Original title: "All the past is a preface, the great millet is still on the journey: an in-depth report on millet by a non-rice noodle", by Economic Shi.
Key summary
1. Xiaomi’s growth process is comparable to legend, but behind every growth is a painful tempering. The course of Xiaomi is divided into four stages, namely, the dream start of miracle (2010-2014), internal troubles and foreign invasion, entering a trough (2015-2016), returning to growth (2017-2020) and strategic repositioning, company re-starting and future re-layout (2021- present).
2. Xiaomi’s business map is mainly composed of six pieces of content, of which mobile phone business is the cornerstone, accounting for more than 60% of operating income; AIoT business is an important supplement of more than 25%, and the new manufacturing business represents a new growth space, mainly including Xiaomi Automobile and Xiaomi.And intelligent engineering factories; Due to the early layout of giants such as Tencent and Netease, it is not easy to open the situation. The financial business license is relatively complete, and it will be an independent listed sector in the future; The investment sector is an important guarantee for the construction of industrial chain ecology.
3. Xiaomi’s basic financial indicators are healthy, its scale is still expanding, and its inventory turnover rate is at a high level in the industry. Due to the expansion of new manufacturing business, the three major cash flow indicators fell sharply in 2021.
4. In the new 10-year strategy, Xiaomi’s senior executives have been handed over from old to new, Li Wanqiang, KK Wong and Zhou Guangping have retired behind the scenes or left, Wang Xiang, Lu Weibing and Adam Gao and other new forces are heading for Center Stage, and the only constant sail is Lei Jun. The figure of the strong is always a little lonely and sad.
5. Xiaomi’s corporate culture is closely related to the founder team. The engineer culture is the base, the efficiency innovation culture is the path, and the fan community culture is the initial heart. In the new ten-year strategy, "mobile phone× ×AIoT" is still the core business content, but "internet plus Intelligent Manufacturing" will play a more important role, which is an important direction for Xiaomi’s future transformation and upgrading.
6. The domestic mobile phone market has entered the bloody market of stock game, and the arms race carried out by various mobile phone brands has gradually produced more direct competition from the original characteristics.
7. It is preliminarily estimated that the future market value of Xiaomi should be between 400 billion yuan and 1.5 trillion yuan. However, in order to truly realize the transformation and upgrading of Xiaomi and its evergreen foundation, it is necessary to deeply build Xiaomi’s own moat. Xiaomi has done a good job in defining some categories of standards in the AIoT industry, but it still needs to expand its territory. The significance of MIUI is to greatly expand the ecological boundary of Xiaomi brand and include non-mobile phone users in the whole system, forming a synergistic effect.
8. The significance of Xiaomi Automobile is not only a new growth point of business scale, but also an important carrier for Xiaomi to give labels to technology companies; Xiaomi still lacks some abilities to break the game at this stage, such as improving the design of mobile phones, establishing the soft advantages of AIoT platform, and preparing for a protracted war in building cars. Xiaomi is pursuing greatness, and constantly creating social value is the best gift for those users who have supported Xiaomi for a long time.
First, the growth process and listing structure analysis of Xiaomi
1.1 the growth process of millet
Regarding why Xiaomi wants to be a mobile phone, Lei Jun himself explained this. "In fact, what Xiaomi wants to do is not a mobile phone, but a personal mobile computing center. Only in this era, the personal mobile computing center happens to be a mobile phone. " Since its establishment in April 2010, Xiaomi can be roughly divided into four stages, which respectively represent Xiaomi’s dream start, trough crisis, return to growth and new decade strategy:
(1)2010~2014: the dream start of miracle.
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April 2010Yingu Building, Xiaomi was established (the name of Xiaomi comes from agama, "A grain of rice is as big as Mount Sumi", which means that the power of a small grain of rice is equivalent to a Mount Sumi), and the MIUI internal test version was released in August of the same year;
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Xiaomi 1 was released in August, 2011, priced in 1999. The first order was over 300,000 within 22 hours, and the sales volume exceeded 3 million in one year, with a cumulative sales volume of 7.8 million (including Xiaomi 1s).
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Xiaomi 2 was released in August 2012. In 2012, its revenue exceeded 10 billion yuan, and its cumulative sales volume was 14 million (including Xiaomi 2S).
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In 2013, MIUI users exceeded 10 million; In September of the same year, Xiaomi 3 was released, with a cumulative sales volume of 16 million models, making it the best-selling Xiaomi digital flagship;
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In 2014, the cumulative sales volume of Xiaomi mobile phones exceeded 60 million units, with an operating income of over 10 billion US dollars and a valuation of 46 billion US dollars, ranking first in China and third in the world.
At this stage, with the resource endowment and technical support of founders such as Lei Jun and Lin Bin, Xiaomi started from online marketing with MIUI as a breakthrough, quickly opened the mobile phone market with the ultimate cost performance, and caught up with the dividend of 3G to 4G. In just four years, mobile phone sales reached the first place in China and the third place in the world, which can be said to be a very successful dream start. At the same time, the platform business of IoT was officially launched to build a platform ecosystem.
However, the rapid expansion of Xiaomi has put forward higher requirements for its internal organizational structure, supply chain management and R&D technology innovation, and also laid hidden dangers for its subsequent crisis.
(2)2015~2016: Internal troubles and foreign invasion, entering a trough.
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In April 2015, Xiaomi 4 was released, and the cumulative sales volume of models was 14 million (including Xiaomi 4S). Xiaomi shipped 64.9 million units in the whole year, with a market share of 15%, ranking first among domestic brands;
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In February 2016, Xiaomi 5 was released at the National Convention Center, with a cumulative sales volume of 9.2 million models (including Xiaomi 5S and 5Splus). Xiaomi’s annual shipments plummeted to 4,150 units, with a market share of only 8.9%, ranking fifth in China. In October of the same year, Xiaomi MIX was released amazingly, which was the first generation full-screen concept mobile phone in the whole industry. Although it was widely praised and recognized, its sales volume was bleak.
Xiaomi in this period, under the double unfavorable situation of internal and external troubles, developed into a bottleneck period. In 2016, mobile phone sales plummeted by 36.06%. There are four main reasons:
In May 2016, Lei Jun had to take over the mobile phone department again, and made it clear that "delivery, innovation and quality" was the starting point, which fully filled Xiaomi’s shortcomings. After experiencing hellish self-help (Lei Jun often held more than 15 meetings a day, the longest one was 23 meetings a day. For two years, sleeping less than 4 hours a day), Xiaomi also ushered in the dawn of growth.
(3)2017~2020: Return to growth.
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In April 2017, a generation of classic model Xiaomi 6 was released. Although the product was excellent, the sales volume of the model was only 5.5 million units. However, with the laying of offline channels and the hot sale of models such as Red Rice Note4X, the annual shipment in 2017 exceeded 90 million units and the revenue exceeded 100 billion yuan.
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In May 2018, Xiaomi 8 was released, and the sales volume of the model exceeded 10 million again. Xiaomi’s annual mobile phone sales exceeded 100 million, reaching 118.66 million units, but the main sales volume was mainly low-end models;
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On January 18th, 2019, Redmi brand became independent, and started its brand differentiation development strategy, focusing on the ultimate cost performance. In May of the same year, Redmi K20 was released with a price of 1999 yuan. In February of the same year, Xiaomi 9 was released, and the sales volume of the model was only 2.47 million units, which was the worst sales volume of the digital flagship over the years.
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In February 2020, Xiaomi 10 was released at a price of 3,999 yuan, and the sales volume in that year exceeded 8 million. In December of the same year, Xiaomi 11 was released, and the price further increased to 6,999 yuan.
In addition to making up for the shortcomings in supply chain and internal organization and management, Xiaomi at this stage has made breakthroughs in three aspects:
The business ecology that Xiaomi wants to build has basically taken shape, but years of rapid growth and increasingly fierce competition in the mobile phone market have always pushed Xiaomi to consider the future development direction.
(4) From 2021 to now: strategic repositioning, company re-starting, and future re-layout.
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In March 2021, Xiaomi launched the first Xiaomi MIX FOLD equipped with self-developed image chip 澎湃 C1 at the spring new product launch conference of Xiaomi. At the same time, Lei Jun announced that he was willing to put all the accumulated honors and achievements in his life and invest 10 billion US dollars in 10 years to realize Xiaomi Automobile as the last major venture in his life.
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Xiaomi 12 was released in December of the same year, and the self-developed charging chip 澎湃 P1 was applied to its flagship mobile phone for the first time. At the same time, a model with a wider coverage at the price of 12X appeared.
