at 20%. India’s rising import duties and recently imposed restrictions on FDI (Foreign Direct Investment) have been forcing Chinese vendors to march into the local manufacturing industry.  Though there is no official announcement that Xiaomi is setting up its local production in Bangladesh – yet this is almost a certain move since the tariff policy still offers room to grow, and its counterparts, such as OPPO, vivo and Samsung, have already contributed in local manufacturing development. Besides the policy issue, local production offers great help in smoothing the inventory and sales flow when there is a steep change in local demand. China and India, as the first and second largest import partners, take 32% and 16% of Bangladesh’s total import volume, respectively. However, Bangladesh’s electronics devices market did not heavily rely on the import due to the limited demand, local production capacity and the abnormally high import duty. Compared with China, India is a small fish in terms of imports for Bangladesh, for the trade value of Bangladesh in terms of mobile phone import generated from India is less than 10% of China’s. Though there is a limited access to Xiaomi Bangladesh’s specific import data, it is fair to deduce that Xiaomi in Bangladesh is still at the stage of high dependency on China. Though it failed to diversify supplier sources to reduce the risks of uncertainty brought by overreliance on a single source, India will serve as a strong backup to address the potential risks of concentrating production in mainland China. Distribution in Bangladesh Xiaomi never lacks imagination in terms of business model tweaking, especially in the later product lifecycle period, i.e. marketing and sales. In Bangladesh, a country with a fairly good Internet penetration rate that resembles China’s at 58%, Xiaomi developed sound online sales channels, as well as 229 offline stores and distributors with a much higher number in quantity. For online distribution, the company partnered with local e-commerce platforms DealBazaar and Gadget and Gear to manage online services. Notably, the online purchase offers a value-added financial service, in which customers could resort to an equated monthly installment for payments. This financial-related service revealed the firm’s ambition in a thorough product and service coverage for customer needs.   For the offline channel, offline Mi stores and Shwapno outlets are the right places to look into. Among the 64 districts in the country, Mi store covers 58 districts, depicting a complete coverage and localization in distribution. In addition, the partnership with Shwapno outlets would further assist in Xiaomi’s in-depth sales throughout the country. Marketing and sales Liked by 2.56 million people, the Facebook page of Xiaomi Bangladesh served as the main social media channel for promotion and public communication. Keeping a pace at two or three new updates on Facebook each day, the number of ‘likes’ and ‘comments’ is around 2,000 on average, which is ten times as large as the online presence data of its local competitor Walton. Though Walton and Xiaomi have quite close smartphone market shares, the huge gap of attention from Internet users indicates the user portrait of Xiaomi is that of a younger generation, with better Internet literacy and tech awareness. The fan culture of Xiaomi also contributes a lot in terms of digital marketing. The traits of the firm’s user structure promises its future growth space through further Internet service offers and growing customer loyalty.

Analysis EO
May 14, 2020
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Analysis EO
May 14, 2020

Roborock is Expected to Extend Its Single Product Structure

► Roborock accounted for 11% of the domestic cleaning robot market share in 2019. ► The current PE falls to 31.55, dropped 32% from its IPO date. On February 21, Roborock (688169:SH), a Xiaomi-backed smart home appliances provider, started trading officially on the Star Market. The price started at CNY 271.12 per share, which was the highest issued price on the board, and had hit CNY 538.88 at its first trading day. After the hype, the stock price has fallen to a rational level with a current PE of 31.55, but it’s still the most expensive stock on the Star Market. Founded in 2014, Roborock is a smart appliance developer and manufacturer specializing in intelligent hardware design, R&D, production and sales of intelligent cleaning robots. It is also applying lidar technology and related algorithms on a large scale in the field of intelligent cleaning robots. According to its website, its main products include six types of smart cleaners with a price range from CNY 1,099 to CNY 2,700. According to Roborock’s annual report, in 2019, the company achieved a sales revenue of CNY 4.21 billion, an increase of 37.81% year-on-year; and realized a net profit of CNY 783 million, an increase of 154.52% year-on-year. In the first quarter of 2020, it achieved an income of CNY 611 million, a year-on-year decrease of 29.48%; net profit of 126 CNY million, a year-on-year decrease of 7.94%. Regarding the decline in performance growth in the first quarter of 2020, Roborock stated that it was mainly due to the decrease in orders for customized products of Xiaomi and the impact of the COVID-19 pandemic on the industry.  Xiaomi’s ecosystem brings strong supply chain management, while concerns around Roborock’s single product structure still exists. Actually, Roborock is the first company in Xiaomi’s supply chain on the Star Market. Before this, wearable-device firm Huami (HMI:NYSE) and Internet-of-things-enabled home products provider Viomi Technology (VIOT:NASDAQ) went public in the US successfully, both part of Xiaomi’s ecological chain. Today, tech giant Xiaomi connects more and more users to each other and to services through cost-effective, diversified products and efficient marketing channels. A clear and vibrant ecological chain is gradually being built and many companies are joining up, following the company’s blueprint. Across the entire Internet of Things (IoT) strategy, the core idea is "connection." First, between people and things, then between people, then finally reaching a big IoT era where everything is connected. These companies are under the control of Xiaomi’s unified quality control; in the meantime, leveraging Xiaomi’s supply chain and credit endorsements, they are able to compress production costs in the initial stage and achieve mass sales through Xiaomi’s platforms to grab market share. However, investors have been concerned about Roborock’s simple product line. From 2017 to 2019, the revenue of its cleaning robots accounted for more than 90% of the main business revenue. The company stated in its annual report that it has a single product structure and relatively few product categories. In the future, if the market demand for cleaning robots fluctuates greatly or the company cannot respond to consumer demand for smart cleaning robot performance and new functions in a timely manner, the company’s performance will be adversely affected. Intense market competition From the perspective of domestic market share, the top three brands in the domestic market in the first half of 2019 are ECOVACS, Xiaomi and Roborock, with market shares of 48%, 12% and 11%, and a total market share of 71%. From the perspective of the domestic online market share, the top five brands in the online market in the first half of 2019 were ECOVACS, Xiaomi, Roborock, Haier and iRobot, accounting for 43.4%, 13.3%, 12.7%, 5.0% and 4.8%, respectively. The total market share of the top 5 suppliers is 79.2%. It is worth noting that ECOVACS is slightly ahead of Roborock in terms of R&D expenditure. In 2019, ECOVACS’s R&D expenses were CNY 277 million, an increase of 35.2% over the previous year, while Roborock’s R&D expenses were CNY193 million, of which salary expenses accounted for 68.43% of R&D expenses. Industry trends of cleaning robots (1) Product intelligence upgraded and user experience enhanced Cognitive intelligence means that the machine has the ability to think and understand actively and realize the human-computer interaction with the user. As an intelligent combination of hardware and software, the intelligent cleaning robot's technological breakthrough is the key driving force for industrial upgrading. The development of data resources, computing power and core algorithms will jointly promote innovation in the intelligent cleaning robot industry. At present, the technical trend of intelligent cleaning robots is changing from random collision to path planning and will be oriented towards cognitive intelligence in the future. Specifically, it can collect information on the cleaning area, such as house structure, item placement, and user habits combined with big data analysis, deep learning and artificial intelligence technology, based on user preferences, to form a variety of cleaning modes. It provides users with personalized services, thereby greatly improving the consumer experience. (2) Multiple scenarios expand product application areas With the continuous improvement in technology, the types of consumer demands for cleaning robots will become more and more complex, and the application of diverse scenarios will become the development direction of the industry. The major suppliers are actively laying out various product areas, strengthening the technological innovation of various products and the development of artificial intelligence, and promoting the diversification of intelligent sweeping robot product forms. In the future, the products will further integrate the application of artificial intelligence and other technologies to meet the needs of consumers in different application scenarios. At the same time, the application of high-performance and new-type sensors such as vision sensors, low-cost high-performance lidar sensors, software anti-collision contact sensors, and so on, will provide smart sweeping robots with richer information at the algorithm level. The multi-sensor information fusion processing algorithm can extract effective information and optimize the algorithm according to the optimization strategy. (3) The market competition in the industry is becoming increasingly fierce, and the brand concentration will continue to increase The main players in the smart cleaning robot market include service robot companies and traditional home appliance companies. With the increase in market participants, the competition will become more intense. For the domestic market, companies with strong brands and independent research and development capabilities will further consolidate their market position. Competitive companies can use capital, R&D, and channels to gain more market share, and market brand concentration will continue to increase.

