SMARTPHONES: Xiaomi Comeback Marches On, But Will It Last?

Bottom line: Xiaomi’s rising market share and securing of $1 billion in new financing underscore its nascent turnaround may have some legs, even as its position remains tenuous in the cutthroat market.

Xiaomi unveils latest phone

Former smartphone sensation Xiaomi is in several headlines as we head into the close of the week, all of which seem to underscore that its nascent rebound may have some legs. But as anyone in the industry will tell you, any smartphone maker is really only as good as its last model these days, meaning fortunes can quickly turn with just one misstep. The smartphone sphere is littered with such examples of such missteps that ultimately led to corporate downfalls, including Samsung (Seoul: 005930), as well as former giants Nokia (Helsinki: NOK1V) and Motorola.

That said, Xiaomi is a slightly different case from that trio, since its initial rise to fame was really almost exclusively based on hype and savvy marketing rather than any cutting-edge product. The company is trying to correct that problem now by improving its product lineup, including the unveiling of its latest phone and upgrades to its own operating system. At the same time, media are reporting the company has received a new $1 billion loan, meaning banks still have some confidence in the firm, even if investors are skeptical.

Let’s begin with the latest quarterly sales data, which is just beginning to trickle out and should continue when big research houses IDC and Gartner release their figures next week. For now we’ll have to settle on data from one of the smaller houses, Canalys, which has released figures showing Xiaomi’s share of its home China market reached 13 percent in the second quarter, up nearly 2 percentage points from a year earlier. (Chinese article)

Despite the big jump, Xiaomi only managed to retain its position as the market’s fourth largest player during the quarter, behind Huawei, Oppo and Vivo. All three of those also made solid gains in market share during the quarter. Those gains came at the expense of Samsung, whose share tumbled by more than half to just 3 percent, and the many smaller players whose combined share nosedived by more than 7 percentage points to 20 percent.

At the same time, Xiaomi has just unveiled its latest model, the dual camera Mi 5X, priced at a very affordable 1,499 yuan ($220). (Chinese article) The phones will go on sale August 1, which is just 5 days from now, meaning Xiaomi isn’t really interested in giving reviewers time to look at them to build up a bit of buzz. That’s not too surprising, since this is clearly a lower end model that probably wouldn’t generate much buzz anyhow.

Low-Key Approach

After learning that buzz can be a double-edged sword by building up unrealistic expectations, Xiaomi chief Lei Jun seems to be taking a newer, low-key approach that lets his products speak for themselves. That seems to be working, along with other major tweaks like setting up a real-world retail network to complement the company’s former model of selling products only online.

Xiaomi’s turnaround is clearly gaining a little momentum, but not enough yet to embolden Lei Jun to go back to investors for more money. That’s because he knows that any money he gets right now will value the company well below its last valuation of $45 billion, which came more than 2 years ago when the company was still at its height. One of my sources recently told me some of the company’s smaller stakeholders have been trying to sell their shares on the open market at about 60 percent of that last valuation, meaning the company would now be worth about $27 billion based on that benchmark.

While Xiaomi may not feel bold enough to approach investors for more money, it’s obvious it probably needs new funds more than two years after its last capital raising exercise. Media are reporting it may have found such funding with a $1 billion syndicated loan from 17 banks. (English article) The reports call this a refinancing rather than new funding, though I suspect at least some of the money is new funds.

The fact that it’s coming from 17 banks means each is only providing a relatively modest sum of about $60 million, showing that people still consider this company a somewhat risky proposition. But the fact that banks are willing to lend at all to a mediocre company in such a cutthroat industry is a modestly positive sign.

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