Xiaomi: promises, promises
Over the last eight years, Xiaomi has earned itself a place as one of China’s most popular smartphone brand, with impressive sales in numerous markets. But its launch on the Hong Kong Stock Exchange has proved something of a damp squib. Founder Lei Jun was hoping to reach a valuation of $100 billion, then lowered his expectations to $70 billion, and ended up with a more realistic $54 billion. Even so, by the end of its first day of trading, Xiaomi’s share price was down 6%.
The problem? Xiaomi’s Mi brand smartphones provide near-unbeatable price/quality ratios sold with very tight margins to millions of users in a range of markets. It has copied Apple’s strategy and set up a network of own stores in a bid to improve its margins. It has also developed a strategy of selling services on these products to try to complement those narrow margins with other more lucrative activities. The idea is to take the company from making cheap phones to becoming an internet company. Thanks to this well-designed and implemented strategy it has grown quickly, and not just in China, like most of its domestic counterparts, but by conquering other countries, such as Russia or Spain. But none of that was enough to increase its share value by almost 40 times its revenues for 2017, particularly when even Apple is only managing a 16-fold increase, or Tencent 36 times. Being an internet company is about more than making promises: other objectives must be reached as well.
Companies can start from a certain base and try to explain their intentions in many ways. In the case of another Chinese company, Huawei, the starting point is solid operations with interesting margins such as the sale of technology, the development of patents and contracts with governments and telecommunications companies around the world. On that, they develop sales of consumer electronics, basically to complete their vision about the technology they develop and sell, and they are doing great. Even so, they have decided not to go for an IPO, and instead prefer to remain the largest company in the world in the hands of its employees. In contrast, Xiaomi relies on huge — but fragile — sales of consumer electronics with ridiculous margins and promises, for the moment only a promise, to build a services empire on it with more lucrative margins. Promises are riskier than realities, and that is something that the market is, logically, sensitive about. Selling a lot of smartphones is not necessarily synonymous with making a lot of money… in fact, it can lead to big losses, as many brands know all too well.
Other factors may have contributed to a poor IPO: what Donald Trump’s trade war will lead to, and its possible effect on foreign markets that are more volatile than ever. Xiaomi is a clear example of a company with impatient shareholders, hence the rushed IPO to avoid further financing rounds or more expensive share increases. But when an IPO shows an urgent need for money to continue financing rapid growth at the expense of minuscule margins (and that is without taking into account a cancelled Chinese launch last month), what investors want to see are not more promises of selling services, but something more tangible.
Can the company’s outlook change? Possibly. Once the baseline is established, we are already in the world of expectations, perceptions and quarterly results. A good run of sales or announcements suggesting better progress in its transition from “cheap smartphone makers” to “internet company”, and things could start looking up for Xiaomi quickly. But Monday’s launch will have left a bitter taste and a reminder that growth is not as simple to bring about as some believe and nor do the markets necessarily believe everything companies promise.
(En español, aquí)
