Xiaomi the money: The making of China’s $100bn tech giant

3 May 2018406 Views

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Xiaomi building in Hangzhou, China. Image: Think A/Shutterstock

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With a potential valuation of $100bn, Xiaomi’s addition to the Hong Kong stock exchange could be the biggest IPO since Alibaba’s $25bn debut four years ago.

Propelled by the promise of early days Android, Xiaomi is the Chinese tech player that took the ball in 2010 and ran with it, and it is now a fully fledged tech giant.

The company is in the news because it has emerged it is planning to launch an initial public offering (IPO) on the Hong Kong Stock Exchange that could net it $10bn in funding on a potential valuation of $100bn.

Xiaomi has, in just eight years, emerged to be the fourth-largest smartphone maker by shipment. The flotation could be the biggest IPO since Alibaba made its $25bn debut in 2014. It would also see the company surpass Baidu and JD.com to become the third-biggest Chinese tech company by value after Tencent Holdings and Alibaba.

So who or what is Xiaomi?

Xiaomi the money: The making of China’s $100bn tech giant

Xiaomi headquarters in Beijing. Image: Testing/Shutterstock

The company was founded in 2010 by serial entrepreneur Lei Jun and it released its first smartphone in 2011.

Xiaomi is the Chinese word for ‘millet’. However, it is commonly recounted that the ‘xiao’ part is linked to a Buddhist concept that a single grain of rice is as great as a mountain, while the ‘mi’ is an acronym for mobile internet.

In 2010, the company built its first Android-based firmware, MIUI, and attracted investment from Temasek Holdings, IDG, Qiming Venture Partners and Qualcomm.

Its first smartphone, the Xiaomi Mi 1, came out in August 2011.

Prior to revealing its IPO plans, Xiaomi was ranked as the world’s fourth-most valuable tech start-up after receiving $1.1bn in funding from investors including DST Global, All-Stars Investment and GIC in 2014, valuing it at $46bn at the time.

The company employs 15,000 people in China, India, Malaysia and Singapore and is expanding to Indonesia, the Philippines and South Africa.

Xiaomi suffered a challenging 2016 but bounced back by revamping its sales model and expanding in India, where it rivals Samsung.

According to its financials, which were published for the first time along with its application for the Hong Kong listing, the company posted a net loss of 43.9bn yuan ($6.9bn) compared with a profit a year earlier. Revenues, however, were up 67.5pc on last year to 114.5bn yuan ($17.9bn).

Who is Lei Jun?

Xiaomi the money: The making of China’s $100bn tech giant

Xiaomi founder and CEO Lei Jun. Image: Zhanglin_net/Shutterstock

Lei Jun is believed to be China’s 24th-richest person and, in 2017, had an estimated net worth of $6.8bn.

Aged 48, Jun is a computer science graduate from Wuhan University and started his first company during his last year in college.

He joined Kingsoft in 1992 as an engineer, rose swiftly through the ranks, and led it to IPO in 1998.

After leaving Kingsoft in 2007 citing health reasons, he became a prolific angel investor in China and invested in more than 20 companies.

He still has a penchant for investing in up-and-coming companies. Jun and Xiaomi between them have invested in more than 70 start-ups and plan to invest in many, many more.

So Xiaomi just makes phones?

Xiaomi the money: The making of China’s $100bn tech giant

Xiaomi Mi flagship store in mall in central China. Image: MyCreative/Shutterstock

Ahem, no. Xiaomi is a veritable consumer technology giant and makes myriad products as well as smartphones, including tablet computers, laptops and smart TVs. Its hallmark is high-end but affordable devices.

It also has a number of subsdiaries that are involved in different tech verticals, including Huami, Mija, Aqara, Yeelight, Amazfit and Blackshark.

The key thing to realise is Xiaomi views hardware sales as a way of opening up a bigger market for apps and services. This is a long-term play, since smartphones currently account for 90pc of Xiaomi’s revenues.

Now Facebook’s Oculus VR chief, Hugo Barra joined Xiaomi in 2013 to lead the Chinese tech giant’s international expansion. He summed up the business model thus: “We are an internet and a software company, much more than a hardware company.”

How has it managed to grow so fast?

Xiaomi the money: The making of China’s $100bn tech giant

Xiaomi Mi Mix 2 smartphone. Image: Mehmet Cetin/Shutterstock

Xiaomi prices phones as close to bill-of-materials prices as possible without compromising on build or quality, and it began by selling its devices exclusively online. It has since opened 54 bricks and mortar stores across China to keep its competitors at bay.

A tight control over its stock enables the company to place cheap batch orders based on demand and then it executes flash sales to promote products.

Another tactic is the company listens closely to customers for feedback and acts on it. This is driven by Jun’s own experience of watching former mobile giants Nokia and Motorola fly into oblivion driven by the power of their own hubris.

Xiaomi has confined itself to Asia and has resisted global expansion – perhaps a wise move considering the struggles Chinese tech players like ZTE and Huawei, as well as Singapore’s Broadcom, have had cracking the US market.

But will Xiaomi come to Europe? It is already in Spain and other markets are likely to follow.

With an emphasis on selling smartphones and other tech devices at a razor-thin profit margin, and the fact that it sold more than 27m units in the first quarter of 2018 (Apple, by comparison, sold 52.2m units in the same quarter), Xiaomi’s remarkable ascent is definitely one to watch.

Xiaomi building in Hangzhou, China. Image: Think A/Shutterstock

Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com