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Xiaomi’s Road to Glory – The China Moment of IoT

As Xiaomi grew into the world’s largest IoT (Internet of Things) company, it was also the only one with a complete business model.

Lei Jun, the founder of Xiaomi (01810.HK), made a speech at the 20th annual conference of the Yabuli China Entrepreneurs Forum. While talking about the difficulties of starting a business, he also clarified the “three misunderstandings” about Xiaomi in the market: the products are all low-end, the products are all made by contract manufacturers, and Xiaomi has no technology.

Compared with international giants, Xiaomi was founded only ten years ago with some shortcomings, but it is far from the “three misconceptions” that were doubted. These “three misunderstandings” just show that under the rapid development of Xiaomi, the inherent investment framework was hard to make an accurate assessment of its future value. What’s the special point of Xiaomi?

It is neither a mobile phone manufacturer nor a pure Internet company. Xiaomi, as the world’s largest IoT company, is the only  IoT company with a complete business model in the global market.

Through ten years of hard work, Xiaomi has realized the “dream” of changing people’s life. By taking mobile phones as the core business and radiating to home products, Xiaomi has almost expanded to every aspect of daily life. Xiaomi leading users to successfully move towards the intelligent home life of the Internet of everything, forming a “Xiaomi network” that is still in continuous extension. At present, there are 290 million devices connected to the “Xiaomi network”.

According to its 2020 third-quarter data, Xiaomi has become a domestic leader in several segments, including mobile phones, televisions, routers, and bracelets. Driven by Xiaomi, enterprises distributed in the whole ecological chain of Xiaomi have risen comprehensively, and many companies such as Roborock and Ninebot have been successfully listed.

In addition to enabling ecological enterprises, the Xiaomi ecology has begun to open to third-party manufacturers, Hototo, IKEA, NVC, Opple, and other third-party manufacturers that have joined the Xiaomi ecology. In the future, Xiaomi will gradually open up its imaging capabilities and IoT platform “Xiaomi Vela” to further improve its IoT ecology.

After years of accumulation, Xiaomi has created a unique business model in the market. With the continuous enlargement of its overall scale advantage, the value of the whole ecosystem will also continue to improve. When the ecological advantage becomes more and more obvious, the profit contributed by Xiaomi’s value-added business will be more and more, which will become the impetus for Xiaomi’s performance in the future.

The short-term trend is based on performance, while the long-term trend depends on value. In terms of both short-term performance and long-term scarcity, Xiaomi has shown super-strong investment value.

Outbreak moment of single product business of Xiaomi IoT

If the previous two quarters were still a quick turnaround from the crisis, this quarter has been a full blowout.

Xiaomi’s total revenue in the third quarter was 72.2 billion yuan, up 34.5% compared with last year, setting a new high for the single quarterly revenue growth since its listing. Adjusted net profit reached 4.1 billion yuan, up 18.9 %. Under the onslaught of the coronavirus, Xiaomi is still showing super strong performance resilience.

In the third quarter, the brightest spot in Xiaomi’s performance came from its mobile phone business. The overall market is still in a declining trend, Xiaomi achieved a sales performance of 47.6 billion, with an astonishing rate of 47.5%.

Smart Phone Shipment
Smart Phone Shipment Q1 2017- Q3-2020

According to Canalys, global smartphone shipments fell 1% in the third quarter of 2020. Xiaomi is the fastest-growing smartphone vendor among phone manufacturers, with shipments ranking third in the world. This is the second time Xiaomi has been in the top three globally after 2014.

To be specific, in the third quarter, global mobile phone shipments reached 348 million units, with Samsung, Huawei, Xiaomi, Apple, and Vivo taking the top five spots respectively. Among them, Samsung increased by 2% year on year, Huawei fell by 23%, while Xiaomi shipped 44.1 million units, up 45% year on year. Xiaomi was the only Mobile phone manufacturer among the top four to buck the trend.