Analysis EO
May 12, 2020
report
Analysis EO
May 12, 2020

Five Moves to Expect from Xiaomi in the COVID-19 Era

► The disrupted supply chain and weak domestic demand hammered Xiaomi’s business in the March quarter. ► A combination of new technologies and old marketing stratagems can help the company to make it through the crisis. A ten-year-old firm, Xiaomi Corporation (1810:HKEX) has emerged as a consumer electronics giant, making a particularly deep dent in the vast markets for electronics in the developing world, as well as in the recently stagnating advanced economies.  Needless to say, the Beijing-based firm’s entire product mix seems a good fit for both the rich that get poorer and the poor that get richer. Thus, the macroeconomic trends of the pre-pandemic decade were a particular boon for Xiaomi, as these two groups were getting bigger within that period.  Now, things will, almost certainly, change. In league with the fierce competition in the industry, deteriorating economic conditions on a global scale have already started testing the company’s resilience.  Read more about how Chinese tech enterprises are dealing with the COVID-19 outbreak in our latest report. Some new challenges have appeared on its path to success and it will be way harder in the future to ‘build amazing products with honest prices’ without adjusting operations, marketing approach and other essential dimensions. Below, we list five possible strategic actions Xiaomi is likely to take in the short term to mitigate systematic risks and stay competitive worldwide. Less ‘2B,’ more ‘2C’ The advertising business was among the forces that drove Xiaomi’s gross profit margin up in 2019. A truly cherry-picking segment, it is also utterly fragile: as companies all over the place are cutting their marketing budgets, the ads earnings will, indeed, drop in the first half of 2020.  A rational move would be reinforcing one of the fast-growing parts of the corporation’s product mix – value-added Internet services. For instance, online gaming, the revenue from which saw a year-over-year increase of over 44% in the last quarter of 2019, is an absolute gold mine in the period of lockdown.  At the same time, as the company reported in its recent financial statement, in the December quarter of the last year, the new segments, including e-commerce, fintech, TV Internet services and overseas Internet services, jumped by more than 112% last year. All the aforementioned four, unlike ads, are widely projected to further benefit from the pandemic, and Xiaomi might allocate more resources to them in order to excel in 2020. Less offline, more online Online distribution channels have been vital since the early stages of the smartphone maker’s development. Stirred by the high fixed cost of keeping physical stores, its executives’ initial reluctance to go brick-and-mortar was a primary reason for the extremely competitive pricing policy that has made Xiaomi famous. However, the bright orange outlets started appearing later on – founder Lei Jun and the team were lured by abundant opportunities in China’s burgeoning lower-tier cities.  As a result, the nascent network has boosted the total headcount to 18,170 employees, over 92% of which are based in China’s mainland, as of the last day of 2019. The company’s president Xiang Wang said in a recent interview with Bloomberg that Xiaomi currently possesses 2000-odd stores in the country. The COVID-19 outbreak, of course, badly damaged profitability in most of these selling points. But has it passed? In the same interview, Mr. Wang mentioned that the local offline sales rebounded in April, reaching “80% to 90%” of January’s figure. Impressive, but, apparently, still far from what can be called ‘growth.’ Besides the fact that the pandemic is clearly not over, and China is not protected from new spikes of domestic cases, the country’s tech-savvy consumers will be seeking safer ways to buy devices by default – this trend is rather natural. A more severe situation can be observed in the countries that are yet to experience a peak of the disease. In India, for example, Xiaomi went deeper into the e-commerce space, launching a home-grown service, on May 5. And the problems here are just getting started – almost half of the company’s earnings came from overseas in 2019. In short, there is a relatively high probability of Xiaomi cutting its offline presence planetwide in 2020 in pursuit of efficiency. Becoming a venture capital powerhouse With its partnership model, Xiaomi is a prime example of how to build a hardware ecosystem. But it has also been closing deals of other types. Once nurtured by private equity players, the consumer electronics juggernaut is now as active in the venture capital field as its backers back in the days.  EqualOcean has lately reported on several financing rounds undertaken by early-stage startups in the fields of microelectronics, where we saw participation from the Beijing corporation. For one, in February, Wi-Fi 6 chip developer Senscomm bagged an undisclosed amount from Xiaomi, Glory Ventures and a few state-backed funds to scale up its production.  Meanwhile, spinoffs are happening, too. Big Fish Semiconductor’s Series A in November 2019 was the first independent deal made by the successor of Pinecone, the subsidiary that designed Xiaomi’s first in-house chipset three years ago. The need for supply chain flexibility and robustness in the upstream will drive the gadget producer’s aggressive demeanor in the private equity space.  According to Crunchbase, Xiaomi has taken part in 75 funding rounds since 2014, with Series A, B and C accounting for 33%, 23% and 21% of the total number, respectively. Going 5G The 5G race between the major smartphone makers started last year, when South Korean behemoth Samsung launched the world’s first handset designed to operate under the fifth generation of wireless technology.  Xiaomi answered in November. Lei Jun said (in Chinese) during the firm’s developer conference that 2020 will see at least ten new 5G-enabled models branded with the two small letters. The first of them – Mi Mix 3 5G – was announced some three months later.  On many occasions, the corporation’s spokespeople have been discussing their intentions to push the so-called ‘5G+AIoT’ strategy further: by leveraging the upcoming communication network upgrade and the mixture of machine learning and connected devices, Xiaomi has not only stepped on the technology bandwagon, but it has also tailored this plan in line with the countrywide hype around the ‘new infrastructure.’ Even though it is yet to be seen whether the new generation of wireless can make a real difference in the consumer electronics sector beyond augmented/virtual reality, the Asian nation’s omnipresent fuss over it may be crucial for domestic sales of the fancy handsets. Considering the Star Market listing In 2018, the industry deemed Xiaomi’s proposed dual Shanghai-Hong Kong initial public offering a landmark event – the enterprise could be the first to land on both bourses at once, issuing Chinese Depositary Receipts (CDRs). After receiving the famous 84 questions from the China Securities Regulatory Commission, which raised concerns about the Beijing firm’s valuation and the ‘Internet company’ identity, it simply opted for a sole Hong Kong IPO, raising USD 4.72 billion in July that year. Twelve months later, a new Nasdaq-esque board kicked off operation on the bedrock of the Shanghai exchange. Dubbed the ‘Star Market,’ the venue has since gathered a plethora of technology-focused enterprises.  Check out our latest quarterly overview of the emerging marketplace. Many Xiaomi ecosystem players are either currently trading on the tech platform or making their way through the IPO pipeline. An early software project of digital savant Mr. Lei, Kingsoft Corporation’s (3888:HKEX) subsidiary Kingsoft Office (688111:SH), for instance, went public thereon in November 2019, obtaining CNY 4.5 billion on IPO day. Ninebot-Segway, the corporation’s key micromobility tools supplier, filed a prospectus in last April – it has a chance to become the first enterprise to issue CDR. Although Xiaomi doesn’t seem to be short in cash and normally prefers other ways to raise liquidity, we believe that the Star Market’s sky-high valuations and frenzied stock debuts may attract the Chinese hardware maverick’s attention. 

