Can Xiaomi Support its US $100B Valuation?

Xiaomi may be the most shining Internet company of 2017. Relying on Mi MIX 2 and eco-chain, the brand has won back fans and cultivated a good reputation. Xiaomi‘s mobile phone sales are back in the world’s Top 5 and it met a sales target of hundreds of billions yuan two months ahead of schedule. In the overseas market, Xiaomi also made great strides. It overtook Samsung in the Indian market as the handset manufacturer with the most sales volume. In terms of sales, Xiaomi is among the Top 3 in several overseas markets. Both Lei Jun and Xiaomi have built a good public image.

SEE ALSO: Xiaomi May Be Discussing IPO, Estimated Value $50B

Recently, Xiaomi and Xiaomi-affiliated companies have made a series of adjustments and rearrangements:

• On November 24, Lei Jun’s internal letter said Xiaomi met its annual sales target of 100 billion in early October and announced a series of structural changes.
• His internal letter on December 12 announced that Youpin team would become independent from the MIoT team as the Youpin E-commerce Department.
• On December 12 evening, Xunlei announced its board of directors had elected Wang Chuan as chairman.

Xiaomi was established in 2010. It experienced low times during the past two years before returning to prosperity. Thus, it is necessary for Xiaomi to adjust its personnel and consolidate its business. But China’s smart terminal market is almost saturated. The Top 5 enterprises occupy more than 70 percent of the market. As the demographic dividend disappears, a new business layout is becoming a necessary foundation for capital operation.

Xiaomi has 15,000 employees and is far more than a mobile phone company in the eyes of consumers. Most see it as a tech empire driven by capital and technology. The layout of its emerging business can be found in the past.

The ecological layout of Xiaomi

The ecological layout of Xiaomi can be divided into the following aspects, from core layer to business:

1. Investment: Shunwei Capital, angel investment from Lei Jun, and investment from Xiaomi
2. Technology: IoT (ecology chain), cloud computing and big data (Kingsoft Cloud, Xunlei, Xiaomi Router and WPS), AI (Cheetah and Baidu)
3. Service: Xiaomi Entertainment (Xishanju and YY), Xiaomi Finance (XW Bank and Xunlei), TV platform (iQIYI)
4. Products: Xiaomi mobile phone, TV and router, eco-chain (smart home, smart appliances, health management, infant and child education, smart travel, life quality, clothing and accessories, office supplies, food)
5. Channels: Mi Home, Youpin, traditional online channels (Xiaomi web/Tmall/JD.com (http://jd.com/)), traditional offline channels (operators/Xiaomi store) and overseas market (India/Russia)

The application of its capital is the most important endogenous power in the Xiaomi system.

Lei Jun became an angel investor when Kingsoft was listed in 2007. He invested in YY, UC, Lakala, Kingsoft and Xunlei, which are the so-called Lei Jun line. Lei Jun line enterprises have been indispensable in building Xiaomi‘s empire. These enterprises play an important role in terms of the layout of the Internet services and technology.

The other important investor contributing to the Xiaomi empire is Shunwei Capital, which was almost established at the same time as Xiaomi. As a young VC, Shunwei now manages four periods of funds: the first phase was US $225 million, the second was US $525 million, the third was US $1 billion, and the last was 1 billion yuan. Xiaomi always has a hand in Shunwei’s investment, including in hardware, education, property, electricity and financial services. Shunwei’s future investment priorities are smart hardware, new real estate and services and rural Internet, which will further strengthen the foundation of the Xiaomi empire.

Strengthening the Driving Force of Technology

Xiaomi‘s technical layout has three main directions:

IOT – Xiaomi has built the world’s largest IoT platform, which connects 80 million devices. Its next step is to use the technology to expand its advantage. Technology accumulation in platform, chip and IoT modules is the key to greater value.

Cloud computing and big data – The layout is mainly through investment, including investing in Kingsoft Cloud, Xunlei and WPS Office. This area has received positive news. Kingsoft Cloud Group just received new financing; Xunlei re-elected its administrator; and WPS will become a listed company next year. We can boldly predict this will be one of the highlights of Xiaomi‘s business in 2018.

AI – Xiaomi has a huge number of smart hardware products, which can be matched with multiple AI application scenarios. Due to its late technological layout, Xiaomi will operate an open platform by means of its eco chain. Xiaomi is active in cooperation and investment, with Baidu and Cheetah being typical cases.

Its Internet service needs an urgent success, and time is running out for Xiaomi Entertainment.