Counterpoint Global Smartphone Quarterly Market Data 2018Q1-2020Q3
Counterpoint Global Smartphone Quarterly Market Data 2018Q1-2020Q3

Xiaomi’s mobile phone business has grown dramatically. On the one hand, the success of Xiaomi 10 helped propel the brand to enter the high-end market. On the other hand, Redmi 8 has high sales over the world, due to the superior cost performance.

On November 19, Redmi announced that its Redmi Note series had sold 140 million units worldwide. Meanwhile, in the first half of this year, the Redmi Note 8 series was the second best-selling mobile phone in the world, second only to Apple’s iPhone.

As for AIoT, although it is not as dazzling as the mobile phone business, it also achieved a good result of 18.119 billion yuan, with a growth rate of 16.1%. By September 2020, the number of connected devices on the Xiaomi AIoT platform reached 290 million, which increased by 35.8%. The number of monthly active MIUI uses worldwide reached 368 million, up to 26.3%. “Xiaoai Speaker” has upgraded with a comprehensive strategy, the monthly active users have reached 78.4 million, up to 35.5%.

Xiaoai AI Speaker of Xiaomi
Xiaoai AI Speaker of Xiaomi

It’s not the whole harvest of the Xiaomi AIoT field. Focusing on the single product field, investors will find a greater value of Xiaomi.

The smart TV business of Xiaomi continued to be the industry leader, with its global shipments reaching 3.1 million units. It was the seventh consecutive quarter of Xiaomi shipments in  China mainland, and the world smart TV shipments of Xiaomi continued to rank among the top five.

According to the IDC data, Xiaomi Smart shipped 11.8 million wearable devices in the second quarter, which increased to 13.5%, the market share is 11.8%. Besides, in the scooter, the floor robot, and other businesses, Xiaomi also showed super-strong competitiveness.

It is the outbreak of these single products business that drives the overall growth of AIoT business.

Expected revenue growth, Xiaomi’s outstanding performance is reflected at the cost. In the third quarter, sales expenses, administrative expenses, and research and development (R&D) expenses accounted for 4.99%, 3.22%, and 1.18% of Xiaomi’s total revenue respectively. The share of all three expenses is at its lowest level in the past year, suggesting that Xiaomi’s revenue growth has not been achieved by burning through cash.

In general, Xiaomi’s overall performance significantly exceeded market expectations, the revenue, net profit, and other 15 performance indicators are hitting a record high in a single quarter.

Xiaomi IoT has taken shape

After years of precipitation, Xiaomi’s ambitions in the IoT field have become clear. As the company’s strategy has been upgraded from “mobile +AIoT” to “mobile ×AIoT”, a huge “Xiaomi network” has taken shape as a whole.

In this huge “Xiaomi network”, a mobile phone is undoubtedly the core network hub. As the most direct entrance to AIoT ecology, Xiaomi mobile phone has been endowed with more important strategic significance.

At the Xiaomi developer conference in early November, the “One Finger Connect” UWB technology of Xiaomi has been wowed the crowd.  The “One Finger Connect” is a new generation of connection technology with ultra-precise positioning. Pointing the Xiaomi mobile phone at Xiaomi AIoT product, then the direct interconnection control can be achieved, and it’s even accurate to the centimeter level.

Xiaomi One Finger Link
One Finger Link with UWB

Besides, to improve the connectivity experience between products, Xiaomi also published the carefree connection technology, which enables devices with the new network to connect without having to enter a password, but only when the phone is near.

These technological innovations comprehensively connect the entire ecosystem of Xiaomi IoT. When consumers purchase Xiaomi products, it’s not only to enjoy the function of the product itself but also enjoy the added value of the entire Xiaomi IoT system.

Considering that the Xiaomi AIoT platform has more than 290 million connected devices, and there are more than 5.1 million households with more than 5 IoT devices, IoT device connection through mobile phones can maximize the value of the whole ecosystem.

Xiaomi mobile phone is the leader of the AIoT ecology, and its efficient penetration can open a breakthrough for the whole AIoT ecology. Most “mi fans” also start to “sink” into other AIoT products of Xiaomi only after they have the high-quality experience of Xiaomi phones.