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Because the power consumption of two generations of Snapdragon 888 and 8gen chips has been overturned, the fever is serious, which greatly affects the user experience of mobile phones. Xiaomi 12ultra did not release the Snapdragon 8+Gen1 chip manufactured by TSMC until July 2022. At present, the overall sales volume of Xiaomi 12 is not as good as that of Xiaomi 11, but the sales volume of Xiaomi 12ultra is relatively high.
Figure 1-1 Sales and Revenue of Millet over the Years
1.2 Analysis of listing structure: the path and advantages of VIE
According to the company structure disclosed when Xiaomi went public, VIE was adopted for listing due to factors such as tax policy, registered investment and financial openness. That is, the overseas listed entities are separated from the domestic operating entities, and the overseas listed entities completely control the business activities and profits of the domestic operating entities through a series of agreements and contractual arrangements instead of equity.
The profit transfer path under VIE framework is: domestic operating entity →WFOE (foreign-invested enterprise/wholly foreign-owned enterprise) → Hong Kong company → overseas holding company. Taking Xiaomi Technology as an example, the profit transfer path is Xiaomi Technology → Xiaomi Communication (Hong Kong-invested enterprise) → Xiaomi Hong Kong (Hong Kong) → Xiaomi Group (Cayman).
According to the disclosure in the prospectus, the contractual arrangements involving domestic entities mainly include Xiaomi Technology, Youpin Information Technology, Beijing Kawara Tsutomu Culture, Metso Software Design, Beijing Duoyue, Xiaomi Electronic Software, Beijing Kawara Tsutomu Network, Xiaomi Film and other eight units, that is, the operating income and profits of domestic companies are transferred to overseas holding companies through a series of contractual arrangements.
There are two points to note. First, the purpose of setting up a Hong Kong company is mainly to enjoy preferential tax policies. Xiaomi Group (Cayman) registered its wholly-owned subsidiary Xiaomi Hong Kong in Hong Kong, and then registered and established foreign-invested enterprises (WFOE) such as Xiaomi Communication in China through Hong Kong companies.
The reason why you have to go through Hong Kong instead of directly registering in China is because of the particularity of Hong Kong. According to the new Enterprise Income Tax Law, which came into effect on January 1st, 2008, 10% withholding income tax is required to be paid in China for the dividend income obtained by overseas PE without an institution in China (unless otherwise preferential in the tax treaty). Due to the arrangement between the mainland and Hong Kong to avoid double taxation, withholding income tax can be levied at the rate of 5% on the eligible dividend income of Hong Kong companies originating in China. Therefore, many red-chip organizations set up companies that directly hold the rights and interests of domestic companies in Hong Kong to enjoy the withholding tax concessions on dividend income between the Mainland and Hong Kong.
Second, most of the overseas subsidiaries of Xiaomi’s international business are integrated in Xiaomi Singapore Company, and the expansion center of Xiaomi’s overseas business is Xiaomi Singapore Company. The main reasons are Singapore’s advantages such as preferential tax policies, high degree of opening to the outside world and less capital control. Many domestic companies, such as SF Express and SHEIN, also use Singapore as a base for international business.
Figure 1-2 Xiaomi listed enterprise structure
Second, Xiaomi’s business map analysis
Xiaomi is the earliest among several major mobile phone manufacturers in China, which is closely related to Lei Jun’s experience of investing in a number of Internet and manufacturing enterprises as an angel investor after 2006. At present, Xiaomi’s ecological map has basically taken shape, mainly covering six sectors: mobile phone communication and software services, AIoT ecological chain, new manufacturing, cultural mutual entertainment, finance and investment.
2.1 Mobile phone communication and software services
This sector has always been the most important basic business of Xiaomi, with an average revenue ratio of 61.6% in the past three years. At present, there are mainly three brands: Xiaomi, Redmi and MIUI. The main positioning of Xiaomi mobile phone is flagship and high-end mobile phone, so digital series such as Xiaomi 13 and MIX series such as Xiaomi MIX4 and Xiaomi MIX Fold2 are an upward breakthrough in cost performance in the whole product layout.
Redmi mobile phones locate low-end mobile phones, mainly including K digital series such as Redmi K50 and Note series such as RedmiNote11T, which inherits the brand concept of Xiaomi’s ultimate cost performance. In fact, when Redmi became independent in 2019, in addition to differentiated development, it was also to compete for glory more effectively, so that Xiaomi could get rid of Huawei directly.
MIUI is an asset that is easily overlooked. In addition to the mobile phone system MIUI13, MIUI Home, MIUI TV and MIUI Watch also play an important tandem role in extended products. In the environment of hardware convergence, manufacturers are paying more and more attention to the development investment at the software level. Xiaomi’s success is inseparable from the iterative deepening of MIUI, especially in the early 2010 s, when the Android system was acclimatized and the operation was imperfect, the launch of MIUI laid a solid foundation for the word-of-mouth publicity and sales of Xiaomi in the early days.
2.2 AIoT ecological chain business
At present, this sector has the second largest revenue contribution in Xiaomi system, accounting for 27.8% of the average revenue in the past three years. Because there are many categories of ecological chain, products are simply classified into three categories here.
Because the principle of Xiaomi’s investment is "investment does not hold shares, help does not add chaos", compared with Ali, the investment is still relatively friendly, and Xiaomi also has the support of other factors such as technology, so more and more enterprises participate in the eco-chain platform.
2.3 New manufacturing business
This business is not very mature compared with the mobile phone and AIoT business, and it is more about Xiaomi’s exploration of the future strategic sector, including Xiaomi Automobile, Xiaomi Robot and Smart Factory.
Xiaomi Automobile is Lei Jun’s ambition to start a business for the last time. Investing 10 billion yuan in the first phase and 10 billion dollars in ten years is undoubtedly one of the most expensive business sectors of Xiaomi in the future. The significance of Xiaomi Automobile lies not only in the huge wave trend of visible new energy vehicles, but also in the completion of the last mile of Xiaomi’s ecological intelligence scene, that is, the complete closed loop of work, home and travel. This means that users can enjoy the full coverage service of Xiaomi Ecology all day long.
At present, the main direction of Xiaomi Automobile is autonomous driving technology (the first phase invested 3.3 billion yuan, and the R&D team exceeded 500 people), which has entered the testing stage. As for why autopilot technology is chosen as a breakthrough, on the one hand, the foundation of Xiaomi, a software research and development team, and on the other hand, autopilot, as the brain center of electric vehicles, is also located in the highlands in the industrial chain.
In terms of Xiaomi robot, CyberOne robot and CyberDog robot dog have been publicly disclosed, which are mainly developed by Xiaomi Robot Research Office. In the commercial development, bionic robot is far less than industrial manipulator in application because of its complex scene and high scientific and technological difficulty.
If the large-scale application of most digital factories and AGV handling robots corresponds to improving the quality and efficiency of the secondary manufacturing industry, major breakthroughs have been achieved in some fields; Then the large-scale commercialization scene corresponding to CyberOne and CyberDog is the tertiary service industry, which can have a far-reaching impact on this industry. In fact, individuals are doubtful.
The essential reason is that the manufacturing industry is product-oriented, and it is easy to formulate standardized processes and rules. However, the object-oriented service industry is essentially individual users, and the personalized services it needs are complex and changeable. The data and capacity to be calculated are actually enormous, and the existing computing level is far from meeting the needs of complex scenarios. At least in the short to medium term, the prospect of breaking through this technological bottleneck is not optimistic.
Smart factory is Xiaomi’s latest practice in intelligent manufacturing, representing advanced manufacturing technology and R&D base. In 2020, Beijing Xiaomi Smart Factory (Phase I) settled in Yizhuang, Beijing, with a total investment of 600 million yuan and a total construction area of 18,600 square meters. In addition to the annual output of 1 million high-end mobile phones, it also has a strong R&D base attribute, which is not only a "large laboratory" for the pre-research of new processes, new materials and new technologies, but also an "experimental base" for advanced manufacturing equipment and automated production lines.
Beijing Xiaomi Smart Factory (Phase II) is located in Changping District, Beijing, with a project area of 87.45 mu, a total construction area of 141,100 square meters, and an annual output of 10 million ultra-high-end smart phones, with an output value of about 60 billion yuan. It will be the second-generation smart mobile phone production line including SMT placement, board testing, assembly, whole machine testing and finished product packaging, and the second-phase factory will pay more attention to the improvement of production capacity. At the same time, Xiaomi Argentina smart factory is also under construction to serve the development of South American market.
2.4 Cultural Mutual Entertainment Plate
The business involving the agency distribution of film and television works and games is mainly realized by Xiaomi Pictures and Beijing Kawara Tsutomu. Xiaomi Film is mainly responsible for the investment and publicity of film and television. The film and television works involved include Chinatown Detective 2 and Former 2, etc. In fact, Beijing Kawara Tsutomu is mainly responsible for the investment and agency distribution of game business, and the main works include Xiaomi Gunfight, etc. This business is not very successful at present because giants such as Tencent and Netease are in the forefront.