Analysis
Mar 1, 2020 · TMT Post
Analysis
Mar 1, 2020 · TMT Post

I Do Hit Products in XiaoMi

Analysis
Feb 19, 2020 · TMT Post
Analysis EO
Aug 4, 2019
report
Analysis EO
Aug 4, 2019

A Fast-Growing Market: Intelligent Household Electrical Appliance in China

According to Huajing Securities’s data, the CAGR (复合年均增长率) for the domestic smart homes market is expected to be 14.65% from 2016-2020 which is made up of the Internet of things and big data, attracting traditional household appliance enterprises, Internet giants, and startups to the pursuit of tuyere (风口) in the tech industry. On the other side, the global annual consumer spending of smart home in 2018 seems to be on the verge of USD 96 billion, including intelligent device, intelligent system, and related intelligent services, according to a report by Strategy Analytics. It will rise to USD 155 billion in 2023 along with a 10% CAGR increase as well.  Meanwhile, there will be 293 million households with smart systems in the global smart home market in 2023 as shown in the data above. The brief classification of smart home industry in China In China, the smart home industry consists of three big sectors from the product classification according to the report of EO Intelligence, such as intelligent household electrical appliance (智能家电) , home security products (家庭安防产品) , intelligent connection control platform (智能连接控制平台) .  Intelligent household electrical appliance mainly contains both electrical appliance with large volume and small volume, especially the intelligent upgrade of all home appliances. Home security products compose of intelligent door locks, switches, sockets, alarms, cameras, etc.  Intelligent connection control platform provides a variety of the connection between products and as well as the connection of products and platform. It consists of intelligent lighting system, electrical control system and system software control system.  Each section contain a variety of different types of products, among which the influence of smart appliances is gradually expanding. It shows great possibilities for expansion because of the large market for the appliance industry in the past. A big developing market in China: Intelligent household electrical appliance  The domestic smart home market is divided into the hardware market and service market among which the hardware market includes two major markets:  the market of existing stock (存量智能家居市场) and incremental market (增量智能家居市场) .  The smart upgrade market is the most important part of the market of existing stock for a smart home, which is caused by the intelligent upgrade of the existing traditional home appliances market. It is popular that most appliances in China are regarded as driving on an intelligent express, such as air conditioner, TV, washing machine, kitchen appliance and other traditional big appliances. The incremental market for the domestic smart home market is called emerging market along with the influence of consumption upgrades, loT and Artificial Intelligence in recent years. It is widely distributed in a variety of smart home scenes which is mainly about newly emerging products like a smart speaker, a sweeping robot, smart camera and smart vacuum cleaner. It is in the lower position comparing to the market of existing stock for smart home due to the weak market accumulation and short development period for the product.  The market of existing stock for smart home has great performance among them with the largest share, which is mainly composed of upgrading smart home appliances, such as TV, air-conditioner, fridge, washing machine, and others. There is an obvious change that the intellectualization of upgrading tradition household appliance industry is becoming a huge industry trend at present. According to the report from Huajing Securities, the smart home market will be worth more than CNY 1120 billion (USD 163 billion) in 2020. Meanwhile, it shows huge development that the market for intelligent household appliances upgrades in China will reach CNY 926 billion (USD 134 billion) in 2020, which means the latter will grab a market share of almost 83% for the whole smart home market. Four types of developed electrical upgrading appliances in China The penetration rate (渗透率) of the smart home appliance industry shows great development in the near future,  which includes a variety of electrical appliances product. Smart TV, smart air conditioner, smart fridge, and smart washing machine are among intelligent products with loftiest sales among these years. Smart TV For instance, Chinese domestic smart television sold almost 173 million units in 2016 and by 2020 this number is expected to reach 210 million, which will cause the penetration rate to grow from 85% to 93%. Nowadays, Smart Television is becoming one of the three strategic zones of the war within the smart home entrance for consumers.  Xiaomi is leading the industry by grabbing a market share of 20%, both shipments and sales of the Xiaomi TV product line exceeded 4 million units in H1 2019.  Smart air conditioner, smart fridge, and smart washing machine It seems that the market of the smart air conditioner, smart fridge and smart washing machine has more potential in the field of the smart home market especially air conditioner and fridge.  The penetration rate (渗透率) of the smart fridge market is the lowest field among them, which only captured 17.4% in 2016 showing the largest growth space in the future. With promoting consumption upgrading, it will grab a penetration rate of 37% in 2020, and sales volume will reach almost 107 million units over the same period.  As a result of the popularity of smart air conditioners in recent years, many giants of the industry such as Haier, Gree and Midea took action at an intelligent air conditioning strategy, which seemed to be getting very popular in the industry.  Internet giants like Xiaomi did not miss this opportunity. It formally launched an Internet air conditioner in 2017 with a low-price strategy which has become its second-largest home appliance category after the layout of smart TV.  The main competition war: loT Nowadays, each home appliance products are likely to become the entrance of the smart home as the advent of the IoT.  “In the future, 5G and AIoT will be the next generation of super-internet. The reserves of Xiaomi in the field of IoT has developed lots of years which will give us a head start on opportunities of the war.” Lei Jun, co-founder&CEO of Xiaomi Inc, said on Second Session of the 13th National People's Congress (十三届全国人大二次会议) .  EqualOcean expects that the Internet of things will be the main competition in smart home appliances war. Besides, intelligent household electrical appliance is the next battlefield of the “IoT war”.