Because of this, in the third quarter of this year, Xiaomi’s return to the world’s third-largest mobile phone sales volume is even more significant. It is not only the sales growth of individual mobile phone business but also opens up the ecological path of the follow-up Xiaomi AIoT.

While phones are the most important AIoT hub of Xiaomi, but not the only one. Expected mobile phones, WiFi routers, TV, and other products show the potential to become the hub of Xiaomi AIoT. During the second and the third landing hubs of Xiaomi, the whole ecology will become more stereo and indestructible.

From this point of view, the large-scale “Xiaomi Network” has gradually become the moat of Xiaomi. Meanwhile, with the landing of more hubs and product lines, this network is still expanding outward and will be able to penetrate every aspect of our lives in the future.

A new high in share price due to revaluation

Xiaomi has never positioned itself as a hardware company, but as the only IoT company with a complete business model.

After reviewing the actions of Xiaomi in the past year, it can be found that the mobile phones business is the Xiaomi flagship product, which has been increasingly “marginalized.”

Although the mobile phone business has bucked the trend, its share in the company’s overall revenue has been quietly decreasing, which implies the success of Xiaomi’s ecological strategy.

Xiaomi IoT products
Xiaomi IoT products

With the continuous extension of the “Xiaomi Network”, more and more third-party manufacturers begin to join the entire Miui ecosystem. It can be seen that Xiaomi is an open ecosystem, whose ecological attributes have been more and more recognized by relevant industries, which also brings Xiaomi a steady stream of incremental users.

In August, Xiaomi released a pioneer level product Mi10 Ultra, which is independently produced by the company’s smart factory. The Xiaomi smart factory adopts the same “black light factory” model as the Tesla factory, and the whole factory is all automated production by robots.

Coming into the physical manufacturing industry is a big challenge for Xiaomi. After all, small differences in product manufacturing may determine the success or failure of a product.

Before that, Xiaomi did not have experience in physical manufacturing, but years of AIoT product layout has provided Xiaomi with a large amount of data accumulation. Coupled with years of experience in investing in industry chain companies, this has laid the cornerstone for Xiaomi to devote itself to manufacturing, and Xiaomi has become China’s “Made in Made”.

From the perspective of the business model, the constantly expanding “Xiaomi Network” is collecting, processing, and analyzing data through a large number of terminal devices to get the evolution trend of big data. What’s more, Xiaomi will constantly breed new species, and excavate new demands of users.

It is this positive feedback model that can be cyclically evolved and the “Xiaomi Network” that has been formed and is still expanding, which has brought an immeasurable future for Xiaomi.

The development of any industry requires continuous iteration of products, and these iterations are based on the accumulation of big data. It is easy for companies to obtain data from one track, but it is impossible to obtain data from so many tracks in all directions, and this is also the unique value of the Xiaomi AIoT ecosystem.

Therefore, it is completely wrong to regard Xiaomi as a mobile phone company or an Internet company.

Now, Xiaomi has become the world’s largest consumer-level AIoT platform and has achieved positive circular growth through this model, proving that this ecological model is completely feasible.

Xiaomi is a unique scarce target in the market, and its AIoT ecology has achieved positive feedback. Regardless of the hardware sales can bring profit growth for Xiaomi, and not counting the investment income from hundreds of supply chain enterprises, the contribution of the value-added business after the ecological formation of Xiaomi can become the continuous impetus for Xiaomi’s performance in the future.

On December 31st, the share price of Xiaomi hit a record high of 33.2 Hong Kong dollars. It is a correction of the market misunderstanding of Xiaomi, and it is also the market revaluation of the ecological moat of Xiaomi.

Yuffie Song

Yuffie Song is a big data analyst expert before she joined FirmKnow. She was studying Financial and Corporate Risk Management, at the University of Sussex. The most important personal feature of her is intelligent, logical, and sweet. Yuffie always has some wise suggests, which filled people around her always surprised by the original insight.

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