Among important Internet services, finance is the biggest draw for investment – although it has not begun to integrate. The competition for a TV platform is drawing to an end. The most interesting thing may be gaming. Today, China’s game market has shifted from developing channels to developing content. Pursuing upstream involvement in game development and distribution is an inevitable choice. According to data released by Xiaomi, its platform turnover was about 3 billion yuan in 2016, which is little when compared with Xiaomi‘s 100 billion yuan in sales.

In the TapTap Manufacturer Zone, Xiaomi‘s game brand score was as high as 9.3. But none of its games had a score higher than 8.0, which also indicated the weakness of Xiaomi‘s game offerings. A phenomenal game could push it into the top echelon of the Chinese game market, but there is not much time left for Xiaomi Entertainment.

Competition among hardware products has entered the stock stage, where technology iterations and new product designs are the highlights.

China’s smartphone market entered a similar position this year, and the main competition among enterprises is competition for users. During the past two years, the direction of smart phones development focused on optimization of ID design, with few breakthrough technologies. This trend will continue in 2018.

And for Xiaomi, its internally-developed chip is worth attention. In 2017, Xiaomi released the 5C, which came with its S1 chip. In 2018, if the second generation of products are mature, Xiaomi may equip its high-end products with a Snapdragon and low-end products with a Surge. Xiaomi has become one of the few mobile phone companies with a mature SOC, which will be an important milestone in Xiaomi‘s mobile phone development.

At a Xiaomi IOT Conference held the other day, Xiaomi announced its Mi Platform had linked more than 80 million sets of equipment. The highlight of Xiaomi‘s eco-chain will be the ease of use of its products and total shipments. So far, except for poor performance in UAVs, Xiaomi products occupy an advantageous position in each market segment.

At the same time, we are seeing more and more eco-chain products from other brands instead of Xiaomi or Mi Home. As Lei Jun said at the Xiaomi Annual Investment Conference: the Xiaomi brand cannot carry too many products or endorse everything. In 2018, Xiaomi will gradually reduce the release speed of eco-chain products. Xiaomi will exercise more quality control, reduce the amount of Xiaomi branded products, and give more resources to its IoT open platform. This is why Xiaomi held its IoT Developers Conference and set up the IoT Technology Committee.

New Retail Strategies and Overseas Markets

The fifth circle is the channel strategy of Xiaomi, which is the most important direction for the company’s investment.

The first is Mi Home, which the company has rolled out faster than expected. The goal of opening 1,000 Mi Home locations will be completed ahead of schedule. According to official data, at present the area effectiveness of Mi Home is 270,000, and it carries about 300 SKU. Mi Home has high conversion rate and ARPU. With more Mi Home locations to opened and with a slower release of new products, Mi Home is likely to introduce third party products and build a POP platform.

Secondly, Youpin. As a self-operated e-commerce platform, Youpin was initially a sales channel for Mi Home in the Mi Home APP. After gaining independence in April, Youpin focuses on quality e-commerce and caters to the trend of consumption upgrades among differentiated products. Youpin is growing rapidly. At the end of 2017, Youpin carried around 1,000 SKUs, and its products were from Xiaomi, its eco-chain and third parties. Youpin can control product quality and guarantee higher profit.

More important is that Youpin expands consumer scope. Through the comparison between Youpin and Xiaomi‘s typical APP (MAU: 65.86 million), it can be found that more than 40 percent of Youpin users are female. And the proportion of middle-end and high-end users is 48.43 percent, far higher than the Xiaomi APP store. Xiaomi increasingly values Youpin, which also makes Youpin another variable in 2018.

The third focus is undoubtedly the overseas market. Success in the Indian market has been a great inspiration for Xiaomi this year. Xiaomi spent the past few years building up its patents. According to official data, Xiaomi has 4,806 patents. Through a patent cooperation with Nokia, Xiaomi has laid a preliminary foundation for entering overseas markets. In 2018, Xiaomi will promote products in India and other emerging markets, while keeping its modest and steady steps into European and North American markets. This has been its long term development plan.

With technology upgrades and market changes, 2017-2018 is a key period for Xiaomi’s further development. Xiaomi intends to be listed, but it needs to lay the foundation for upcoming technology upgrades. After years of accumulation and distribution, Xiaomi has been formed a benign ecological closed-loop. Through its ecological layout, we can see the shape of Xiaomi‘s empire and make a preliminary judgment about its next year.