2.5 Financial Sector Business
It is co-ordinated by Xiaomi Finance Hong Kong Company, and its business involves banking, insurance, factoring, internet financing, micro-loans and third-party payment. Among them, the carriers of banking business are Star Bank (virtual bank, Hong Kong license) and New Network Bank (the second largest shareholder accounts for 29.5%), which carry out bank deposit and loan business.
Tianjin Xiaomi Commercial Factoring mainly provides trade financing and settlement management of accounts receivable, Chongqing Xiaomi Microfinance mainly provides microfinance services, and Jiefu Ruitong mainly provides third-party payment services. The importance of the financial sector lies in its high market space, high valuation and high coverage (supply chain finance, inclusive amount, financial technology, etc.). In the prospectus, it is clear that Xiaomi’s financial business will be divested and seek independent listing.
Figure 2-2 Xiaomi Financial Sector Diagram
2.6 Investment business segment
Xiaomi’s investment channels mainly include Hubei Xiaomi Changjiang Industrial Fund Partnership (Limited Partnership), Hubei Xiaomi Changjiang Industrial Investment Fund Management Co., Ltd., Tianjin Jinmi Investment Partnership (Limited Partnership) and Xiaomi Technology (Wuhan) Co., Ltd.. According to incomplete statistics, by the end of the first quarter of 2022, Xiaomi had made about 425 foreign equity investments, and the total publicly disclosed financing amount of its participating projects was about 84.77 billion yuan. In 2021 alone, the project financing amount reached 45.24 billion yuan.
Xiaomi’s investment sector is diversified, which not only serves its own business map, but also continuously invests in cutting-edge technology industries. The investment direction mainly focuses on smart home appliances and electronic products industry, automobile related industry, game entertainment and media industry, integrated circuit and chip industry. Xiaomi’s investment in 2014 and 2021 was significantly higher than that in other years. Among them, 2014 may be related to the strategic layout of IoT. In addition, the investment and financing environment was relatively relaxed at that time, and the overall investment scale of the market expanded rapidly. In 2021, it was Xiaomi’s expansion of new business, and the layout of the upgraded industrial chain of intelligent manufacturing represented by Xiaomi Automobile increased significantly.
Third, the analysis of basic financial indicators of Xiaomi
After talking about the ecological map, most investors may be concerned about the financial indicators of Xiaomi. Then we interpret it according to the level of profitability, debt and debt repayment structure and cash flow in turn.
The first is the analysis of profitability. The compound growth rate of Xiaomi’s revenue in the past five years is as high as 36.84%, which is at a high-speed development level. The operating income in the three years from 2019 to 2021 is 205.839 billion yuan (17.68% year-on-year), 245.866 billion yuan (19.45% year-on-year) and 328.309 billion yuan (33.53% year-on-year) respectively. The main reason is that the sales volume of Xiaomi 9, which was released that year, was only 2.47 million (the sales volume of Xiaomi 8 exceeded 10 million units in the same period), and the revenue of mobile phone business only increased by 7.3%, and the sales volume mainly depended on the low-end models.
The five-year review growth rate of gross profit has further reached 51.71% (the gross profit level has increased from 13.22% in 2017 to 17.75% in 2021), of which the gross profit in 2019-2021 was 28.554 billion yuan (28.67% year-on-year), 36.752 billion yuan (28.71% year-on-year) and 528.
In terms of net profit, except for the large fair value loss of convertible redeemable preferred shares in 2017 due to international accounting standards before listing, which caused a loss of 43.889 billion yuan in that year, it has remained profitable since listing, of which the net profit from 2019 to 2021 was 101.03 (-25.04% year-on-year), 203.13 (101.06% year-on-year) and 192.83 respectively.
It should be noted that, although the revenue and profits of various businesses showed a rapid increase in 2021, the final net profit showed a negative growth. The reason was not that there was a problem with Xiaomi’s mobile phone business, but mainly two factors. On the one hand, entering new manufacturing industries such as Xiaomi Automobile led to a large increase in research and development expenses (an increase of 3.911 billion yuan year-on-year) and other operating expenses (an increase of 11.324 billion yuan year-on-year); On the other hand, the investment income dropped by 54.98% to 6.045 billion yuan and the income tax expenses surged by 288.71% to 5.134 billion yuan, which eroded profits. The decline in investment income was due to the overall downturn in the stock market and the surge in income tax was mainly due to the sharp decline in deductible expenses in the same period, which led to a net profit increase of only 12.87%, but the income tax increased by 288.71%.
Another key indicator is the inventory turnover rate, because the overall upgrading structure of the mobile phone industry is relatively fast, and the discount rate of inventory machines is very fast. After one year, the depreciation rate of new machines can reach 6-7 fold, so the inventory turnover rate also directly affects the profitability of enterprises. Xiaomi’s inventory turnover rate in the past three years has been above 5, which is the fastest mobile phone manufacturer except Apple (which has remained above 40 all the year round, and the industry has been riding the dust), namely 5.71 and 5.71 respectively.
In terms of debt structure and solvency, Xiaomi’s asset-liability ratio is relatively stable in the past three years, which are 55.53% (total assets of 183.6 billion yuan), 51.11% (total assets of 253.6 billion yuan) and 53.08% (total assets of 292.892 billion yuan), and its solvency is also relatively stable, with current ratios of 1.49, 1.63 and 1.66 respectively in the past three years.
There are three major changes in cash flow:
First, the operating cash flow dropped sharply. In 2021, the operating income was 9.785 billion yuan, down 55.27% year-on-year. The main reason was that the annual growth of accounts receivable was 7.8 billion yuan, and the annual growth of inventory was 10.7 billion yuan. Together, they occupied more than 18.4 billion yuan.
Second, the investment cash flow flowed out sharply, increasing to 45.008 billion yuan (up 154.59% year-on-year), mainly due to Xiaomi’s entry into new businesses such as Xiaomi Automobile and the substantial increase in foreign investment.
Third, the cash flow of fund-raising has been greatly reduced, from 26.216 billion yuan in 2020 to 4.499 billion yuan in 2021. From the perspective of investment and fund-raising activities after listing, after sufficient cash reserves, Xiaomi will often open up new businesses and the latter will greatly increase investment activities, which is manifested in the fact that the next year of the fund-raising year in 2018 and 2020 is often the big year of investment activities, namely 2019 and 2021.
Although the financial report data of Xiaomi Company is very bright in recent years, there are actually some hidden risks.
Internal factors: Xiaomi automobile is the biggest uncertainty, and the investment of 10 billion dollars is not a small investment for any company, which is also reflected in the substantial increase in R&D investment and other business expenses last year. In addition to funds, Xiaomi’s internal talent tilt is bound to occupy more, including more than 1,000 R&D teams, etc. Xiaomi Automobile, which occupies a lot of funds and talent resources, will inevitably have a certain impact on the mobile phone business. At present, Xiaomi plans to build a car in the form of a self-built factory, which requires higher regulatory approval and integration of the supply chain. It is difficult to achieve mass production of automobiles in the first half of 2024.
External factors: mainly manifested in the global economic downturn and the gradual saturation of the mobile phone industry. The economic downturn has led to a decrease in consumers’ disposable income and a weakening of their willingness to consume. The saturation of the mobile phone industry has changed from the blue ocean of incremental competition to the blood sea of stock competition.
Fourth, management analysis
Xiaomi’s senior management mainly includes 16 people including Lei Jun, Lin Bin and Hong Feng. It can be divided into three levels. Lei Jun is the only one, the early co-founder and the new management. In the early days, Xiaomi had eight founders, including Lei Jun (Jinshan), Lin Bin (Google), Hongfeng (Google), Wang Chuan (see more about technology), Liu De (Beijing University of Science and Technology), Li Wanqiang (Jinshan), KK Wong (Microsoft) and Zhou Guangping (Motorola), mainly from Jinshan and foreign giants such as Google, Microsoft and Motorola. Except that Liu De and Li Wanqiang were born as designers,
The first floor: Lei Jun is the absolute core of Xiaomi and currently has more than half of the voting rights.
Lei Jun (51 years old) is undoubtedly the totem of Xiaomi and the most important intangible asset (although not included in the report). He is the founder of Xiaomi Company, and currently serves as the CEO and chairman of Xiaomi Group who also serves as the CEO of electric vehicles, so just as Lei Jun himself said at the Xiaomi spring conference in March 2021, he wants to gamble all the previous honors for the last venture of Xiaomi electric vehicles, so in the internal division of labor, he focuses on electric vehicles. I don’t want to dwell on Lei Jun’s legendary experience, but I want to summarize it with a few labels: genius programmer, university entrepreneurial failure, three in and three out of Jinshan, Joyo. com transfer, angel investor and Xiaomi founder.
