SMARTPHONES: Xiaomi Takes Big Step Into South Korea

Bottom line:  Xiaomi appears to be gaining confidence of investors through moves like its entry into South Korea, but it will take at least another year to prove it really has the savvy to thrive over the longer term.

Xiaomi calls on South Korea

Newly listed smartphone maker Xiaomi (HKEx: 1810) has kept the world guessing these past two weeks with its on-again-off-again performance both on the Hong Kong stock exchange and now in the real world. The former is a reference to its stock, which did quite poorly in the run-up to its trading debut last Monday but has done a U-turn since then and posted some impressive gains.

The latter is a reference to the company’s latest strategic move, which has it launching its low-end smartphones in South Korea. That may not sound like much, since the market is relatively small and Xiaomi already sells its products in more than 70 countries and regions globally. But the symbolic significance is quite large, since South Korea is home to leading global smartphone maker Samsung (Seoul: 005930).

Let’s kick off by reviewing the unlikely U-turn by Xiaomi’s stock since its unimpressive trading debut last Monday. The shares priced at HK$17 apiece, at the lower end of their range, and then sputtered to log a small loss on their first trading day. Since then, however, the stock has come roaring back and was trading at HK$21.85 as of this writing, up nearly 30 percent from the IPO price.

At its current price, the company is now worth about $63 billion, which isn’t too bad for such a young company. But the bottom line is that nothing has really changed in just the last two weeks, except for perhaps some investor perception about where Xiaomi is going. I previously argued, and still believe, the company is far too reliant on cheap smartphones that will have a difficult time differentiating themselves from all the other lookalike products out there in the market.

But perhaps others are zeroing in on the company’s global story, as it builds up a relatively impressive worldwide distribution network that will be critical to its future success. That network is taking it into South Korea on its latest whistle stop, with local media reporting the company has signed major deals with two of the country’s leading carriers, KT and SK. (Chinese article)

Low Prices

The reports come just days after Xiaomi announced it would launch the latest product from its cheap line of Redmi smartphones, the Note 5, in South Korea. The phones will sell for the equivalent of about $265, which is definitely a step up from the company’s average price of about $140 per phone that it disclosed in its IPO prospectus back in May. That speaks to the fact that South Korea is certainly a step up from the developing markets that currently form the backbone of Xiaomi’s global expansion.

Still, the $265 price tag still isn’t exactly going to break anyone’s bank. South Korea is already known as one of the world’s most tech-savvy nations, especially in telecoms, so I would expect this kind of price is probably slumming a bit for that kind of market. By comparison, Chinese rival Huawei is making a serious play at the higher end of the market for smartphones costing more in the $500 range, or about twice the price of Xiaomi’s. Then there are Apple and Samsung, whose products cost even more.

As to the symbolic nature of the move, perhaps some investors are viewing it as Xiaomi’s way of saying it’s not afraid to take on the giants in their own backyards. Of course the bigger move on that front will be a potential Xiaomi launch in the US, where it would face the dominant Apple (Nasdaq: AAPL), which also happens to be Xiaomi’s role model.

Images are important to investor perceptions, but operational execution is what really matters for a company’s success or failure at the end of the day. Xiaomi certainly seems to be operationally sound, and is also working hard to improve its perception among investors with this kind of bold entry into South Korea. All that said, my main concerns are still that this is quite a fast-moving industry and that Xiaomi is in a very competitive part of that market. Accordingly, I would still require another year or two of solid execution before buying into this company’s longer-term story.


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