MI AND YOU

There has never, ever been a company exactly like Xiaomi

Obsession
China's Transition
Obsession
China's Transition

At least, according to Xiaomi.

Just ahead of its massive IPO, the Chinese tech company’s founders echoed a common refrain at a Saturday press conference in Hong Kong: Xiaomi is far from being only a smartphone company, and there’s nothing like it out there.

The company is set to begin taking orders from institutional investors on Monday (June 25), and will start trading on July 9. Some 2.2 billion shares are being offered, priced at 17 to 22 Hong Kong dollars (US$2.1 to US$2.8), in hopes of raising up to $6 billion or so for the company. The pricing equates to a valuation for the entire company of US$54 to US$70 billion dollars. Pricing is expected to be completed by Friday (June 29).

James Paradise, co-president of Goldman Sachs Asia Pacific, a co-sponsor of the IPO, kicked off the presser describing Xiaomi as a “new species.” In CEO Lei Jun’s half-hour presentation, one slide proclaimed Xiaomi’s “triathlon business model.” Xiaomi is really three companies in one, company executives contend.

“You shouldn’t think of Xiaomi as a hardware company, or an internet company, or an e-commerce company. We are the rare company that can do hardware, and do internet, and do e-commerce. This sort of company basically has not existed before,” said Xiaomi CFO Chew Shou Zi at the event.

But is it really such a new model? Isn’t selling cheap gadgets to a ton of people quite a traditional model? Is it the only tech giant to have multiple prongs to its business model? Those are questions Xiaomi has been trying to clarify ahead of an IPO that is likely to be one of the biggest in years—but that has also seen valuation estimates reduce as the listing approached.

On Saturday, Lei said that Xiaomi’s “triathlon” model consists of “three pillars”—selling smartphones, selling connected hardware and other products offline, and selling internet services–typically advertisements or or virtual goods over a suite of mobile apps it develops.

While the focus by Lei and other leaders on how unique this is is intended to drum up excitement, there’s some truth behind the hype.

While Apple makes money both from hardware and software, its phones are differentiated because of its proprietary iOS software and remain the company’s main profit driver. Xiaomi, on the other hand, sells devices which are largely undifferentiated Android devices and provide thin profit margins. To date, no hardware company has built a global business using cheap devices as a vehicle to rake in profits from advertisements and other services. Meanwhile, internet companies like Alibaba and Amazon have dabbled in hardware, but it has never been a core part of their revenue.

Will this model achieve a $70 billion valuation? That depends on whether investors focus more on its hardware side, or its internet side, and the growth potential they see in each.

According to Xiaomi executives, its three pillars are all connected in a way that bodes well for growth—Xiaomi smartphone owners, the argument goes, are likely to buy other Xiaomi goods. The company has invested in over 200 companies which make products ranging from electric scooters to air filters to ballpoint pens, most of which are sold under Xiaomi’s brand. Furthermore, executives argue, Xiaomi smartphone owners are also more likely to spend time on Xiaomi’s apps—there are over 30—where they see ads.

Lei said he sees enormous revenue potential on the internet side, pointing out its average revenues per user are $9 compared with more than $20 for Facebook, and nearly $35 for Chinese social media giant Tencent. But there’s a real risk that Xiaomi’s internet business will not achieve the same success overseas it’s had in China.

While Xiaomi’s handsets have sold well in India and show promising signs in Europe, creating and ads software to appeal to non-Chinese users could prove more difficult. Domestically, Google’s suite of mobile apps are blocked by China’s firewall, as are services like YouTube and Facebook, so its success there has come without having to compete with US giants offering those services.

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