Genius programmer: Because of his thick black hair, many netizens questioned the identity of Lei Jun’s programmer. In fact, Lei Jun is not only a programmer, but also a genius programmer in my opinion. In his freshman year, he wrote Pascal programs and compiled new textbooks. He completed all the credits in two years in college, wrote more than 1 million computer applications in BITLOK0.99 (encryption software, anti-theft version), deciphered WPS1.0 in two weeks, and rewritten BITLOK 3.0 in two months. Therefore, if Lei Jun does not become CEO, he can actually become a programmer god.
University entrepreneurial failure: In the junior year of 1990, I founded a three-color company with my friends, sold computers, copied Hanka, etc. Because Hanka was cracked and the internal contradictions were prominent under the company’s four people sharing the equity, I was dissolved six months later, and my first venture failed.
Three in and three out of Jinshan Company: Lei Jun joined Jinshan Company in January 1992, submitted his resignation in April 1996 (although he failed to resign in the end and took a seven-month vacation), returned to Jinshan in November 1996, resigned as CEO two months after Jinshan went public in December 2007, returned to Jinshan as chairman in July 2011, and resigned as chairman of Jinshan in June 2020.
The experience in Jinshan enabled Lei Jun to grow from a technician to a manager, from a tactician to a strategist. After the frustration of Pangu Office and the helplessness of Joyo.com, Lei Jun had a deeper understanding of the Internet industry and laid the foundation for the establishment of Xiaomi in the future.
For Jinshan, Lei Jun saved Jinshan twice and realized the listing of Jinshan in two places, which is the best way to repay Jinshan. The first time was in 1996, when Pangu Office ran out of funds to develop the project, but it ended badly. Lei Jun later won new cash flow for the company by developing tools such as kingplayer, Kingsoft and Chivalrous Man’s Love, and on the other hand, improved WPS to get the company out of the predicament.
Another time, in 2011, Lei Jun returned to Jinshan in order to repay Qiu Bojun’s kindness. At this time, the performance of Hong Kong stocks in Jinshan was bleak. The price of Hong Kong stocks was less than HK$ 3, and the market value was less than HK$ 5 billion. After Lei Jun’s return, through a series of reforms and strategic adjustment, Jinshan’s revenue increased by 5 times and its share price increased by 10 times within 3 years. A shares were realized by splitting subsidiaries and implementing internal reforms.The listing, the stock price is as high as 518 yuan, the market value is as high as 240 billion yuan.
Joyo’s transfer: Joyo, founded in 1999, was Lei Jun’s first attempt to establish an Internet enterprise. At first, it was software download, but the cost of doing this business in the domestic Internet infrastructure environment was too high. In 2000, it was split from Jinshan and transformed into e-commerce, and it achieved the first place in domestic B2C e-commerce. The sales in a single season exceeded 100 million yuan, but the company still lost money and needed to continue to burn money. According to Lei Jun’s estimation at that time, Joyo needed to burn another 1 billion yuan to make a profit.
In the end, Joyo didn’t survive the capital winter after the Internet bubble, and its internal funds were quickly burned out. In addition, Jinshan was busy preparing to go public at that time, so it didn’t pay much attention to this business. Finally, Joyo sold it to Amazon at a price of $75 million in August 2004. In Lei Jun’s own words, Joyo was founded after the Internet bubble burst and fell before the all-round rise of e-commerce. This incident actually dealt a great blow to Lei Jun. At that time, Lei Jun did not advocate selling, and even had a fierce quarrel with Jinshan, but he finally had to sell under the pressure of shareholders Jinshan and the capital.
Angel investor: The defeat of Joyo, especially in such a way, made Lei Jun miserable. Since then, he began to participate in the development wave of the Internet industry in the form of an investment company. Lei Jun’s investment career is actually divided into two stages. In the first stage, according to incomplete statistics, he invested in 21 projects from 2004 to 2011, includingAt that time, Lei Jun’s investment style was "not familiar, not investing, only investing people, helping without adding chaos", which can also be regarded as the investment principle template of Xiaomi investment plate.
After the establishment of Shunwei Capital in 2011, Lei Jun’s personal investment decreased, and he invested more in the name of Shunwei Capital and Xiaomi Group, and invested in Jinshan Cloud, Wanmo Acoustics, I micro poly, Vanke Eslite (failure case) and other enterprises, and more companies related to the mobile phone industry or smart home supply chain were laid out to interact with the development of Xiaomi’s ecological chain.
Founder of Xiaomi: The establishment of Xiaomi is the first time that Lei Jun was in the general trend of the development of mobile mobile Internet and founded a company for his own ideal (to create a great company). As the youngest Fortune 5000 company, Xiaomi’s mobile phone shipments rank third in the world, wearable devices rank first in the world, and TV shipments rank first in China, etc., and its performance is constantly refreshing. Lei Jun is not only the CEO and chairman of Xiaomi, but also the spiritual soul of Xiaomi. The outside world has deeply linked Xiaomi to Lei Jun, just as Ma Yun is to Ali and Ma Huateng is to Tencent.
The second level: At present, Lin Bin, Hong Feng, Liu De and Wang Chuan, the co-founders who started their business with Lei Jun, remain in the senior management team, while Li Wanqiang, KK Wong and Zhou Guangping have retired behind the scenes. In the process of enterprise development, they will always face the founder’s financial freedom, or their management ability can’t keep up with the needs of enterprise development and quit or even leave. This is an objective law of enterprise’s long-term development.
Lin Bin (53 years old), co-founder and vice chairman of Xiaomi Group, and Lin Bin, the No.2 veteran of Xiaomi, worked as engineering director in Microsoft (1995-2006) and Google (2006-2010) in his early years, with rich experience, and his software technology development and engineering management were also big coffee. Similar experiences and technical language communication make Lin Bin and Lei Jun have a common language, and both of them have the habit of carrying various mobile phones in their backpacks for research.
At present, Lin Bin has left the core position of President of the Group and President of the Mobile Phone Department, and retired to the second line to serve as the vice chairman of the Strategy Committee, and accumulated cash of nearly 8 billion yuan in 2019 and 2020. Crucially, in 2020 and 2021, Lin Bin’s own 1.86 billion Class A shares (one Class A share has 10 votes) were converted into Class B shares (one share has one vote). After the conversion, Lin Bin still held 460 million Class A shares, and the voting rights were diluted from the peak of 29.52% to 6.9% (by the end of 2021, Lei Jun’s voting rights had increased from 55.2% at the time of listing).
Hongfeng (44 years old) is the co-founder and senior vice president of Xiaomi. He is currently the chairman of Tianxing Digital Branch. He was originally responsible for the construction of MIUI system and Internet services. After the adjustment of division of labor, he is now mainly responsible for Xiaomi’s financial services, including credit, third-party payment, Internet wealth management and insurance.
Hongfeng himself is an old subordinate of Lin Bin. From 2005 to 2010, he took a job at Google in charge of product and engineering management, and from 2001 to 2005, he worked as a senior software engineer at Siebel Systems (later acquired by Oracle Bone Inscriptions). However, for Hongfeng, who was born as an engineer, the financial business is also new to him. At present, Xiaomi’s financial business has been deeply involved in the financial investment in the supply chain, and has undertaken the overall planning of capital exchanges within the group. It is clear that the financial business will be listed independently in the later stage, so in fact, although the current income is not large, it is definitely one of the core businesses in the future.
Liu De (48 years old) is the co-founder, senior vice president and head of the organization department of Xiaomi. Originally, he was mainly responsible for the supply chain, industrial design team and ecological chain business of the mobile phone department. At present, he is mainly responsible for the selection and training of cadres and the design of the company’s organizational structure. Liu De, a designer, obtained a master’s degree in mechanical design and theory from Beijing Institute of Technology and a master’s degree in industrial design from art center college of design, California, USA. He participated in the design of the first generation of Xiaomi, and visited and conquered Sharp as a screen supplier with Lei Jun and Lin Bin during the Japanese earthquake. At the same time, it also laid a solid foundation for the expansion of AIoT business in the initial stage of Xiaomi.
Wang Chuan (52 years old), co-founder, senior vice president and chief strategy officer. Wang Chuan made Xiaomi TV the first in China. In 2021, Xiaomi TV sold about 9 million sets, ranking first in the domestic market for three consecutive years. At the same time, the development of Xiaomi box and Xiaomi TV form ecological complementarity.
The third floor represents the new force of Xiaomi’s alternation between old and new. The representatives include Wang Xiang, the new president, Lu Weibing, the general manager of Redmi, and Adam Gao, the president of the mobile phone department. These later executives are an update to the original founding team, bringing more professional management ability and an important guarantee force for the new decade strategy.
