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One in the hand

27 May 2021 By Sharon Lam

Xiaomi is making the smartphone business look cool again. Even as the company ploughs into exciting new ventures like electric vehicles, its quarterly handset revenue rose by a blistering 70% to 52 billion yuan ($8 billion), faster than Apple iPhone sales growth in the same period. The Chinese company has gained from rival Huawei’s woes and turned the global chip shortage to its advantage.

Results released late Wednesday demonstrate the $91 billion smartphone maker’s growing clout in smartphones. Overall revenue jumped 55% year-on-year in the first quarter, while gross profit margin from smartphones increased to 13% compared with 8% in the same period in 2020, due in part to better product mix and fewer promotions. Xiaomi has taken third place in the world smartphone market, behind Samsung Electronics and Apple, according to industry tracker Canalys, with a 14% share by shipments in the first quarter, up from 11% in the same period last year.

Aggressive international expansion, combined with the successful rollout of new models like the Xiaomi 11, which retails for around $700, appear to be paying off. Diplomatic winds are blowing the right way too. A U.S. court on Tuesday formally removed the company’s designation as a “Communist Chinese Military Company“. Shares have risen 127% over the past 12 months.

Founder and Chief Executive Lei Jun has his work cut out sustaining this momentum. Selling and marketing expenses blew up 59% as the company pushed into places like Russia and Europe. Daiwa analysts reckon that once the chipset shortage crisis stabilises, Xiaomi will probably have to resume spending on product promotions, which could drive down margins by 2 to 3 percentage points. Indeed management says it will prioritise smartphone market share over profitability. Stockpiling of chips and inventory could also lead to an oversupply in the future.

Unfortunately there’s not much padding elsewhere in the company. Xiaomi’s internet services units have much higher margins but are growing slowly, making up a meagre 8.5% of quarterly revenue. Lei is pushing hard to diversify away from the low-margin handset business, but Xiaomi’s financial health still depends on them.

 

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