Analysis EO
May 3, 2019
Analysis EO
May 3, 2019

Being Independent from Xiaomi: A Struggle for Xiaomi Ecological Chain Companies

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.

Analysis EO
Apr 28, 2019
Analysis EO
Apr 28, 2019

Xiaomi's Indian Business Decreases in 2019 Q1

Counterpoint, a market research institute published its statistics for 2019 Q1, which showed that in 2019 Q1, Xiaomi’s smartphone shipment decreased 2% in the Indian market. The decrease shows that Xiaomi might be kind of tired under the violent competition, and actually, Xiaomi is facing besieging from many strong competitors. The Indian smartphone market has the fastest increasing speed among the world’s 20 smartphone markets, which attracts a lot of smartphone players from all over the world. Chinese manufacturers play important roles in India, and Xiaomi, as one of the largest smartphone manufacturers in China, keeps ranking the 1st in term of the smartphone shipment in the Indian market, from the past 6 quarters.   The Chinese smartphone market has been decreasing in 2 years. In 2019 Q1, the total smartphone shipment in the Chinese market has a year-on-year decrease rate of 10.7%. With a decreasing domestic market, the Indian market becomes increasingly important for Chinese manufacturers, such as Xiaomi, Vivo, and Oppo. Samsung, as the world’s largest smartphone manufacturer, kept ranking 1st place before Xiaomi’s evolvement. After being exceeded by Xiaomi, Samsung has promoted its products in the Indian market and published more M series smartphones on its online market in order to gain more market shares in India. Vivo and Oppo are popular Chinese smartphone brands. With many new smartphone models, Vivo and Oppo’s smartphone shipments increased during the 2018 Q4, while Xiaomi has decreased by 35% in the Chinese market. Oppo, even published “Realme” brand on the Indian market, from April 2019. Other competitors including Nokia, which used to be the king of the mobile phone industry. In China, Nokia used to publish the high price-performance ratio phones to occupy the market share but finally failed. After that, Nokia behaves actively in the Indian market and published many kinds of smartphone models with a price of less than CNY 1000. Xiaomi’s success in the Indian market is kind of similar to its success in China several years ago. The business model is almost the same: Xiaomi publishes high price-performance ratio smartphones in the Indian online market and rapidly increase its brand recognition in the Indian market with hunger marketing strategies. After being famous in India, Xiaomi began to establish its offline stores and future occupy the Indian market. In India, the Redmi series is the most popular smartphone models in India. According to Xiaomi, the new flagship model of Redmi, the Redmi Note 7, has shipped more than 1 million in the Indian market. However, with Vivo, Oppo’s efforts, as well as Samsung’s publications, Xiaomi’s market position has been challenged. The smartphones from Samsung, Vivo, and Oppo, have the same price-performance ratios, which offers more choices to Indian customers.        Though Xiaomi plans to establish more than 1000 Mi home in India, it can hardly maintain its dominating market position with the increasing coemption from other manufacturers. In addition, Xiaomi’s low-profit margin leads to a low net profit of its retail partners, thus many distributors choose Vivo and Oppo as partners. Xiaomi’s declining business in China might be the future of its Indian market, and that’s may be one of the reasons for Xiaomi’s expansion in Latin America. On Apr 28, 2019, Xiaomi opens its first Mi home in San Diego, Chile. In 2019, Xiaomi plans to establish 6 Mi home in Chile, which aims to promote the recognition of Xiaomi brand in Chile.    

Analysis EO
Apr 4, 2019
Analysis EO
Apr 4, 2019

Will Xiaomi Get Eaten by Huawei?

Xiaomi (小米) and Huawei (华为) are two notable Chinese telecommunications companies whose products are often pitted against each other. As Huawei gains global traction, it raises the question of what will happen to other Chinese telecommunications companies.   Recently, LEI Jun (雷军), Xiaomi’s Chairman and CEO, announced via Weibo (新浪微博) that Xiaomi 9 shipments exceeded 1 million units, according to 36Kr. Combined with Xiaomi 9SE, total shipments exceeded 1.5 million units. While Xiaomi 9 achieved a great milestone, Huawei’s Mate 10’s global shipment exceeded 10 million units in the first half of 2018, according to 199it.  While shipments do not equate to the number of sales, Xiaomi’s smartphones have sold relatively well in the past as it comprises the bulk of the company’s revenue. In 2017, it made up 61% of the company’s total revenue and increased 41.3% over the previous year, according to Xiaomi’s financial report. “In the fourth quarter of 2018, the revenue generated by smartphones sold for [CNY] 2000 or more accounted for 31.8% of the total revenue of the smartphone segment,” Xiaomi reported. In fact, both smartphone companies are doing relatively well compared to the global market. Xiaomi saw incredible success in 2018. According to IDC in Xiaomi’s financial presentation report, the company “achieved 32.2% YOY growth in smartphone shipments while the global market declined by 4.1% in 2018.” Huawei led in the YOY growth in smartphone shipments, slightly above Xiaomi at 33.6%. Huawei is certainly winning in smartphone shipments. As such, some may deduce that Huawei is doing better than Xiaomi According to Counterpoint Research, it’s on par with Apple’s global smartphone shipments market share at 14%. Xiaomi and Oppo, another Chinese telecommunications company, are tied for fourth place. Therefore, what does Huawei have that Xiaomi does not? And is Xiaomi really getting the short end of the stick when it comes to Huawei? R&D (Research & Development) R&D has never been so important. According to CB Insights, China is quickly catching up to the United States in R&D spending (20.2% and 26.4% respectively). One reason for Huawei’s success and increasing competitiveness in the global market is its large investment in R&D. It’s the only company from China to be listed on EU’s Top Ten Global R&D Investors, according to Caixin Global.   In addition, according to CNBC’s interview with Neil Shah, research director of devices and ecosystems at Counterpoint Research, he mentioned “the risk from investors is Xiaomi’s gross margins” and weak operating margins. “The business model they are adopting is not based on intellectual property or significant R&D investment like Google, Apple, Huawei, so it's easily replicable.” According to ScienceBusiness, 45% of Huawei’s employees are engaged in R&D. The telecommunications company also “set up 16 R&D centers in countries that include Germany, Sweden, the US, France, Italy, Russia, and China.” Over the last decade, Huawei’s R&D expenditure exceeded CNY 480 million, according to the company’s 2018 press event. On the other hand, Xiaomi’s R&D team accounts for approximately 38% of its full-time employees, according to ITHOME. As such, Xiaomi isn’t trailing too far behind in R&D. However, it’s still lagging in comparison to other global leaders. Additionally, OPPO, Xiaomi’s other large rival is expected to double “R&D investment to keep up with rivals ahead of 5G deployment.” In 2018, OPPO exceeded Xiaomi in Asia in smartphone market share, trailing just behind Huawei at 16% and 15% respectively. Xiaomi and Vivo are tied at 13%. Despite 5G still in its early stages of development, there is already news about Shanghai to be the first city to completely adopt the 5G network. As Xiaomi isn’t even in the top 5 of China’s model share, it may be valuable to begin scaling more efforts into 5G as countries begin to adapt. According to Reuters, Huawei reports that 5G “is expected to come into large-scale use in 2020.” Xiaomi’s Country Advantage While Xiaomi may have to allocate resource and talent to R&D research to compete globally and grow its competitive edge domestically, the company is achieving great success in other markets, specifically India. While Xiaomi has yet to reveal the proportion of countries their phones are sent to, it’s likely that India takes a huge chunk. In 2017, Xiaomi’s sales in India increased by an overwhelming 696%, according to 199it. Furthermore, Xiaomi’s products occupy most of India’s model share. ​​​​​​​According to the company’s 2018 financial results, its shipment to India had an overwhelming 59.6% YOY growth from 2017 to 2018. It beat VIVO and OPPO in 2017 and 2018’s market share and surpassed Samsung in 2018. Xiaomi is also making progress in Indonesia, placing second after Samsung in the country’s smartphone market share in 2018. Xiaomi’s success in India can be attributed to its efforts in a localization strategy. On Apr 9, 2018, the company announced “the opening of three new smartphone plants in India” and is investing in educating its “component suppliers” about the Indian manufacturing ecosystem. “We believe that this will help our suppliers effectively assess and expand their manufacturing capabilities in the country,” Manu Jain, Xiaomi’s vice president and global managing director in India said. According to Telecom, Xiaomi “is in active discussions with two more component partners to set up factories to support its growing operations.” In addition, Xiaomi’s offline MI stores partners with local retail chains such as Croma, Univercell, Poorvika, and Sangeetha. This allows Xiaomi to get more coverage in terms of area and word-of-mouth marketing. Will Xiaomi Get Eaten by Huawei? Not likely. Xiaomi has already begun its 5G support with the MI Mix 3, and it’s not loosening its grip on one of its largest market. However, as more and more telecom companies invest in R&D, Xiaomi should be cautious to not fall behind.  Rather than Huawei, perhaps Xiaomi’s biggest fears will be OPPO and Samsung as the former is quickly gaining traction in China and the latter planning to win back its India market advantage. Briefly comparing a Xiaomi and Samsung model mentioned above, Xiaomi's Redmi 6A is approximately 5,999 Indian rupee (87.7 USD) while the Samsung J4 Plus is approximately 8450 Indian rupee (123.35 USD) doing a search online. Therefore, Xiaomi still has competitive pricing. It'll be interesting to see how Xiaomi and Samsung proceed in the future for dominance in the Indian market. 

