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Lei Jun, founder, chairman and CEO of Xiaomi Inc speeches in front map of the world. Xiaomi's IOT(Internet of things) developer conference on November 28, 2017.
Image: Lei Jun, founder, chairman and CEO of Xiaomi Inc speeches in front map of the world. Xiaomi's IOT(Internet of things) developer conference on November 28, 2017.

Xiaomi: Ready For An IPO?

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Image: Lei Jun, founder, chairman and CEO of Xiaomi Inc speeches in front map of the world. Xiaomi's IOT(Internet of things) developer conference on November 28, 2017.

Three years ago Xiaomi was the star of the Chinese technology industry. In December 2014, the smartphone maker had completed a $1 billion round of funding. At a valuation of $45 billion, the deal made Xiaomi, founded in Beijing 2010, the most valuable startup in the world at the time.

The “Apple of China”

The company made its mark with glitzy online marketing campaigns, favouring digital sales over retail stores. In 2014, its strategy of flash sales and social media savvy propelled it to the top of Chinese smartphone rankings and helped ensured its status as the “Apple of China”. The company saw a sales surge between 2012 and 2014, including a 200% year-on-year increase in 2014. Yuri Milner, an early investor in Facebook and Alibaba, predicted Xiaomi’s valuation would rocket to $100 billion.

Yet despite talk circling of an initial public offering, the company has struggled over the past two years. The mooted IPO would give Xiaomi a valuation of at least $50 billion, according to media reports, and could take place as early as 2018, with Hong Kong mooted as the most likely host. That would make Xiaomi the largest technology company to float its shares since Alibaba raised a record $25 billion in 2014, and would follow Snap’s recent listing at a valuation of around $20 billion.

Chinese Smartphone Sales Fall 40%

But Xiaomi will face many troubles on its path to going public. Its shipments have in recent years fallen in the face of competition from local rivals Oppo and Vivo. According to IDC, Xiaomi’s smartphone sales in China fell by some 40% in the second quarter of 2016 compared with the same period a year before — despite the fact that China’s overall market grew by 4.6%. IDC has ranked Xiaomi’s shipments as only the fifth highest in globally in the second and third quarters of 2017.

The Indian Expansion

An IPO would help ensure the momentum Xiaomi has gained in recent months endures. Under chief executive Lei Jun, the company has sought aggressive expansion in retail stores in India and is on the cusp of surpassing Samsung in the world’s fastest-growing smartphone market. An IPO would raise at least $5 billion, people familiar with the matter have said, providing more fuel for the fire.

“We want to transplant China’s business ideas into other countries,” Jun said this week. In an interview with Bloomberg in March, he said the company planned to double its investment in India, spending a further $500 million in the next three to five years. Xiaomi sold 250,000 of its new Redmi Note 4 smartphone handsets within 10 minutes on local Indian online retailer Flipkart and on its own site. Revenue for India topped $1 billion in 2016.

Xiaomi’s Retail Store Sales Strategy

The capital injection from the IPO would also aid the chief executive’s plan to build 1,000 retail stores by 2019, as Xiaomi targets shipping 100 million smartphones next year, and $10 billion of retail sales by 2021. The company is focusing on emerging markets such as Russia and Indonesia, as well as the US.

“Our path towards internationalization began four years ago,” Jun said this week. “At first we faced many difficulties. In 2015 we lost around 1 billion or more yuan – a great loss caused because we were starting in so many countries. After that, we set on an idea of whether we could build an example market, and we settled on India. Three years later we’re in over 60 countries.”

Global Wearables Market Dominance

Another bright spot for Xiaomi is wearables. Xiaomi’s unique strategy of producing a wide range of wearable devices at cheaper prices than its competitors — its Mi Band is just $14.99 in the US — appears to be bearing fruit. It dominates the global market for wearable technologies, with 3.5 million, ahead of rival Fitbit’s 3.3 million and Apple’s 2.7 million shipments, according to Canalys. It’s other products, such as smart televisions and internet routers, are selling well also.

Capping this successful run recently, Xiaomi shipped 23 million smartphones in the second quarter of 2017, a 70% increase from the previous quarter. Propelling its growth is a retail sales push. Xiaomi has gained increased visibility through partnering with online sales platforms such as JD.com, Tmail and Suning, which has expanded its consumer base.

It has also increased its investment in innovation, and research and development. In February this year, the company began producing chips in-house, and has improved its camera and battery technologies for smartphone models Mi6 and Mi Max 2.

Further investment in these areas and on retail stores in emerging markets should ensure more sustainable growth for Xiaomi.

“In the first few years, we pushed ahead too fast. We created a miracle, but also drew on some long-term growth. So we have to slow down, further improve in some areas, and ensure sustainable growth for a long-term future,” its chief executive said in a recent letter written to employees.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.