Troubled Chinese smartphone maker Gionee seeks new investment to restructure

The smartphone maker has not managed a turnaround, unlike Xiaomi.

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Troubled Chinese smartphone maker Gionee seeks new investment to restructure

Embattled Chinese phone manufacturer Gionee, best known outside of China for making some of the budget Blu smartphones, announced plans to restructure after a likely investment from a state-owned enterprise (SOE), according to Securities Daily, a state-owned media outlet on Sunday.

The cash-strapped company has been facing months of uncertainty and is now seeking a cash infusion to undergo a major restructuring, which an unnamed SOE is likely to provide, the same report said – citing an anonymous source within the company. Rumours circulating in Chinese media since March this year have indicated that Hisense, a Qingdao-based electronics and appliances maker, is considering to buy out Gionee. Hisense is an SOE with publicly-traded subsidiaries in Hong Kong and China.

Details of the restructuring would be announced soon, said the Securities Daily report, without mentioning a timeline.

Gionee, a second-tier smartphone maker, after more high-end companies like Huawei, Oppo and Xiaomi, has been facing financial difficulties amidst a slowing domestic market. In January, a Chinese court ordered the freezing of a 41.4 percent stake held by Gionee CEO and Chairman Liu Lirong,  due to the inability of the company to pay suppliers. Just this month, Gionee slashed half of its workforce at a major manufacturing plant in Dongguan, China.

The company, which was one of the first Chinese brands to expand to India, is experiencing cash flow problems due to a slowing demand for smartphones in China. Smartphone shipment in China has decreased by 4.9 percent in 2017 compared to a year earlier. It sold its Indian operations to Karbonn, an Indian phone maker, late last month,  due to the financial problems of its parent company. This was after announcing big marketing plans to be one of the top five mobile phone companies in the country in March this year.

Slowing domestic demand in China has impacted second and third-tier smartphone makers such as Gionee, Meizu and Coolpad, who are vying for lower-income customers behind the top-tier five major players which are Huawei, Oppo, Vivo, Xiaomi and US firm Apple. Smartphone makers like Gionee, which operate in the budget smartphone spectrum, face razor-thin margins from their smartphone sales but require heavy investments to differentiate themselves in the overall very competitive and saturated Chinese smartphone market.  The company said earlier this year that it has spent more than US$1 billion in investments and marketing over the last three years, causing it to overextend itself.

Unlike Xiaomi, Gionee has not been able to re-invented itself amidst a slump in smartphone sales. Xiaomi saw its smartphone sales plummet in 2016. The company’s executives blamed “supply-chain issues” stemming from rapid expansion. Xiaomi, which earned most of its revenue back then from mobile phone sales and online services, underwent a turnaround that saw it developing its own ecosystem and branching into consumer goods, albeit with US$1 billion in syndicate loans from 18 banks.

Happy days for Lei Jun, Xiaomi’s CEO and founder.

Xiaomi moved on to the higher-end price point of the smartphone market, by building phones that Chinese consumers were willing to pay for and would go to the Xiaomi stores to buy. It also engaged with a network of about 100 startups to form an ecosystem that sells mid-tier products that are well designed, but affordable.

One of the hits was the Mi Air Purifier 2, which retails for a little over US$100 and sold well in China where air pollution is a serious issue. The air purifier is also connected to smartphones, where users can receive updates when the filters need changing. The same approach was taken with fitness bands, rice cookers, headphones and other gadgets. The ecosystem strategy also saw it amassing millions of Xiaomi fans, known as “Mi Fans.”

Xiaomi has since debuted at the Hong Kong Stock Exchange. Financially, the company is in a much better position than in 2016 although while revenues are increasing, its losses are also widening. The company’s operating profits are propped up by its corporate venturing efforts and its main business remains in the highly competitive mobile phone market. At the very least, Xiaomi found a new way to position itself, while Gionee’s fate is still to be decided.

Editor: Nadine Freischlad