Wang Xiang (60 years old), a partner and president, assisted Lei Jun in the operation of the group and assumed the role of Lin Bin. Wang Xiang used to be the senior vice president of Qualcomm and the president of Greater China, and Wang Xiang played a key role in the negotiations with Qualcomm in the early days of Xiaomi’s establishment. In 2015, he joined Xiaomi under the lobbying of Lei Jun. At that time, he was mainly responsible for the expansion of international business, especially for the opening of the European market.
In 2021, Xiaomi’s overseas shipments exceeded 25 million units, up by more than 120% year-on-year. Among them, the market share of operators in Europe reached 16.8%, ranking third only after Samsung and Apple, and the market share of operators in Latin America was 12.3%, ranking third only after Samsung and Motorola. It is the outstanding performance of overseas business that Lei Jun placed high hopes on Wang Xiang, which enabled him to take over the position of Lin Bin in 2019. A big company that wants to turn Xiaomi into an international company also needs talents with a more international vision.
Lu Weibing (46 years old), partner, senior vice president, president of China District, and concurrently general manager of Redmi (Redmi), is mainly responsible for the independent operation of REDMI brand. Lu Wei Icefield was first the president of Gionee Mobile. Later, due to Gionee’s failure in transformation and poor management in the era of smart phones, and founder Liu Lirong’s gambling loss of more than one billion in Saipan, the company’s capital chain broke and led to bankruptcy. Later, Lu Weibing founded Chengyi Technology, but it was unsuccessful. After being acquired by Lei Jun, it was included in the management of Xiaomi (Lei Jun spared no effort to obtain talents).
After taking over the spin-off Redmi brand, Lu Weibing has made great efforts in product integration and marketing, and often appears in headlines and hot words. Redmi also appears in the public eye, especially in Redmi K series, which dominated the Double Eleven and JD.COM 618 activities, and Redmi 9 and Redmi 9A were also selected as the top 10 best-selling models in the world in 2021 (only the second in China).
Adam Gao (48 years old), senior vice president and president of mobile phone department, is mainly responsible for the research and development and production of mobile phone products. Adam Gao obtained a bachelor’s degree in physics and a master’s degree in business administration from Tsinghua University in 1996.Executive vice president, CEO of ZTE Mobile, global executive vice president of Ziguang Group, CEO of Ziguang Zhanrui, chairman and general manager of Huixin Communication, their resumes are extremely glamorous.
Adam Gao, who is also an engineer, has witnessed the glory and decline of ZTE, and has rich experience in management, but in recent years, his posts have been transferred frequently. Perhaps it was frustration in the workplace, or it was deliberate. In 2019, Adam Gao set up Huixin Communication (Xiaomi invested in shares) and joined Xiaomi Group the following year.
The representatives of the above three levels represent the three stages of the evolution of Xiaomi’s management model:
In the initial stage of 2010~2014, Lei Jun and Lin Bin formed a team to dig people everywhere, and their management was mainly Lei Jun and Lin Bin, so they were also the founders who directly held Class A shares (super voting rights) in the initial stage of Xiaomi’s listing.
During the exploration from 2015 to 2017, Xiaomi suffered a crisis, with business stagnation and sales decline. Thanks to the joint efforts of Lei Jun and other co-founders, the management at this time was centered on the eight founders and developed separately. Lack of communication between major departments affected the efficiency of Xiaomi, so that Lei Jun made a difficult decision in 2016 to transfer Zhou Guangping, who was in charge of the mobile phone department, to Lin Bin, which also laid the groundwork for Zhou Guangping’s resignation in 2018. This is the problem that enterprises often face when they develop. When the management ability of the founder can’t control the growing business of the company, how to choose?
From 2018 to 2021, the internal management of Xiaomi Group was integrated. The four major departments were split into more than a dozen business departments, and the division of labor among senior executives was readjusted. Young cadres began to move to management positions, while those new to Xiaomi’s senior management with Wang Xiang, Lu Weibing and Adam Gao began to move to Center Stage, and the old group of co-founders Li Wanqiang, Zhou Guangping and KK Wong began to launch the group management sequence or resign.
However, at the turn of the old and the new, it is still Lei Jun who hangs the sail for Xiaomi’s re-starting in the second decade, indicating the sailing direction, but the partners behind him have changed a group of people. After Lin Bin’s faint retreat, Lei Jun’s voting army once exceeded 69% (absolute holding), and became centralized. Perhaps Lei Jun himself saw the limitations of human nature and soon reduced his voting right to 62.6%, which is perhaps Lei Jun’s greatest wisdom.
V. Corporate Culture and Group Strategy
5.1 Xiaomi’s corporate culture
There is not much discussion about Xiaomi’s corporate culture, and there is little public information. According to my own understanding and referring to Lei Jun’s books, there are roughly three cultures of Xiaomi that are of great significance, namely, engineer culture, efficiency innovation culture and fan community culture.
The first is engineer culture, which is closely related to Xiaomi’s founding background. Eight co-founders are called Eight donkey kong, of which six are ten engineers, and two designers are from science and engineering backgrounds. Therefore, Xiaomi attached great importance to the training and recruitment of engineers from the beginning. By the end of 2021, Xiaomi had 35,415 employees, including 14,592 technical posts, accounting for 43.65%. In addition, Lei Jun was born as a programmer, and Lin Bin is the engineering director of Google. Therefore, engineers are paid more attention to both economically and emotionally.
At the beginning of the business, Lei Jun himself participated in the design of Xiaomi mobile phone. Once, because of the disagreement between the technical department and the design department at the beginning of Xiaomi mobile phone design, Lei Jun even demonstrated how the components were stacked. Xiaomi Company has three iron laws, which were laid down by Lei Jun himself, namely "technology-oriented", "making friends with users" and "making the coolest products", among which "technology-oriented" is essentially a pursuit of engineer culture.
Secondly, the culture of efficiency innovation, which actually means that Xiaomi pays attention to the improvement of efficiency on the one hand and the innovative development model on the other. Paying attention to efficiency is a concern of all enterprises, but this efficiency is extremely important for Xiaomi, because the profit rate of Xiaomi is relatively low compared with that of its friends. Under the low profit rate, only by achieving high turnover and high efficiency can the enterprise ensure a certain profit level, so Xiaomi’s inventory turnover rate can be maintained at a high turnover level, second only to Apple. At the same time, Xiaomi’s corporate structure is relatively flat, with fewer internal levels and lower communication costs, which is also conducive to improving company efficiency.
Innovation is a portrayal of Xiaomi’s business model and product research and development. From the triathlon business model (hardware+new retail+Internet) to the eco-chain investment cluster, to the MIX series’ search for the direction of the mobile phone industry, it is Xiaomi’s bold exploration of future technological innovation.
Finally, the culture of fan community, Xiaomi is the first mobile phone manufacturer in China to start operating fan community, which is related to Lei Jun’s experience of posting in CFido forum in Jinshan in 1996 for half a year and communicating with others. At that time, he met Ma Huateng, a programmer in Shenzhen Runxun Communication, and Ding Lei, a civil servant in Ningbo Telecom Bureau.
Lei Jun implanted community operation into Xiaomi’s corporate strategy from the beginning, and interacted with users through the fan community to find problems, improve problems and feedback problems in time, which was called "Internet development mode with user participation" by Lei Jun. Therefore, there is the story of Xiaomi’s 100 dream sponsors, that is, the first 100 fans who signed up for the brush machine in Xiaomi Forum. At that time, the success rate of the mobile phone brush machine was not very high, which easily caused the mobile phone to turn brick. By the end of 2021, MIUI had more than 500 million monthly users, and it was the spark of those 100 people that ignited the hope of Xiaomi’s continuous progress.
5.2 Xiaomi Company’s New Ten-year Strategy
In the strategic upgrade in the new decade, Xiaomi has established the core strategy from "mobile phone +AIoT" to "mobile phone ×AIoT". It seems that the word difference actually corrects the original internal differences. First, the mobile phone business is still the core. Second, the layout of AIoT is no longer a simple expansion, but a multiplier effect with mobile phones, resulting in multiple empowerment effects. For Xiaomi’s Eco-chain 2.0, it is to provide a more robust, comprehensive and in-depth capacity support platform for the cooperative industry team, promote Xiaomi’s scientific and technological ecology of "people-oriented, connecting people and everything", and improve the product technology and experience level of the whole industry.
