Update (12 Dec, 2014): Xiaomi Raises $1.1 Billion At $45 Billion Valuation proving to be a serious threat to Apple and Samsung.
- Xiaomi took over the Chinese smartphone market with 14% market share and outperformed Samsung and Apple there.
- Xiaomi settles for small profit margin for its high-end smartphones, which enables it to offer high-end smartphones for competitive price compared with Apple and Samsung.
- Xiaomi grew number of shipments every quarter and entered the top five worldwide smartphone vendors.
- After it took over the Chinese market in a very short time, Apple and Samsung should be concerned by Xiaomi’s global expansion plans.
Chinese smartphone vendor Xiaomi reportedly seeks private equity funding of $1.5 billion, which reflects a valuation of $40 billion to $50 billion for the four-year-old manufacturer. Proceeds of the funding are targeted to assist the company in their international expansion since the company’s Mi4 and Redmi models have been highly successful.
Xiaomi was founded in 2010 by Ex Joyo (Amazon China) founder Lei Jun and launched its first smartphone one year later in August 2011. The Xiaomi Mi1 was considered, at the time, to be the Chinese iPhone and received more than 300,000 pre-orders after the company priced it considerably lower than any Apple iPhone. Since the Mi1, Xiaomi has launched a new high-end smartphone every year and has started expanding its offerings to more electronic devices, such as tablets, smart TVs, and mobile GoPro-like cameras.
In 2013, Xiaomi received funding in a series-D round that valued the company at around $10 billion. By that time, as shown in chart 1 below, Xiaomi had already gained 5% of the market share in the Chinese smartphone market. By the time the company launched its latest high-end smartphone, the Mi4, it had 14% of the market share in China.
Xiaomi does not only fight Apple and Samsung in the hardware offering but also fights against Apple iOS and the high-end Android devices on the high-end smartphone market. For Example, Xiaomi's Mi Pad which emulates Apple's popular tablet, would cost just over $240 whereas the cheapest iPad mini is $399. Xiaomi’s latest Mi4 smartphone is powered by Qualcomm’s Snapdragon 801 chipset and Xiaomi´s MIUI 6 operating system. Unlike the Apple iPhone 6 and Samsung S5 that are sold for $649 (16GB, no contract), the Xiaomi Mi4 is sold for only $400.
The increase in the number of units shipped per quarter and the market share growth in China are only part of the Xiaomi phenomenon. Research firm IDC recently reported that Xiaomi is gaining a share in the global market too.
According to IDC’s worldwide smartphone tracker for Q3 2014, published at the end of October, Xiaomi’s strategy of selling high-end devices for low prices seems to be working and has enabled the company to penetrate the top five global smartphone vendors.
According to the IDC report, Xiaomi has a 5.3% market share of the global smartphone market, with more than 17 million units shifted, placing it as the number three smartphone vendor worldwide with a triple digits increase year-over-year in smartphone shipments. Meanwhile, from Q3 2013 to Q3 2014, Samsung lost eight percentage points in the global market share and Apple one point in a disappointing trend for both companies.
The incredible worldwide success drove Xiaomi’s executives to accelerate global expansion and to open a new office at Singapore to act as their intentional headquarters. The recent funding round in which Xiaomi tried to raise $1.5 billion was another step in its attempt to expand globally and increase sales outside of China.
Xiaomi can sell high-end smartphones at low prices by accepting a small profit margin for every smartphone sold, pushing the company to increase sales. According to the Wall Street Journal, this strategy yielded to Xiaomi more than $3 billion in net profit in 2013, which is an 84% increase year-over-year, and is expected to increase its net profit by 75% in 2014. As shown in chart 3 below, Xiaomi works under significantly lower gross margins and a lower pre-tax profit margin than Apple and Samsung. However, in order to remain profitable and maintain current levels of margins, Xiaomi needs to increase shipments and market share worldwide.
Since Xiaomi’s business model is very different from Apple's and Samsung's and forces the Chinese company to sell large quantities of smartphones, the company will likely fight Apple and Samsung in every major market to gain more share and generate more revenues to offset the high costs related to the smartphones market. Proceeds of Xiaomi’s latest funding round are aimed at penetrating two large, emerging markets: Brazil and Indonesia, and that could boost the company’s sales. As the company's patent portfolio is not broad enough to penetrate the U.S. market (according to the Wall Street Journal), Xiaomi will probably work to expand it within the next year. Apple and Samsung should be very concerned about the competition on their high-end smartphones from low-priced, rapidly growing Xiaomi.
Xiaomi, a Chinese smartphone manufacturer, entered the top five worldwide smartphone vendors with more than seventeen million units sold in Q3 2014. Xiaomi is now the market leader in China with a larger share than Samsung, Apple, Lenovo and other leading brands. Xiaomi, often nicknamed China’s Apple, offers its high-end smartphones for considerably lower prices than Apple and Samsung and is gaining market share quickly within China. After it has become the market leader in China, Xiaomi will try to expand globally. Considering Xiaomi's regional success in mainland China, Hong Kong and Singapore, Apple and Samsung should be worried about Xiaomi’s international plans and should try to fight back to block its market share increase and narrow its profit margins.
In case Xiaomi grows and receive funds, it is very likely that the Chinese wonder will go public in the U.S. in order to speed up its international expansion and penetrate the U.S market more quickly and smoothly than it could under current conditions.
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