Analysis EO
Mar 21, 2019
Analysis EO
Mar 21, 2019

Not Perfect But Excellent - Xiaomi's 2018 Transcript

Xiaomi (01810) started its “5G+AIoT” strategy from 2019 and changed its organizational structure many times in order to promote its level of technology. March is the time for companies to show their annual reports, and the financial performances of giant Internet companies such as Baidu, JD, Meituan, are highly interested in society. Xiaomi was listed in 2018 in Hong Kong Exchanges and Clearing, this company has lots of “Mi” fans who must be curious about the transcript of this technology magnate. Performance is Excellent But Not as Good as Expected Listed on Jul 9, 2019, Xiaomi uploaded a relatively ideal transcript. Xiaomi changed its strategy in 2018. The production structure and publication pace of Xiaomi’s smartphone are different from the previous year. In the past time, Xiaomi published many Redmi series mobile phone in the second half of the year, however, in 2018, no Redmi phone was published after June. Besides the change of its mobile phone business, Xiaomi expanded the IoT business to a large degree. More than 230 million devices (except smartphone and laptop) have been connected to Xiaomi ecological chain. Xiaomi set 5G and AIoT as its two development engines in 2018, and in 2019, Xiaomi started this strategy officially. Corresponding with its strategy changes, the financial performance of Xiaomi also proves that this company is doing the right things. Xiaomi made revenue of CNY 45.2 billion in 2018 Q2, with a YOY growth of 68.3%. The profit of Xiaomi in 2018 Q2 was CNY 2.1 billion, with a YOY growth of 25.1%. In 2018 Q3, the total revenue of Xiaomi was CNY 50.8 billion, with a YOY growth of 49.1%. The adjusted profit of CNY 2.9 billion, with a YOY growth of 17.3%. In 2018 Q4, according to the latest annual report, the revenue of Xiaomi is CNY 44.4 billion, with a YOY growth of 26.5%. However, comparing with the financial performance of Q3, Xiaomi’s revenue declined 12.6% and was not as high as markets expectation: CNY 46.2 billion. In 2018, the total revenue of Xiaomi was CNY 174.9 billion, with a YOY growth of 52.6%. The adjusted net profit of Xiaomi was CNY 8.6 billion, and a YOY growth of 59.5%. According to the statistic data from IDC, Xiaomi’s smart phone’s shipment ranked 4th in the world, while the devices connected to the IoT platform of Xiaomi reached 150.9 million, an increased of 193.2% (YOY). Meanwhile, the Internet business of Xiaomi increased by 61.2% (YOY) and earned CNY 16 billion in revenues. Two Power Engines to Push the Group Moving Jingzhun (鲸准), a research institution, said in its report that “the market underestimated the Xiaomi Group. In 2020, Xiaomi’s revenue is expected to exceed CNY 300 billion, and the net profit will be more than CNY 10 billion.” The 5G and AIoT, are the two powerful engines that push the company forward. The combination of smartphones, 5G technologies and the AI with the IoT platforms act as strong forces for the Xiaomi group.  In 2018, Xiaomi made CNY 113.8 billion in its smartphone business, with a YOY growth of 41.3% and a 118.7 million shipment. In 2018, according to IDC’s data, the global shipment decreased by 4.1%. It’s interesting that 31.8% of the smart phone’s revenue came from models with a price higher than CNY 2000, which shows the success of Xiaomi’s pricing strategy. Mi 8 and Xiaomi Mix 3 were popular models in 2018.  Previously, Xiaomi changed its organizational structure several times, which was regarded as making preparation for its “5G+AIoT” strategy. The committee of technology was founded inside of the group, and LEI Jun (雷军), the founder and CEO of Xiaomi, said that Xiaomi would invest CNY 10 billion in its AIoT business in the next 5 years, which shows the ambition of Xiaomi Group in exploring the new technology. We could have a clear understanding of Xiaomi’s strategy from the revenue structure changes from 2017 to 2018. In terms of smartphone, Xiaomi changed its strategies in order to keep competitiveness in the market. Xiaomi began to open the high-end market with an increasing retail price of its high-end models. In 2018, Xiaomi focused on its Xiaomi 8 series and Xiaomi Mix series, which are its high-end models. On the segment market of smartphone, Xiaomi made a lot of attempts. In Apr 2018, Xiaomi cooperated with Heisha (黑鲨) technology to publish the Heisha Phone, targeting the mobile-end game players. In Aug 2018, Xiaomi published Poco Phone in India for overseas Geeks. In Nov 2018, Xiaomi announced to cooperated with Meitu and attract more female users.  Although the market of a smartphone has not been good in 2018, Xiaomi adjusted its strategies carefully and finally did a good job. Besides the smartphone, Xiaomi paid a lot of attention to AIoT and consumer goods. From 2017 to 2018, the ratio of the AIoT business’s revenue increased by 5.1% and is expected to increase in the future. According to Xiaomi’s annual report, in 2018, the IoT and consumer goods business increased by 86.9%. It’s clear that Xiaomi does not only rely on its mobile phone business to make a profit. With the two powerful engines of the company, Xiaomi may achieve more this year. Great changes can be seen from the revenue structure of Xiaomi in 2018 Q4. In 2018 Q4, Xiaomi earned CNY 14.9 billion from its IoT business with a YOY growth of 75.4% and a QOQ growth of 38%. However, in 2018 Q4, the IoT business accounted for 33.6% of the whole revenue of Xiaomi Group, which shows the power of the “two engines” of Xiaomi. In 2018, the revenue of IoT business increased from CNY 23.4 billion to CNY 43.8 billion with a YOY growth of 86.9% because of the rapid increasing requirement of Xiaomi’s ecological chain products such as smart TV, Xiaomi bracelet, Mi+ electric scooter, and Mi+ cleaning robot, etc. Comparing with the smart phone’s bad market situation with a declining global shipment, the power of IoT, with the help of AI technology, is being recognized gradually. By the end of 2018, there are more than 150 million devices connected to Xiaomi’s IoT platform, with a QOQ growth of 14.7% and a YOY growth of 193.2%. Xiaomi’s AIoT platform has attracted more and more third-parties. In Dec 2018, Xiaomi cooperated with IKEA to connect IKEA’s smart light productions into Xiaomi IoT platform. In addition, MAU of M+ reached 203 million and more than 50% of them come from non-Xiaomi smartphones. Xiaomi also equipped its IoT with artificial intelligence technology. Xiaoai, the AI assistant, was sold more than 100 million with an MAU of 38 million. Xiaoai has been one of the most active AI interaction platforms in China. Meanwhile, Xiaomi’s smart speaker had a shipment of more than 9 million. With more devices connected to Xiaomi’s IoT platform, the AI could receive a broader users group, more abundant application scenes, and a stronger data flow. With the 10 billion investment, Xiaomi’s IoT business may achieve more in the future. Currently, Xiaomi opens its IoT platform to a larger degree. On one hand, Xiaomi established a fund with CNY 100 million to welcome the developers to join its IoT platform. On the other hand, Xiaomi cooperated with other third-party cloud platforms to build a larger AIoT platform. Internet Business: Another Significant Income Source Xiaomi’s Internet business might be at the point where it could make money in the long term. In 2018, the Internet business’s revenue was CNY 16 billion with a YOY growth