At the same time, the three strategies of "re-starting a business", "Made in internet plus" and "Steady and Far-reaching" in the new decade are defined, which reflects Xiaomi’s ambition in promoting the efficiency revolution of the whole manufacturing chain. The core of the three strategies is the efficiency revolution of the manufacturing industry, which corresponds to the internal exploration of Xiaomi’s smart factory, Xiaomi automobile and Xiaomi robot, and the investment empowerment of Hubei Xiaomi Changjiang Industrial Fund (initiated by Lei Jun and controlled by Hubei Provincial State-owned Assets Supervision and Administration Commission) in the manufacturing industry, mainly targeting the investment in advanced manufacturing, intelligent manufacturing, industrial robots and unmanned factories.
Xiaomi exports foreign capital to jointly develop or export technical solutions to promote the efficiency change of manufacturing industry, such as Xiaomi’s partners.Xiangtan Science and Technology Park, which was put into production in March 2021, was built with standardized modules deployed by Xiaomi Smart Factory, and introduced the "one-key calibration" function developed by Xiaomi, which doubled the efficiency of the robotic arm and improved the debugging efficiency of the assembly line by more than 10 times.
It is not only Xiaomi’s mission, but also the best footnote to its culture and strategy to always insist on making good products that are "touching people’s hearts and kind in price" so that everyone in the world can enjoy the beautiful life brought by technology.
Six, the industry competition analysis
At present, the mobile phone industry is actually highly mature, and the supply chain is also complete enough. With the upgrade of function machines and the disappearance of dividends from 3G to 4G network, the incremental space of domestic users is close to saturation. At the same time, a large number of mobile phone brands have withdrawn from the market, and the competition in the mobile phone industry has entered an oligopoly era. The market is no longer the blue ocean more than a decade ago, but has become a sea of blood.
6.1 The overall cooling of the industry is obvious, and the domestic high-end stage "failed"
The overall cooling of the industry is mainly attributed to three factors:
According to the data of CINNO Research, in the first half of 2022, the sales volume of smart phones in China market was about 134 million units, down 16.9% year-on-year, setting the worst sales performance in the first half of 2015. The main reasons are the repeated epidemic situation, the shortage of core components such as upstream chips, and the reduction of residents’ consumption expectations.
At the same time, influenced by the unique mobile phone festival of "JD.COM 618" in China, the sales volume in June is often the peak of annual purchase. In June this year, the sales volume of smart phones in Chinese mainland market was about 23.2 million units, which was 21.3% higher than that in May, showing obvious signs of recovery. However, compared with the same period last year, the year-on-year decline was still as high as 18.6%, setting the worst monthly sales volume in June since 2015.
Thanks to the hot sale of Redmi K50, the monthly sales volume ranked second. Xiaomi won the monthly sales crown of domestic mobile phones in June, and shipped 4.1 million units, but it still fell by more than 20% simultaneously. OPPO’s monthly sales volume fell by more than 40% to 3.6 million units. Only Glory achieved positive growth, up 42.5% year-on-year, due to the low shipping base of Glory last year and the good performance after Glory 70 went public.
Figure 5-1 Sales volume of domestic Top5 mobile phone manufacturers in June
In terms of domestic sales in the first half of the year, OPPO (excluding realme) ranked first with sales of 22.4 million units, down by 39.1% year-on-year, and glory grew rapidly with sales of 22.3 million units, ranking second with an increase of 118.3% year-on-year. Apple, Vivo and Xiaomi ranked third to fifth. The statistical data caliber of different tripartite institutions is slightly different, and the ranking may change, but the pattern of TOP5 is basically stable, with a total market share of over 80%. Under the downward trend of the industry, the gap between TOPs is gradually narrowing. Last year, the gap between TOPs (Huawei’s fifth and glory’s sixth) was 18 million units, while this year’s gap between the first OPPO and the fifth Xiaomi was only 1.2 million units, which fully illustrates a problem. The competitiveness of the mobile phone industry is increasing. It is no longer the blue ocean 10 years ago, but has become a sea of blood for manufacturers to kill.
Huawei, which ranked first in domestic sales, has been gradually eroded by OV since it was sanctioned by the United States in 2019 and its chips and other components were limited, especially leaving a high-end market share. But unfortunately, OPPO, vivo and Xiaomi did not seize the opportunity to occupy the high-end mobile phone market (the unit price was more than $400), but they were taken up by Apple. In the second quarter of 2022, the market share of domestic apple’s high-end mobile phone exceeded 46%, and the global high-end model Apple’s share was as high as 57%, more than half of the country. Therefore, the high-end strategy of domestic mobile phones failed from this perspective.
The main reason why other big manufacturers failed to take over Huawei’s lost market share of high-end mobile phones is that, on the one hand, Huawei’s R&D system is not as strong as Huawei’s (the R&D investment in the past decade exceeded 845 billion yuan, and in 2021, the R&D investment was 142.7 billion yuan, which pushed Microsoft and Samsung Apple to the second place in the world, second only to Alphabet, far exceeding the sum of R&D investment of other domestic manufacturers), and Huawei’s investment and strategies were targeted. On the other hand, several major manufacturers have never been strongly different from the advantages and ecological closed loop of Apple mobile phones, and it is difficult to break through the high-end only by hardware stacking.
Figure 5-2 Half-year Sales of Domestic Top5 Mobile Phone Manufacturer Edition in 2021-2022
Although there is still a lot of homework to make up for the domestic high-end, China, with the global mobile phone sales volume of TOP5, has three seats, which also shows the great progress of domestic mobile phones and plays an increasingly important role in the industry.
In terms of global market, according to Counterpoint’s survey, in the first half of 2022, the global cumulative sales of mobile phones were 621 million units, down 8.4% year-on-year, of which the global mobile phone sales in the second quarter were 294.5 million units, down 9% year-on-year, which was the first time that the sales in a single quarter fell below 300 million units since the second quarter of 2020 (when the global heart disease broke out). In 2022Q2, the TOP5 five market shares were 62.5 million units shipped by Samsung (accounting for 21% of the market, the same below), 46.5 million units shipped by Apple (accounting for 16%), 39.5 million units shipped by Xiaomi (13%), 2,820 units shipped by OPPO (10%) and 25.5 million units shipped by vivo (9%), with a total market share of 69%.
Figure 5-3 Global Mobile Phone Sales Market Share TOP5
Table 5-1 Mobile Phone Sales in Global Market from 2021Q3 to 2022Q2
6.2 Characteristics of domestic mobile phone brands
After fierce competition in recent years, with the launch of the competition stage by mobile phone manufacturers such as Meizu, LeTV, Gionee and Coolpad, the pattern of domestic mobile phone manufacturers has gradually taken shape in recent years, and only Xiaomi (including Redmi), OPPO (including Yijia, realme), VIVO (including iQOO), Huawei and Glory (separated and operated independently) are left in the mainstream manufacturers. Let’s talk about the characteristics of several brands.
Xiaomi, synonymous with cost performance and price butcher, can be said to have lowered the terminal price of domestic mobile phones by its own efforts. The biggest characteristics of mobile phones are "full configuration and balanced buckets", self-developed video chip "surging C1" and charging chip "surging P1". Among them, the sub-brand Redmi, known as the cottage terminator, has greatly accelerated the clearing of the low-end mobile phone market. In 2019, after Redmi became independent, it integrated Xiaomi’s product line, focusing on the ultimate cost performance, while Xiaomi impacted the high-end. In particular, the model represented by MIX was not only a price breakthrough, but also a model created for Xiaomi to create a high-end image. The main audiences are digital enthusiasts and science and engineering men, and the representative models are Redmi K20, Xiaomi 12 and Xiaomi MIX1.
Vivo, a self-developed image V1 chip with outstanding image function, is mainly used to expand the high-speed imaging computing power of ISP (digital imaging system) and improve the functions of taking photos and recording. The classic Slogan "Backlight is also clear, illuminating your beauty" is widely circulated. Vivo focused on music mobile phones in its early years, which promoted the popularization of HiFi sound quality. Vivo NEX released in June 2018 is its exploration of the mobile phone industry. It was amazing that year, but it also failed to complete the high-end mission. The sub-brand iQOO locates the game mobile phone (focusing on performance, fast charging and cooling), focusing on the game experience and cost performance. The main audiences are urban white-collar workers and young women, and the representative models are vivo X70, iQOO8 and vivo NEX.
OPPO(realme, One Plus) is relatively complicated. At present, mobile phones mainly focus on camera and design functions, and the 6nm Mariana MariSilicon X mobile phone image chip has been developed by ourselves, which has improved the graphic display of mobile phones. OPPO, similar to vivo, pays more attention to the adjustment of imaging system, but pays more attention to taking pictures, as well as excellent process design and body feel. Classic Slogan "charging for 5 minutes and talking for 2 hours" was the most successful advertising slogan in 2015, and OPPO was also one of the first manufacturers to put forward the concept of flash charging, which focused on VOOC flash charging in that year.
