- Xiaomi is a very rare company that can do hardware, e-commerce and internet services.
- Last year, Xiaomi registered a revenue of ¥114.6 billion (US$17.3 billion), remarkable for a 7-year-old company, even internationally.
- We promised our users this April that we would cap the net profit margin of our hardware business at 5%; if it surpasses 5%, we will find a way to return it to them.
On the morning of June 23, Lei Jun, founder and CEO of Xiaomi, gave a speech at a press conference announcing the company’s IPO in Hong Kong.
Here’s a full transcript of his speech:
I founded Joyo.com (卓越网) in 1999. By the time I sold it to Amazon, it had grown into China’s largest online retailer. I became an angel investor in 2007, investing in over 30 companies including YY and UCWeb. In 2010, I founded Xiaomi, with an ambition to build world-class products to accelerate the transformation and upgrade of China’s manufacturing industry.
We started out by making mobile phones. It’s a fiercely contested market, yet since the launch of our own mobile phone products in 2011, we have become the largest mobile phone manufacturer in China and the third largest in the world. It was a miracle, and behind this miracle was Xiaomi’s amazing team and pioneering business model.
As you all know, Xiaomi had to overcome a rough patch in 2016. Many wondered how we ended up in that plight.
The reason was simple. Xiaomi had focused solely on the operation of Mi.com, its e-commerce business in the early days, but online sales of mobile phones soon hit a bottleneck in China, so what we needed then was a shift of focus. Futhermore, the company was generating an annual sales revenue of over $10 billion with a workforce of more than 10,000 people then, which posed a challenge to our management ability.
After an internal overhaul, overseas expansion and branching out into the new retail scene, we managed to recover from the crisis and unleashed a new wave of growth from the 2 years of adjustment. This was a rare occurrence in the global mobile phone industry. Before us, no mobile phone company had pulled off what we did when in a similar situation. It was a testament to Xiaomi’s strong competitiveness.
On the screen is a list of the world’s best-selling mobile phone brands for Q4 2017. As you can see, Apple, Samsung and Huawei have all posted negative growth for the period; Xiaomi, however, came in fourth place and had registered a growth of 97.4%.
Having scored a preliminary victory in the mobile phones industry, we began to diversify our product portfolio. We now operate more than 100 products, where tens of them are ranked No. 1 in China and even across the world. It demonstrates Xiaomi’s strong expansion capability. More than 100 million internet-connected Xiaomi devices are currently in use globally, making Xiaomi the world’s largest retailer of IoT devices.
Relative to how widespread IoT products are, our research shows that there are over 1.4 million users utilizing 5 such products, while more than 50,000 users utilize 100 of them. As you can see, Xiaomi’s IoT devices are gaining increasing popularity among consumers.
Why are Xiaomi’s products so popular? The answer is simple. Better quality for lower prices, a principle we have always held onto.
Let me take some time to briefly introduce our products. Mi Mix is Xiaomi’s flagship mobile phone with a pioneering borderless design. It hangs in three art museums and has won gold at the International Design Excellence Awards (IDEA). IDEA has awarded only 12 mobile phones in its 40-plus-years of history, and even Apple has only won once, so the fact that Xiaomi has won is really something. It’s also worth noting that Mi Mix was given the exact same score as the iPhone X.
Xiaomi’s products are loaded with innovative technologies. Mi 8, for example, comes with a pressure-sensitive fingerprint reader, which unlocks the phone as soon as you touch the screen and therefore saving battery. It has an Explorer edition too, with transparent back panel that allows users to see the internal circuiting of the phone, including the chip. The idea is to give users a sense of Xiaomi’s product philosophy.
Xiaomi’s success has to do with its innovative business model as well.
To make it easier to understand, I have singled out three key elements in Xiaomi’s business model, represented by the three circles. Xiaomi is firstly a hardware company, which is why I put hardware on top. It’s in fact costly to make hardware that users acknowledge, but Xiaomi still manages to deliver decent products at affordable prices. How did we do this?
The answer is our e-commerce and new retail platform, without which Xiaomi would never have achieved this level of efficiency. It’s the fact that we are at the same time a hardware supplier and an e-commerce platform that allows us to offer quality products at competitive prices, making Xiaomi stand out.
However, despite the high efficiency, as we choose to keep profit margins low to make our hardware products affordable, many people have questioned our profitability and sustainability. Our solution is offering internet services on top of the large user base we have established through our hardware and new retail business. By doing so, we can not only enhance user experience, but also better monetize our use base to support the long-term growth of the company. This is Xiaomi’s three-in-one business model.
E-commerce and new retail contributed 63.7% of Xiaomi’s revenue last year (calculated by sales channels), while internet services accounted for 8.6%. With a gross profit margin of over 60%, internet services have become Xiaomi’s main source of profit. Xiaomi operates the third largest B2C e-commerce platform for 3C products (communication, computer and consumer electronics) in China and India and has put in place a network of e-commerce infrastructure including warehouses, logistics facilities and information systems.
Xiaomi began to expand its brick-and-mortar retail outlets two years ago. Our offline model is easily scalable, and I think it’s amazing that we have made our offline stores as efficient as our e-commerce platforms. As of the end of Q1 this year, we were operating 331 Mi Home Stores, whose sales per square meter rank No. 2 worldwide, with a cost-to-revenue ratio of less than 10%.
In the past five years, Xiaomi has been doubling down on investment in its ecological chain, all in an effort to refine and diversify its ecological system. Altogether, we invested in 210 companies, to which we then applied the platform-based model so as to hone their competitive edge.