of 61.2%. The revenue structure of Xiaomi is varied. Most of the Internet business’s revenue comes from the advertisement which was CNY 10.1 billion, and grew 79.9% (YOY). On the other hand, the revenue of game was CNY 590 million and other services such as Internet finance and E-commerce was CNY 3.2 billion. The varied revenue structure reflects diversification of Xiaomi’s Internet service. Meanwhile, Xiaomi did a really good job in the overseas market. Firstly, all of Xiaomi’s smartphones are equipped with Xiaomi’s Internet apps. The MAU of MIUI is 242.1 million in Dec 2018, which is a strong support for Xiaomi’s Internet business. Based on MIUI, Xiaomi developed many kinds of apps ranging from games, Internet tools, music and videos, Internet finance, etc. Secondly, Xiaomi is broadening its Internet services outside MIUI. For example, the Mi Mall and Youpin, as well as the Internet service based on smart hardware. The MAU of Xiaoimi’s smart TV and Xiaomi box grew 55.3% in 2018 Q4, and the MAU reached 18.6 million in Dec 2018. In 2018 Q4, the Internet finance business occupies 11.9% of the Internet business with a YOY growth of 80.5%, and the Youpin E-commerce grew 427.6% (YOY). Going Abroad: An Exciting Tour in Southeast Asia and Europe Xiaomi did a really good job in the overseas market. The gross revenue from the overseas market increased to CNY 70 billion with a YOY growth of 118.1%. In addition, the ratio of the revenue from the international market was 40% of the total revenue, while in 2017 the value was 28%. The increasing shipment of smartphone contributed to the Xiaomi’s global business. According to Canalys’ data, In India, Xiaomi smartphones’ shipment ranked on top during 6 quarters and grew 59.65% (YOY) in 2018. The shipment of Xiaomi’s smartphone in Indonesia grew 299.6% (YOY) and was ranked at second place for the whole of Indonesia’s market. Xiaomi opened more than 500 stores in India and covered more than 1000 after-sell service center in over 600 cities. Besides the mobile phone, Xiaomi also took care of its smart home furnishings. In India, Xiaomi sold more than 1 million Xiaomi TV. Besides the Asian market, Xiaomi also focuses on the European market. The smartphones’ shipment has a YOY growth of 415.2% and ranked 4th place for the Western Europe market. In 2018 Q4, the overseas Internet business of Xiaomi has a YOY growth of 1295.6%. In 2018, Xiaomi introduced Internet services such as video, App store to India and Indonesia. Failures Are Important: Analysis of The Loss in Q4 It’s undeniable that Xiaomi did a good job in 2018, but we found that in 2018 Q4, both the revenue and the growth rate of Xiaomi decreased. In 2018 Q4, Xiaomi faced a QOQ decline in its revenue, gross profit, and adjusted net profit. The smart phone’s shipment decreased by 25% (QOQ), too. What factors lead to a decrease in its revenue and shrink of its business is of vital importance. Firstly, the relatively bad market environment in 2018. According to IDC’s data, in 2018, the global shipment of smartphones decreased by 4.1%, which shows an inactive market. Although Xiaomi was ranked at 4th place in smart phone’s shipment, the market reaction may not satisfy. Xiaomi explained that the decrease in its sales volume is because only Mix 3 and Xiaomi Play were published in Q4.  Models with a higher sales volume, for example, Redmi Note 7 and Xiaomi 9, would be published in 2019 Q1. However, according to IDC, Xiaomi has lost control of the Chinese market since 2018 Q2. Although the sales volume and shipment in India market was increasing, the growth rate declined. The Chinese market’s negative sales performance has a strong effect on Xiaomi and in 2018 Q4, the total growth rate of the sales volume of Xiaomi’s smartphones for the whole world is 1%.   Secondly, the profit of smartphones was not high enough. Although Xiaomi announced in its annual report that 38% of its smartphone revenue comes from phones priced more than CNY 2000, the average price of Xiaomi’s phone decreased from CNY 1052 in Q3 to CNY 1005 in Q4. The average prices of Xiaomi’s phones are close to CNY 1000. In Xiaomi’s annual report, it announces that “Xiaomi has a stable market share in the middle-end and high-end smartphone market”, however, according to the average price, we could hardly agree with that. Xiaomi is proud of its performance-cost ratio and in its annual report, Xiaomi said that the gross profit margin of the hardware business of Xiaomi is less than 1% in 2018. During the past years, Xiaomi separated its sub-brand, Redmi, which focuses on the performance-cost ratio. Xiaomi, however, would keep on pursuing innovation and “extreme user experience”. In 2018, with the price’s cutting down of Oppo, Vivo, and Honor, Xiaomi gradually loses its advantages in low-end phones. Due to the large stock of smartphones, Xiaomi should increase its retail prices in order to make a higher profit.  However, even after the average retail price of Xiaomi increased by 17%, there’s was not a great increase in its profit. With the increasing of its ASP, the profit of Xiaomi decreased as it shows in the chart. In 2017 Q4, the net profit per phone is CNY 60. However, in 2018 Q4, the ASP increased CNY 1005 but the net profit increased CNY 1, to 61. It seems like the increase of Xiaomi’s ASP is caused by the increasing cost of its supply chain. Thirdly, the competition from other manufacturers. In 2018 Q4, many other magnates published the new models. Xiaomi faced competition not only from Honor and Vivo but also from international magnates such as Apple. Although the people that Apple is targeting are different from those of Xiaomi, the iPhone XS could at least attract some potential users of Xiaomi.   Fourth, the production capacity. Xiaomi 9 sold out within 1 minute after its publication. LEI Jun (雷军), the founder and CEO of Xiaomi, promised that the inventory of Xiaomi 9 would be more than 1 million. On Mar 19, the day which Xiaomi would publish its annual report, Xiaomi 9 were sold out within 1 minute again. The production capacity greatly limited Xiaomi’s development in Q4. Stop pushing me all the time! If we don’t have 1 million Xiaomi 9 as inventory, I will go to Xiaomi’s factory to tighten the screws! —LEI Jun   Future: Keep Climbing with the help of 5G+AIoT In 2019, Xiaomi started its dual engines strategies with 5G+ AIoT. According to Xiaomi’s annual report, Xiaomi will keep its multi-brand strategy and invest more companies in innovation and supply chain field. Besides, Xiaomi will keep focusing on the AIoT field and invest CNY 10 billion in the next 5 years. Xiaomi will keep exploring the international markets and apply its successful experience in India and to other markets, like, Indonesia. In terms of retail ability, Xiaomi would build an all-channel retail network in China. In addition, Xiaomi will actively develop its IoT Internet services such as TV Internet services and overseas Internet services, while broadening its Internet finance and Youpin E-commerce to other non-Xiaomi smartphone users. As one of the largest technology companies in China, Xiaomi provides technology devices and AIoT related services. With an increased revenue and R&D investment, Xiaomi has the ability to gain more achievements in the future. The era of 5G has arrived and the two engines of Xiaomi are turning on. Although there are still many difficulties for Xiaomi overcome, but we still have great confidence in this technology flagship.