The sub-brand One Plus was integrated into the OPPO system in 2021, focusing on performance and design. Unfortunately, the original simple and original "hydrogen OS" system has been abandoned without success, commonly known as "big hydrogen is dead". Realme is an independent brand at present. In many cases, statistics are not included in OPPO shipments. It was established to counter the Redmi brand, focusing on the ultimate cost performance and master design. The main audiences are urban white-collar workers and trendy youths, and the representative models are OPPO R9, OPPO Reno6 and OPPO find.
Huawei, as the only domestic manufacturer that has successfully gone high-end and can compete with Apple in the domestic market, focuses on business style, and its selling points are mobile phone photos and Kirin chips designed by itself. Excellent design and OEM production by TSMC have temporarily overshadowed Qualcomm’s processors. Unfortunately, the self-developed Kirin chip could not be produced due to US sanctions. In order to keep its glory, it had to be stripped and sold to Shenzhen SASAC at a price of 100 billion. The main audiences are business people, young men and women, and the representative models are Huawei P30 and Huawei mate20.
Glory is actually a brand established by Huawei to contain Xiaomi. It also focuses on cost performance and trend design. After being stripped from Huawei, it integrated part of Huawei’s supply chain, and with the endorsement of Shenzhen SASAC, sales bottomed out in 2022. The main audience is online young people, and the representative models are Glory V30 and Glory X10.
From the above, we can see that the major manufacturers still have some differences in the positioning of mobile phones, but with the saturation of the market from incremental competition to stock game, the customer base among brands is constantly expanding, so that the overlap is high and the profits are down. Moreover, almost all mainstream manufacturers have sub-brands that focus on cost performance. Although Redmi’s independent time is short, Xiaomi is the first manufacturer to implement the brand strategy in the low-end market. Therefore, from business model, brand strategy to chip research and development, Xiaomi still has many innovations, not many people’s inherent corporate image without technological innovation.
Seven, the value analysis of millet
7.1 Xiaomi’s valuation level
Xiaomi’s revenue in 2021 was 328.3 billion yuan and its net profit was 19.283 billion yuan, both of which were the highest in history. Domestic mainstream mobile phone manufacturers are not listed. Therefore, based on the data of Apple and Samsung, it is estimated that in 2021, Apple’s annual revenue was 365.817 billion US dollars, and its net profit was 94.68 billion US dollars. At the end of the year, its P/E ratio was 30.8 times, and its average P/E ratio in recent three years was 27.61 times (fluctuating between 17.07 and 41.95; Price-earnings ratio Samsung Electronics’ annual revenue was 279.6 trillion won, its net profit was 39.24 trillion won, its year-end price-earnings ratio was 11.03 times, and its average price-earnings ratio in recent three years was 14.81 times (ranging from 7.96 to 22.18). According to C39 industry classification of Shanghai and Shenzhen stock markets, the dynamic P/E ratio is 28.07 times and the median is 38.59 times.
According to the P/E ratio of the above peers and industries, the P/E ratio of Xiaomi should be around 8~30 times. Assuming that the revenue of Xiaomi will exceed one trillion yuan in the next decade and the net profit is 5% to 50 billion yuan, the valuation of Xiaomi should be between 400 ~ 1.5 trillion yuan. In July 2020, Xiaomi reached a market value of 840 billion yuan.
As of September 14th, the market value of Xiaomi was 261.7 billion yuan, which was more than 68% lower than the peak of 840 billion yuan in 2021. At the same time, combined with the historical price-earnings ratio TTM, price-to-book ratio and marketing ratio TTM of Xiaomi, the price-earnings ratio TTM is 23.86, which is 52.6% in the historical percentile (that is, the value is higher than 52.6%), the price-to-book ratio is 1.92, the historical percentile is 40.67%, the marketing ratio is 0.81, the historical percentile is 5.35%, and the vertical history of Xiaomi. Therefore, whether it is a horizontal peer comparison or a vertical historical comparison, there is still much room for improvement only in terms of the current market value level of Xiaomi.
Table 7-1 Xiaomi Valuation Indicators
7.2 Xiaomi’s moat
If we say the valuation forecast based on historical data, it will always make people feel too ideal in the market hypothesis of random walk theory. In fact, for the dynamic development of enterprises, enterprises need to dig their own moat if they want to be evergreen. Obviously, in the eyes of many people, Xiaomi has no core competence to form a moat at present, and it will never become a company like Apple, but in my opinion, it may be too harsh for a company founded 12 years ago, at least in the following aspects, Xiaomi has done a lot of work and gradually got the appearance of protecting the city ditch.
(1) the ability to define some category standards of AIoT industry
From smart home to daily consumables, Xiaomi’s AIoT industrial layout is the earliest and the most successful. In 2021, it contributed 84.98 billion yuan in operating income, accounting for 25.88%. If the red rice mobile phone grabs the market of the cottage machine, it defines the product demand of the thousand yuan machine. Then Xiaomi’s expansion of AIoT is gradually changing the industry standards of many categories of production:
Compared with mi band’s Bluetooth chip and circuit design scheme, it realizes the long battery life of standby for 30 days, solving the pain points of users; Xiaomi patch panel defines the functional design of patch panel, and integrates traditional interface with USB interface, leading the design trend; Xiaomi air purifier popularizes the poor information of the core components of the fan and filter screen of the purifier, which gives users a deeper understanding of the product; The LDS (Laser Distance Sensor) developed by Mijia sweeping robot has greatly reduced the price of core components and pushed sweeping robots to thousands of households.
In many industries with low concentration, small market scale and different manufacturing standards, Xiaomi’s involvement has rapidly changed the industry standards, which is a bit of a blow to dimensionality reduction. But what I want to say is that this seemingly simple ability is not easy to copy, because Xiaomi’s investment map has already had ecological barriers, and it is a long-term process to support enterprises (including flow, technology and capital). Few enterprises are willing to help and wait for the supply chain enterprises to slowly. When Xiaomi’s AIoT expands its territory to form an ecological barrier, Xiaomi’s AIoT plate is actually expected to become a platform for defining industry rules, and it is the area where Xiaomi is most likely to form a moat in the future.
(2)MIUI expanded the ecological boundary of Xiaomi brand and included non-mobile phone users in the whole system.
By the end of 2021, there were more than 510 million monthly users of MIUI worldwide, up 28.4% year-on-year, among which 130 million monthly users in mainland China, up 17% year-on-year. It took Xiaomi MIUI users five years to go from 10 billion to 500 million, and it took only 10 months to go from 400 million to 500 million. The growth rate of MIUI users is amazing. At this time, the MIUI ecology already has scale effect. What is the level of monthly activity exceeding 500 million? In fact, it is close to Weibo (monthly activity of 573 million), which is 40.4% of WeChat (monthly activity of 1.262 billion).
Then another message is implied. Most of Xiaomi’s monthly users are in overseas markets, which is essentially different from WeChat and Weibo. Xiaomi has taken the lead in building a global ecosystem. Of course, there are fewer monthly users in Xiaomi mainland, which also reflects the greater competitive pressure faced by Xiaomi in the domestic market. In the same period, there were 270 million monthly users in vivo and nearly 300 million monthly users in OPPO.
The significance of MIUI is to connect and expand the core strategy of "mobile phone ×AIoT", so that users who are not Xiaomi mobile phones can also access Xiaomi’s ecosystem, which greatly expands the boundaries of Xiaomi circle. Just like the "Pantanal" system newly launched by OPPO at the developer conference in August, 2022, it is essentially to incorporate the IoT business into its own ecological map, including the development of the automobile system OPPO Carlink.
This cross-market ecological construction is actually "using multiple products and serving multiple markets" in Ansoff’s strategic matrix, which is called diversified business strategy. MIUI started early, and it has a certain first-Mover advantage in the construction of niche. At the same time, the interaction frequency between MIUI and users influenced by Xiaomi’s social culture is obviously higher than that of other domestic manufacturers. In this environment, the shortcomings of Xiaomi’s mobile phone are easily amplified, which also forces the iterative upgrade of MIUI system to accelerate and the service system to improve. If AIoT can affect the length of Xiaomi’s "moat" in the future, then MIUI will affect the width of the "moat".
Figure 7-1 Monthly Life of Millet MIUI
Figure 7-2 Ansoff Strategic Matrix
Eight, a little advice to Xiaomi
Finally, based on my own thoughts, I would like to give some suggestions to Xiaomi.
8.1 Distinguish the primary and secondary relationship between electric vehicles and robot tracks. You can’t have your cake and eat it.
