Fast-rising smartphone maker Xiaomi is back in the headlines with an update on a high-profile bet made last year by chief Lei Jun, who predicted his company would surpass the older and much larger appliance giant Gree (Shenzhen: 000651) in the next 5 years. At the same time, Lei has also updated a previous pledge that his company won’t go public during that time, which probably reflects the fact that Xiaomi will probably be losing money for much of the next 5 years. Lastly a separate news bit has Xiaomi investing in a GPS technology company, in a further indication that the company intends to follow a path similar to role model Apple (Nasdaq: AAPL) in its future development.
None of these news bits are really that major, reflecting the fact that China is still in the process of getting back to work after a week-long holiday and most companies have yet to turn up their publicity machines to more normal levels. Still, Lei Jun’s reaffirmation of his determination to win his high-profile bet last year with Gree Chairman Dong Mingzhu reflects a high degree of confidence in his company’s growth. At the same time, his refusal to make an IPO in the next 5 years also acknowledges that Xiaomi is operating in a highly competitive market where margins are falling fast and profits will remain elusive.
Dong Mingzhu, often considered China’s most successful businesswoman, made her high-profile bet with Lei last December on a widely watched TV program, with the 2 wagering a whopping 100 billion yuan ($16 billion) on the outcome. (previous post) The challenge looked like a difficult one, since Xiaomi’s revenue in 2013 stood at 30 billion yuan, or less than a third of Gree’s revenue of more than 1 billion yuan for the year. In his latest comments, Lei placed the chances of him winning the bet at 99 percent, adding the triumph of technology over traditional industries like Gree’s was “inevitable”. (Chinese article)
Since that original report came out, Xiaomi has announced results that showed its unit smartphone sales nearly quadrupled in the first half of the year, as it entered the low end of the market in China and also embarked on a global expansion. (previous post) But its revenue grew at a much slower though still impressive rate of 150 percent to 33 billion yuan. That compared with Gree’s first-half revenue of about 59 billion yuan, meaning Xiaomi has already gained significant ground on its older rival.
While Xiaomi’s revenue is now more than half of Gree’s, its margins are also clearly eroding very quickly and I suspect the company is probably posting big losses. It is probably spending heavily on its global expansion, which has it moving aggressively into Southeast and South Asia, and is also facing extremely tough competition in its home China market. That situation is unlikely to change for at least the next 2 years, which explains why Lei Jun doesn’t want to make an IPO anytime soon. His company still has plenty of cash, though I suspect it will need to do at least 2 and more likely 3-4 major new fund-raisings within the next 5 years.
Last let’s look quickly at Xiaomi’s latest strategic move, which has it investing a relatively modest 84 million yuan in Careland Computing Systems, a maker of GPS mapping and navigation technology. (English article) There’s no additional detail in the reports on the deal, and the size makes the investment rather inconsequential to Xiaomi. But it does indicate the company intends to mimic Apple by providing a range of its own services in addition to being a hardware maker. That looks like a smart strategy as it provides a high-margin revenue source, though it also carries some risk due to all the recent concerns about data security and cyber snooping.
Bottom line: Xioami’s Lei Jun is likely to win his bet to surpass Gree’s revenue within 5 years, but the company will remain loss-making and is likely to need at least 2-4 more major funding rounds during that time.