Analysis EO
Feb 14, 2019
Analysis EO
Feb 14, 2019

Xiaomi Converts Its 5.6 Million Class A Share into Class B Share

Xiaomi Corporation (Xiaomi, stock code: 1810) submitted Next Day Disclosure Return on 1 February 2019, saying, 5,591,700 Class A ordinary shares will be converted into the same amount of class B share. The conversion ratio is 1:1. In this disclosure document, it states that Xiaomi has 23,901,146,847 shares (comprising 6,695,187,720 class A ordinary shares and 17,205,959,127 class B ordinary shares) the closing balance as of 31 January 2019. As it can be calculated that 28% of its shares are Class A shares while the other 72% are Class B Shares. The number of Class A share will be converted constitutes 0.02% and 0.08% of the total current total share and total Class A share issued.  Who will convert their own Class A share into Class B share? To answer this question, we first need to answer why shares are divided into different classes and who would typically own class A and class B shares. One common reason is to seize voting power within a certain group of shareholders. Most of the time, the founders or founding team would like to hold more voting power per share in order to have better controls over the company. Usually Class A share comes with more voting rights than Class B shares, for example, one Xiaomi Class A class has ten voting rights per share held while one Class B only represent one voting right. This dual-class structure is widely used in internet companies or startups, founders only have access to limited financial resources which means they need finance several rounds and the ownership will typically be diluted. Diluted ownership could possibly lead founders to lose control over the firm and firms pushed by investors to pursuing short term goals in terms of long term ones. In addition, the only two people hold Xiaomi’s Class A share who are LEI Jun, the founder, and CEO of Xiaomi, and LIN Bin, the co-founder and president of Xiaomi. All the other shareholders hold Class B shares. What will happen after the conversion? Since the number of Class A shares constitutes only a small proportion of the total share or total shares, LEI and LIN will still have control over Xiaomi. Therefore, rarely a real substantial difference will be made. However, this might be a signal to the existing or potential investors that Xiaomi would like to hear more voices from them as it reduces its owned shares with voting rights. Previously, investors typically hold a negative attitude towards dual class shares as their influences are restricted. Other than investors, security exchanges and index compilers around the world generally hold a doubtful attitude on dual-class structure. For now, security exchanges in mainland China do not allow dual-class shares to be listed. Companies insisted this structure would have to choose to be listed overseas such as the US or Hong Kong. For example, Alibaba firstly decided to go public on the Hong Kong stock exchange; however, dual-class was not allowed at that time then it finally went public in the US under a dual-class structure. Overall, there is only a few stock exchanges that allow dual-class share listing. Hong Kong stock exchanges approved it in April, 2018. As EqualOcean covered earlier, investor pressured index compliers not to include dual-class in their track lists as a protest against reduced influenced given to the investors. More on this disclosure document On this disclosure document, it also mentions that 12,444,600 class B ordinary shares will be exercised as options by employees (other than directors), according to the pre-IPO employee stock incentive scheme. The number of employee options takes about 0.052% of the total shares issued before. The weighted average issue price HKD 0.1798 (USD 0.023) per share. Closing market price per share of the immediately preceding business day is at HKD 9.84 (USD 1.25) at a 98.17% discount.