On January 15th, 2016, Lei Jun said at the internal annual meeting that he would set up a Xiaomi Exploration Laboratory, with VR and intelligent robots as the main focus. He announced that he would enter the electric car at the Xiaomi new product launch conference on March 30th, 2021, so Xiaomi entered the robot five years earlier than the electric car, but from the external environment, it is obvious that the track of the electric car is more in line with the needs of Xiaomi’s development than the robot track (the width and breadth of the robot track are not denied). There are two main reasons:
(1) Xiaomi Automobile is an incremental battlefield with revenue exceeding one trillion yuan, and it is also the need of Xiaomi Breakthrough Technology Company.
The market scale of the new energy vehicle track is huge. In 2021, the global sales of new energy vehicles were 6.5 million, which was only 8% compared with the global sales of 81.05 million vehicles. In addition, the automobile manufacturing industry chain and the derivatives of the automobile aftermarket (such as automobile financial services, car rental, used car trading, automobile maintenance, etc.), the scale of the industry itself was tens of billions even in China.
Despite the huge scale, the competition is fierce, except for Tesla.Needless to say, traditional automobile manufacturers such as Volkswagen, Toyota, Ford, Changan, SAIC and Geely have also shifted to the transformation strategy of new energy vehicles, and new power brands such as Weilai, Tucki, Ideality and Nezha have also occupied a certain market share. Xiaomi Automobile wants to break through, not only by integrating the supply chain to focus on cost performance, but also by working hard on vehicle quality control, system services and the expansion and application of AIoT ecology.
When Xiaomi went public, the most questioned question was whether Xiaomi was a manufacturing enterprise or an internet enterprise, which directly affected the market’s valuation expectation of Xiaomi. Coupled with the trade friction between China and the United States at that time, the overall market was depressed. The valuation of Xiaomi in the early stage of listing was $54.3 billion from the highest $120 billion. Lei Jun has always wanted to turn Xiaomi into an Internet technology company, which is his life goal of creating a great Internet company, and the attributes of new energy vehicles also give Xiaomi the opportunity to change the company label.
(2) Xiaomi robot should focus on technological edge innovation, which is far from commercialization.
This is not the problem of Xiaomi, but the problem of the whole industry. The bionic robot has a great market prospect, but the development of science and technology, the physical limit of chip technology, the high cost and other factors restrict the promotion of large-scale commercialization.
The most typical example is Boston Dynamics (founded by Report, a computer professor at MIT), which was established in 1992. Despite its leading technology, it even received tens of millions of dollars of investment from the US Department of Defense, and released the first quadruped robot BigDog in 2005. However, the continuous losses are far from large-scale business, which eventually made it change hands. In 2013, it was acquired by Google at a price of $3 billion, transferred to Softbank at a price of $165 million in 2017, and transferred to Hyundai Motor Group at a price of $880 million in 2020.
Compared with Xiaomi’s technical precipitation in this field, Boston Dynamics is not ahead of 15 years, but at least 7 years. Therefore, for Xiaomi, this field is not suitable for pouring too many resources in the short to medium term.
8.2 What is missing from Xiaomi’s break?
Compared with the initial stage of the venture, Xiaomi now has sufficient funds, a strong R&D team and well-known brands, so what is missing to realize the smart manufacturing strategy of mobile phone ×AIoT+ in Xiaomi’s new ten-year strategy and the break of Xiaomi’s car? My understanding is:
(1) Mobile phone: enhance the recognition of design, and dilute the label of cost performance.
In recent years, the influence of Xiaomi mobile phone on Xiaomi is that the materials are solid, but the design brand recognition and exquisiteness are not enough. In this respect, the Reno series of OPOO and the X series of vivo are better. Xiaomi pursues the product idea of "touching people’s hearts and good price", so it is the highest gear at the same price, but it is relatively poor in the design and texture technology of mobile phones (the design of Xiaomi 11 is actually very good, but unfortunately it was damaged by the fire dragon chip Snapdragon 888 and the accident of burning WiFi).
It is suggested that Xiaomi should not concentrate all the costs on configuration and stacking, but should pay attention to the improvement of the design language and texture technology of the mobile phone, because this is the most intuitive feeling of users on the mobile phone, especially for female users, "whether it looks good or not, whether it is comfortable to hold it" is the key to attract them. Xiaomi’s civi series is an attempt to focus on design and texture, downplaying the label of cost performance, serving different customer groups and changing the user structure. Civi series can’t say how successful it is, but the direction is really right. I hope Xiaomi can stick to it.
(2)AIoT platform: define the underlying access protocol of the internet platform to promote AIoT, and establish soft advantages.
In fact, we have already done this, so we developed the Xiaomi Vela software platform, which is intended to connect the upstream and downstream enterprises of AIoT to the ecological platform system. With the help of Xiaomi’s investment map, Xiaomi still has a first-Mover advantage in the integration of supply chain, with more than 400 million devices linked into AIoT. However, the influence is not enough to form obvious ecological advantages. Therefore, in Xiaomi’s new ten-year strategy, in addition to hardware cooperation, eco-chain enterprises need to promote the standard setting of the underlying agreements.
(3) Xiaomi Automobile: Focus on the key points and shape the supply chain of Xiaomi Automobile in a low profile.
The length and breadth of the automobile supply chain are much more complicated than that of the mobile phone, so it is definitely not feasible to copy the experience of integrating the supply chain with the mobile phone, and even the core suppliers will refuse to supply it with a high probability. First of all, we should settle down and tackle key problems in key areas, such as whether we should do the three electric systems (battery, electric drive and electronic control) of electric vehicles ourselves, how to choose the battery, and who will develop the automobile chip and driving system? At present, the core autopilot system has been determined to be self-developed by Xiaomi full stack. It is suggested that the remaining core links should not be spread out too much. We can try the self-developed electronic control system, because other modules are relatively mature and do not need to start from scratch.
Xiaomi plans to build its own factory instead of OEM, which puts forward higher requirements for the management of supply chain. Therefore, it is essential to reserve talents in this area, and focus on the automobile supply chain. As the youngest Fortune 500 company, Xiaomi’s every move is concerned, and its share price as a listed company is always concerned by investors, so it is not a good thing for Xiaomi Automobile. I don’t doubt Lei Jun’s ability to resist pressure and Xiaomi’s toughness, but it is the best choice for the company to take small steps and integrate the supply chain in a low-key way.
(4) Xiaomi Automobile: The input cost of time may exceed expectations, so be prepared for a protracted war.
It is precisely because the matter of building a car itself is too complicated and full of uncertainty that it will probably take more time than expected to realize the research and development of driving attraction and the mass production of the final car. Xiaomi needs to be prepared to fight a "protracted war", and there may even be a situation of "fighting with war".
8.3 Great companies continue to create social value, and users will also become Xiaomi’s long-term activists.
"Excellent companies create profits and great companies win people’s hearts" is Lei Jun’s expectation for the company’s future before Xiaomi went public, and it is also a solemn commitment to rice noodles. Looking back on the growth of all great companies, it is bound to promote the progress of the industry, improve the lives of residents and create social value.
Motorola’s wireless communication technology played an important role in the communication of World War II. Google’s search engine has promoted the internetization of global information; Microsoft’s operating system and office software liberated the productivity of PC and improved the office efficiency of society. The UHV transmission technology of State Grid has greatly improved the transmission efficiency and ensured the safety of domestic power system. At the same time, it has also provided power infrastructure for a large number of countries such as Europe, Africa, America and Asia, and improved the construction of power energy networks.
Xiaomi is pursuing to be a great company and creating value for society with practical actions. Including the end of the mobile phone cottage market, and the establishment of WiFi6, NFC application and bus card, access card, bank card ecology, Type-C interface application, high-precision dual-frequency GPS, high-power charging, and the popularization of GaN in charging technology, Xiaomi is the main promoter.
However, the distance is highly recognized by consumers, and there is still a gap between the greatness of improving the value of social efficiency and the great company in Lei Jun’s mind. The only constant is Xiaomi’s determination to pursue greatness. Only in this way will users of Xiaomi (not just rice noodles) support the development of Xiaomi with practical actions, witness the greatness of Xiaomi and become a long-term activist of Xiaomi.
reference data
Walk the line
Thinking about Xiaomi’s Entrepreneurship
Zero One Think Tank: Xiaomi Investment Map in 2022
Millennium Investment Bank: Research Report on Xiaomi Industrial Chain in 2022
Xiaomi’s listing prospectus, reported high in fiscal year 2021
Zhihu Wenmu: On the Development History of Xiaomi Mobile Phone
Zhihu ZHANG kid: Looking back on the development of Xiaomi, what did Xiaomi, who was almost eliminated in 16-18 years, experience?
Counterpoint Global Smartphone Market Share： By Quarter
Counterpoint-Research-Global-Smartphone-Market-Q2-2022
CINNO Research
