Dismantling Xiaomi: don’t underestimate Lei Jun and don’t look up at Xiaomi

April 6, 2020 is the 10th anniversary of Xiaomi. In order to commemorate this special moment, Lei Jun issued an open letter with the theme of “everything in the past is the preface”. Speaking of the past, he said, “we’ve had countless sleepless nights over the past decade. Fierce competition, various misunderstandings and slanders have been accompanied by our growth. I’m glad that Xiaomi has not been defeated by difficulties, but has become more and more powerful in setbacks < / P > < p > for his achievements, Lei Jun can not hide his pride: “Xiaomi has become the business card of made in China and designed in China, and there are fans of Xiaomi all over the world; we have also used the ecological chain to copy the millet model to more than 100 industries, changing many fields.” < p > < p > a cup of wine of peach, plum and spring breeze is the lamp of ten years’ night rain in the lake. Xiaomi’s ten years is a story from dream to reality. It is also a journey for China’s mobile phone industry to pursue the wind. There are high tides, low ebbs, trust and doubts We may as well from the most intuitive financial data to peep. < / P > < p > although the first generation of iPhone 3G costs 4999 yuan, and even emasculated WiFi function, it is the kind of black technology such as “IOS intelligent operating system” and “home key return” that can be directly felt by touching the screen with your finger, which is really fascinating. < p > < p > and the opposite of Apple’s noble status is Huaqiangbei’s numerous Shanzhai machines. “Big, thin, clear and strong! Super luxury 3G smart phone! It’s 5888 outside. We only need 399 yuan! Call and order now Advertising words like this, played in turn in major TV stations, contracted the childhood of countless young people. Because of its low price, the market of Shanzhai machine is very strong. According to the iSuppli report, 145 million counterfeit mobile phones were sold in China in 2009, up 43.6% from the previous year and four times that of 2005. This is the domestic mobile phone market around 2010. There are international giants such as apple, Nokia, Motorola and Samsung, but the prices are exorbitant, and there are cheap to scream, poor quality cottage machines, each accounting for half of the country. < / P > < p > “can we make the best mobile phone in the world and sell it for half the price so that everyone can afford it?” As a mobile phone enthusiast and entrepreneur, Lei Jun had such a dream. If you have an idea, go ahead. Lei Jun has successively recruited Lin bin, Hong Feng, Zhou Guangping and other big names from Google, Microsoft, Motorola, Dell and other world-class companies. In addition, Li Wanqiang, Huang Jiangji, Liu De and others have formed a team of more than ten people. < p > < p > on April 6, 2010, a dozen or so members of Xiaomi’s founding team had a bowl of millet porridge and started to make a revolution. < / P > < p > but in the face of reality, this idea is somewhat unreliable. At that time, Xiaomi was just a small Zhongguancun company from scratch. The members of the “dream team” were engineering men who had never been engaged in hardware, but the company to be benchmarked was a giant in the mobile phone hardware industry. How to achieve this seemingly unreliable goal? Xiaomi chose another way to innovate the business model. Learn from apple, hand over the hardware to the OEM, and launch high performance price products; give full play to the advantages and self-developed software to provide a better use experience than the original Android system; the operation adopts the most fashionable Internet thinking, allowing enthusiasts to participate in R & D and improvement, and gather fan effect. < / P > < p > it can be said that starting with the mode of hardware OEM + software self-study + Internet operation was the most correct choice for Xiaomi at that time. It not only avoided the edge of giants and broke through the development dilemma of traditional manufacturing industry, but also made Xiaomi obtain great success in the initial stage and stabilize itself in the market surrounded by strong enemies. < p > < p > in less than a year, the number of MIUI users exceeded 300000; the first generation of Xiaomi mobile phones sold more than 7 million units, far more than the original team expected. In 2014, Xiaomi company, founded only four years ago, became the sales champion of domestic mobile phone brands with the sales volume of 61.06 million mobile phones and the growth rate of 227%; in 2015, the sales volume of Xiaomi mobile phones reached 66.55 million. < / P > < p > most of the time, high-speed growth can cover up many problems, just like a turbulent River, easily crossing the potholes along the way. But when the growth rate slows down, problems will still emerge. < p > < p > in 2016, Xiaomi encountered “Waterloo” and its supply chain was short. In that year, the sales of mobile phones dropped to 55.42 million units, down 16.7% from the previous year. According to Lei Jun’s words, “the situation is extremely grim.”. Fortunately, the old driver Lei Jun took the helm personally, and the depression did not last long. Xiaomi soon returned to the growth track. In 2017, the sales of Xiaomi mobile phones rose to 91.41 million units, reaching 118.6 million units in 2018, more than double that in 2016, and 124.6 million in 2019. < / P > < p > looking back on the development process of Xiaomi, this turnaround mainly relies on product innovation and the first launch of a certain black technology, such as the first millet mix full screen concept mobile phone, the first mobile phone supporting wireless charging, the first generation of off screen camera technology < / P > < p > if we regard 2017 as Xiaomi’s “watershed”, Xiaomi’s “life” can be divided into two stages. Before 2017, Xiaomi quickly stood out with the business model revolution; after 2017, Xiaomi turned to the scientific and technological revolution and continued to move forward. < / P > < p > as early as 2013, Dong Mingzhu, chairman of Gree Electric appliances, and Lei Jun made a five-year 1 billion yuan bet on whether Xiaomi’s revenue could exceed Gree’s in five years? < p > < p > in five years, Xiaomi’s revenue has increased from more than 20 billion yuan to 174.9 billion yuan, which