Analysis EO
Feb 13, 2019
Analysis EO
Feb 13, 2019

Xiaomi 2018 Q4 Performance in Europe

Canalys, a global technology market analyst firm published a report on February 11, 2019 showing Xiaomi (小米) has become the No.1 smartphone brand in Ukraine and top 5 smartphone vendors in west Europe. Chinese smartphone vendors try to seek growth in Europe One possible reason for why Chinese vendors dominate this top 5 list in Ukraine and expand their presence in Western Europe is the eageress of Chinese smartphone companies to seek new opportunities since the growth of smartphone at home market has slowed down and even gone negative. Till the fourth quarter of 2018, the Chinese smartphone market has suffered the seventh consecutive quarter of decline and a 15% year-on-year decrease. Since there is a strong incentive for Chinese companies to find a new battlefield for increasing shipments, gaining market share and generating revenue, the competition among smartphone vendors in the targeted market is likely to get fiercer. However, the fierce competition in the smartphone field might mean smartphone vendors will try to ship the maximum possible amount of phones, as a result, the smartphone users will increase accordingly. As there are more smartphone users, there might be more opportunities for various phone App developers, electronics manufacturing companies, tech companies providing advanced technologies, or phone accessory businesses.    Details on Xiaomi in Ukraine By watching Ukraine’s top 5 favorite brand list, it can be noticed that four of them are Chinese smartphone vendors which are Huawei (华为), Meizu (魅族), and Honor (a sub-brand with more affordable pricing belong to Huawei). The other non-Chinese vendor is Samsung. By market share, Xiaomi takes up 26.7% slightly surpassing the second-ranked Samsung which takes up 26.5%. A bit about Ukraine Ukraine is the largest eastern European country located next to the Black Sea with a total population of 43,876,979 and the urban population taking up 70.1 % as of Monday, February 11, 2019, estimated by United Nations. 55.87% of its population is aged between 15 and 59. Ukraine has a highly skilled with low-cost labor force and most importantly it has a strategic location with access to the Black Sea, Sea of Azov, and the Danube river which could help transport Chinese goods globally. Not only private companies are interested in Ukraine, but China state-backed capital is also interested in investing in Ukraine mainly in infrastructure. For example, the China Harbor Engineering company invested USD 40 million in making bigger ships access to Yuzhny port. Ukraine has many smartphone users at a young age LEAD9 Mobile Marketing agency and Kiev International Institute of Sociology collectively conducted a research showing 45% of adults in Ukraine use smartphones 91% of pooled participants aged 18-30 use smartphones From 2016-2018, the share of smartphone used in Ukraine has increased by 26% and expected to increase by 70% by 2020 The increase of smartphone users is due to the development of mobile internet and the presence of cheap phones. Since more than 90% of teenagers are using smartphones now, and consider a smartphone normally would not upgrade his phone in a relatively short term. It might raise a question that if Ukraine smartphone market will soon become saturated and profit will plunge. Moving on to the Western Europe market Xiaomi ranks at the fifth place with the highest year-on-year growth of 415.5% among top 5 smartphone vendors in Western Europe. In Western Europe, Xiaomi has entered Spain, France, Italy, the UK etc. The first Western Europe Xiaomi entered was Spain in 2017 and in the fourth quarter of 2018, it ranks at the third place with the total shipment of 2.8 million after Samsung and Huawei. While, its year-on-year growth is 273.4%, which is much higher than Samsung (-0.5%) and Huawei (36.8%). It recently opens the largest store in Paris, France as EqualOcean reported earlier.  

Analysis EO
Jan 25, 2019
Analysis EO
Jan 25, 2019

Xiaomi Forms African Business Unit. What Will It Do Next?

EqualOcean mentioned previously Xiaomi (小米) opened its largest European in France. While at the same time it published an announcement saying that the African business unit will be formed in order to promote expansion in Africa. Wang Lingming (汪凌鸣) will be the in-charge of the African business unit and report to Wang Xiang (王翔). It can be seen Xiaomi’s global rollout is on the way. Backed to 2015, Raymond Tian, Xiaomi’s Global Strategy Director, considered Africa as the next frontier for smartphone growth and started to work with Mobile In Africa Group (MIA Group) to distribute Xiaomi phones to key countries in Sub-Saharan Africa, starting with South Africa, Nigeria, and Kenya. The first two phones launched in Africa were Redmi 2 (costing USD 160) and Mi 4 (USD 320).  Xiaomi’s performance in the African market has not been mentioned in its published report though. In 2015, smartphones receive a 66% year-on-year Q1 increase and accounted for 47% of the mobile phones bought in Africa, IDC says. IDC also predicted that total smartphone sales in the Middle East and Africa (MEA) region will reach USD 155 million this year. In Q3 2018, despite the African phone market in Q3 declined 2.1% with feature phones and smartphones declined by 2.7% and 1.3% quarter-on-quarter respectively. IDC reckons the African’s phone market will reach USD 58 million in Q4 2018. For now, feature phones take the majority share of African’s overall phone market. Now, the African market has been dominated by a Chinese phone maker Transsion (传音), which has never sold any phone in China and has no obvious plan to enter the home market. African Business magazine published 2007-2008 Brand Africa 100 ranking Transsion as the 7th admired brand in Africa. It has three brands which are Tecno, Infinix, and Itel. It leads the feature phone space in Q3 2018 with a combined share of 58.2% and is ranked at the second place in the smartphone market (21%). Transsion’s success in Africa can be attributed to its deep localization strategy by adding locally targeted features. For example, it improves the algorithm on its smartphone camera to allow more light exposure boosting photo clarity for darker-colored skin. It also introduced dual-SIM-card phone targeting Africans who use two cards to reduce call rates charged by different telecommunications companies but cannot or reluctant to buy two phones. Transsion's dominance in the African market raises a doubt that how Xiaomi can be a hit in the same market. If it localizes its products significantly, then the consistency of its brand image might be negatively affected. Although the feature phone is the current mainstream in Africa, it might be awkward to see Xiaomi start to produce feature phones as an out-of-date option. While, if it refuses to adjust its products to meet local tastes and needs, then it might be hard to expand as African users might be demanding some other functions which are not involved in Xiaomi’s current phones. Transsion’s success in Africa has helped draw in other Chinese phone brands. Huawei, Oppo, Vivo etc. all started to emphasize African markets where they consider is the world’s next big growth market. When more rivals coming in, the price war is a highly likely strategy for those phone markers to win the African market. By then, it might raise another concern that whether Xiaomi will be involved in the price war or launch cheaper phone options to win market share but lose overall profit. Regarding the top management of Xiaomi’s African unit - Wang Lingming and Wang Xiang, both seem to have sufficient experiences in the phone-related industry and companies. Wang Lingming joined Xiaomi in 2018 and worked as vice-president of Tiaynyu (天语, a phone manufacturer) and T.Word (话机世界, a platform offering phone recharge services). Wang Xiang joined Xiaomi in 2015 and previously worked for Qualcomm (13 years), Motorola and Agere etc.  However, neither of them seem to have previous remarkable successful experience in leading a Chinese brand to win the No.1 or 2 positions overseas. Thus, it might raise a question that if they can lead Xiaomi outpaces Transsion is unknown. In addition, risk factors should not be ignored while considering the African business opportunities. For example, the continent ranks lowest amongst global regions in the Corruption Perceptions Index (CPI), an important corruption measurement, and six out of the bottom ten countries are African, according to Transparency International.