Of the 210 companies, 90 specialize in intelligent hardware. Among them, Huami, in which Xiaomi has a 14.9% stake in, was the first to go public in the United States. That said, we also invested in some content-focused companies, such as iQiyi, in a bid to diversify contents on Xiaomi’s smartphones and televisions. In turn, iQiyi also gets to pick up more users. As you can see, this, indeed, is a mutually beneficial partnership. A few months ago, iQiyi went public in the United States. Currently, Xiaomi, which owns shares worth $2 billion in iQiyi, is its second largest shareholder. In the future, the return on equity from those shares will add to Xiaomi’s profit greatly.
Last year, Xiaomi registered a revenue of ¥114.6 billion (US$17.3 billion), an increase of 67.5% year-on-year. This was indeed a remarkable growth for a 7-year-old company, even in the international arena. In terms of growth rate, Xiaomi stood at No.2 among all large companies globally and No.1 among all internet companies. For companies as large as Xiaomi, managing a growth rate of over 10% is already hard enough. Nevertheless, Xiaomi has exceeded expectations with the growth it experienced. Though, the internet giants such as Tencent, Alibaba and Facebook are also exceptions.
Moving on to Xiaomi’s profitability. In the past, Xiaomi acquired a huge amount of venture capital funding, but it is time to convert those preferred shares to common shares. This will certainly be reflected in the accounting. Accounting aside, Xiaomi effectively recorded a net profit of ¥5.4 billion last year. Xiaomi has maintained its growth momentum by registering a growth rate of 89.5%, with its net profit standing at ¥1.75 billion (US$265 million) in Q1 2018. As you can see, Xiaomi experiences exponential growth in both revenue and profit.
In the past week, we’ve been deliberating on what kind of company Xiaomi is. Xiaomi has never failed to garner high valuation in its funding rounds over the last eight years. Particularly, we examined Xiaomi from the perspective of international investors when they valued Xiaomi at $45 billion three and a half years ago.
After rounds of discussion, our investors finally reached consensus that Xiaomi is a very rare company that can do hardware, e-commerce and internet services.
About three and a half years ago, our investors asked me a question. They said: “Suppose there are three circles respectively representing hardware, internet services and e-commerce, and you have to put the companies across the globe into the circle that they belong to, including Amazon, Google and Facebook.” It turned out, quite surprisingly, that Xiaomi, of all these companies, is the only one that spans all three sectors.
So, it doesn’t matter much to me whether Xiaomi is a hardware company or an internet one. To me, Xiaomi is one of a kind. It is a new species that’s yet to be labelled. Actually, it doesn’t matter what it is called. After all, it is its strong competitiveness that’s worth noting. Also, it’s possible that more companies like Xiaomi will emerge in the future. Admittedly, Xiaomi couldn’t have achieved its impressive international growth if it weren’t for this unique business model. For the same reason, Xiaomi is poised for substantial growth in the future.
Why? Many people say that the mobile phone industry will remain stagnant in the future which I certainly agree. Granted, the mobile phone industry will see snail-paced growth in the coming ten years. The thing is mobile phones represent a big market. In total, 1.47 billion sets of mobile phones were sold last year alone, of which Xiaomi contributed more than 90 million sets. As I see it, the mobile phone market still holds great potential, and Xiaomi is set to achieve dramatic growth regardless of the general landscape in the mobile phone industry.
Moreover, Xiaomi can achieve further growth by diversifying its product portfolio. Xiaomi already has over 100 kinds of products, and has a 12% market share in the television market in China. We’re thinking about taking our business to the next level by expanding our market share in more countries, enhancing our computers’ speed and adding more products to our portfolio. All of these mirror Xiaomi’s strong capability in diversification. In the coming ten years, Xiaomi will continue expanding into more areas to drive its growth.
Lastly, Xiaomi’s growth is also propped up by its expansion to other countries. So far, Xiaomi has established its presence in 74 countries across the globe. Still, there are many other countries that Xiaomi hasn’t branched out into. In the future, Xiaomi looks to gradually extend into these new markets and build its brand recognition there. On this ground, I believe that Xiaomi will still be able to see consistent growth for more than ten years.
Xiaomi makes products that deliver outstanding price/performance ratio. For this reason, we’re rewarded with a large number of supporters worldwide. If you were to think about it, of all the companies worldwide, which ones have managed to win the hearts of this many people? Xiaomi is among the few that boast so many supporters globally.
Why is Xiaomi able to attract so many supporters? Xiaomi’s operation philosophy: treat customers as friends. We want to make good products, products that people can buy without further deliberation. People’s expectation of Xiaomi is to deliver products of good quality and reasonable price. It is these factors that have helped Xiaomi win a large pool of supporters. To win our supporters’ trust, we promised our users this April that we would cap the net profit margin of our hardware business at 5%; if it surpasses 5%, we will find a way to return it to them.
We did some digging, we are the only company across the globe that has made this kind of promise. People, however, may argue that the net profit margin for most hardware companies usually stands at 2% or 3%. That’s is indeed true. Still, we’re the only company worldwide that has promised to cap the net profit margin at 5%. For companies making hardware products, only the top 2 see a chance of earning huge profits. As a matter of fact, many investors have expected Xiaomi to become No.1 in the mobile phone market, netting a profit margin of over 20%, just like Apple. In any case, I would tell them that Xiaomi operates under a philosophy that’s different from others. To us, only by limiting our net profit margin at 5% can we remain highly competitive in different markets, and it is exactly this promise that will make customers feel assured with our price whenever they walk into our stores.
To conclude, as to where a company should set their focus; an outstanding company usually puts profit first, whereas a great company thinks of the people. We hope that Xiaomi will gradually evolve into a great company in the coming ten years. That’s all. Thank you all for your support for Xiaomi!
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