is a miracle. If you look at Gree, it has increased from 120 billion yuan to 1980 billion yuan, an increase of 60%. As a traditional manufacturing enterprise, its performance is also very outstanding. However, according to the bet, Xiaomi still lost. What’s more dramatic is that in 2019, the second year after the end of the bet, Xiaomi won, surpassing Gree’s 1982 billion in total revenue of 206 billion yuan. < / P > < p > during this period, Xiaomi landed in the Hong Kong Stock Exchange in 2018, which opened a window for the outside world to deeply understand this young 100 billion giant. There is a famous saying of Lei Jun, which is “standing on the wind, pigs can fly.” Xiaomi flies very fast. It is estimated that the compound annual growth rate of revenue has reached 112% since its establishment. At present, it has developed into a group integrating smart phones, IOT, consumer goods and Internet services. Generally speaking, the proportion of single business is too large, which means that the greater the market competition risk and the smaller potential growth space, Xiaomi has made a lot of efforts. The proportion of its core business smartphone in the first half of 2020 has decreased from 82% in 2015 to 61% in the first half of 2020; the revenue proportion of IOT and consumer goods business has increased year by year, from 13% in 2015 to 28% in the first half of 2020; the Internet revenue mainly focusing on advertising and games also shows an upward trend, with its share expanding from 5% to 12%. However, in essence, Xiaomi is closer to a mobile phone manufacturer or a hardware manufacturer that combines IOT, consumer goods and Internet services, rather than an Internet company officially declared. The overseas market has become an important driving force for the company’s performance growth in recent years. Xiaomi mainly focused on domestic market in the early stage. After 2015, Xiaomi began to lay out overseas market vigorously. With the fierce competition of Huawei, oppo, vivo and other brands in the domestic mobile phone market, the business income of Xiaomi overseas market continued to rise, which reduced the competitive pressure of the company in the domestic market to a certain extent, and ensured the development of its smart phone business. From 2015 to 2019, Millet’s revenue from overseas market increased from 4.1 billion yuan to 91.2 billion yuan, with a compound annual growth rate of 117.78%. In the first half of 2020, Xiaomi’s business revenue increased by 7.5% year-on-year to 102 billion yuan, accounting for about half of overseas revenue. As we all know, Xiaomi mobile phone is famous for its cost performance. Reflected in the price, cheap has been millet attack the world’s “magic weapon.”. Since 2015, the average price of Xiaomi mobile phone has slightly increased, but it has basically hovered around 1000. Compared with the starting price of 5000 + of apple and Huawei, it is really “conscience”. < / P > < p > is related to price. Just as Lei Jun said, “cost performance is our most powerful weapon and our most vulnerable weakness.” In the deep-rooted concept of the Chinese people, Xiaomi has been labeled as “middle and low-end” from the very beginning. As evidenced by the data, the company’s R & D expenditure increased from 2.104 billion yuan in 2016 to 3.151 billion yuan in 2017, to 5.777 billion yuan in 2018 and 7.493 billion yuan in 2019, with annual growth rates of 52.38%, 81.25% and 29.31%, respectively. In the first half of 2020, Xiaomi’s R & D investment was 3.829 billion yuan, with a year-on-year growth rate of 19.4%, and the R & D cost rate was 3.71%. However, compared with the companies in the same industry, Xiaomi’s R & D investment is not high. In terms of R & D cost ratio, Huawei is around 15%, apple is about 5%, and Lenovo is about 2.5%. After several efforts, Xiaomi has reached 3.71%, about 1.2 percentage points higher than Lenovo. Lenovo is the world’s largest assembly computer manufacturer because of its weak core technology, which may also be the main reason why Xiaomi is criticized by the market. In this regard, the company said that it is expected to continue to increase research and development costs and accumulate technical strength in the core track. Due to the low price, the gross and net interest rates of millet are not high. Lei Jun has previously promised that “the comprehensive net interest rate of the company’s overall hardware business is not more than 5%, otherwise, the excess part will be returned to users.” It can be seen from the curve above that the gross profit rate of Xiaomi is on the rise as a whole, but the net interest rate fluctuates greatly, which was negative in 2015 and 2017. From 2018 to the first half of 2020, it dropped from 7.71% to 4.91%, and then rose to 6.44%. The profitability is not stable and strong enough. < p > < p > specific to each business sector, the gross profit margin of the company’s hardware is less than 10% all the year round, while that of the software service is higher than 60%. In 2019, the gross profit margin of the company’s smartphone business, IOT business and Internet service business were 7.17%, 11.2% and 64.73%, respectively, and 7.77%, 12.32% and 58.7% in the first half of 2020. < p > < p > such revenue and gross profit data highlight Xiaomi’s strategy of taking hardware equipment as the carrier, not making money on hardware to attract customers, fulfill its promise, and then realize its realization through Internet network services. As a representative of “new economy”, Xiaomi, whose growth power is far ahead, has been favored by capital since its establishment. During the period, it has obtained 9 rounds of financing, including Chenxing capital, Qiming venture capital, all stars, DST, GIC, Houpu investment, Yunfeng fund, etc., with a total financing scale of US $1581.2 billion, and preferred shares are the main financing method. < / P > < p > in accounting, preferred stock can be divided into liability and equity, which involves complex financial judgment. Xiaomi finally designated “preferred shares as financial liabilities included in profit and loss at fair value”, which led to the company’s extremely high asset liability ratio in 2015-2017, even more than 300%, and the equity ratio between – 1 and – 1.71, indicating the weak long-term solvency. < / P > < p > until 2018