Xiaomi under pressure, making cars as a straw to save their lives.

Author | Xiong Xing
Editor | Wu Xianzhi

On November 23, Xiaomi released its Q3 financial report, with revenue of RMB 70.474 billion, a year-on-year decrease of 9.7\%.

After reaching a peak of RMB 87.8 billion in Q2 2018, Xiaomi only rebounded in Q4 2018. In the first three quarters of this year, Xiaomi’s overall revenue declined significantly, reaching RMB 73.4 billion, RMB 70.2 billion, and RMB 70.4 billion respectively, indicating a “touching the top and falling back, oscillating” situation.

The impact of the overall environment is one of the important factors. According to Canalys data, global smartphone shipments in Q3 decreased by 9\% year-on-year. Only Apple among the world’s top three vendors achieved year-on-year growth, while the first-ranked Samsung and the third-ranked Xiaomi both had a slight advantage over the market, with an 8\% year-on-year decrease. However, it’s hard to say who won the “victory” in this situation.

In Q3, Xiaomi’s smartphone shipments were 40.2 million units, a 2.8\% increase month-on-month and an 8.8\% decrease year-on-year. There is still a gap of tens of millions of units from the high point of the first and second quarters of last year. The revenue from the smartphone business was RMB 42.5 billion, accounting for 60.3\% of the total revenue, and its revenue backbone is encountering a market winter.

According to Xiaomi’s strategic deployment of the smartphone×AIoT, the smartphone business is no longer a strong “knock-knock brick” and has had a certain impact on the IoT sector.

In Q3, Xiaomi’s IoT revenue was RMB 19.1 billion, a 3.1\% decrease month-on-month and an 8.6\% decrease year-on-year. It is worth noting that Xiaomi’s IoT revenue showed a year-on-year decline for the first time in Q2, and there was a trend of accelerated decline in Q3.

As one of the largest IoT vendors in China, facing external factors such as the impact of the overall environment and more competitors entering the race, Xiaomi’s dividend period has gradually passed. In this context, the test will be Xiaomi’s “internal strength”. How far can the smartphone×AIoT concept go? Can Xiao Ai, MIUI, and massive hardware become its powerful levers in the ten-year strategy?## Stuck in the bottleneck

The number of MIUI monthly active users is an important indicator of Xiaomi’s user base.

In the third quarter, the number of new MIUI monthly active users was 16.9 million, and the total number of active users reached 564 million, with a MoM growth of 3\% and a YoY growth of 16\%. Looking at it in a longer-term, the YoY growth of MIUI monthly active users has decreased from 32.1\% to 16\%. This means that the effect of attracting new users is continuously weakening.

Combining another set of data, we can see that the third quarter was driven by both Xiaomi’s loyal and new fans: Q3 mobile phone sales were 40.2 million units, and combined with the number of new MIUI users, we can find that the repurchase rate for this quarter was 58\%, and the overall repurchase rate is showing an upward trend this year. The advantage is that Mi fans recognize Xiaomi, but the disadvantage is that its high-end development has still not broken through.

If MIUI is the point of measuring mobile phones, then Xiao Ai’s monthly active users reflect the usage of IoT.

In the third quarter, Xiao Ai’s monthly active users reached 114.6 million, with a YoY growth of 9\%, and basic parity with the same period last year on a MoM basis. Since the beginning of this year, Xiao Ai’s monthly active users have been hovering around 115 million, which is stable, but it may also touch the user ceiling.

Of course, the monthly active users of Xiao Ai can only serve as a reference for Xiaomi’s IoT business. From the revenue perspective, the peak of Xiaomi’s IoT business was in the fourth quarter of last year, reaching 25.1 billion yuan, and the three quarters before and after the peak fluctuated between 18 billion yuan and 21 billion yuan. This is different from the stability of the number of monthly active users of Xiao Ai, but it is similar to the trend of Xiaomi’s mobile phone business revenue.

To a certain extent, this reflects that Xiaomi’s IoT business is greatly influenced by its mobile phone business. Treating mobile phones as the starting point of its IoT business still makes sense. However, Xiaomi’s mobile phone shipments are still far from their peak, and it is difficult to achieve substantial rebound in an atmosphere with insufficient overall market demand. Whether the IoT business can create a relatively independent market trend has become particularly important.“`

Positive signals

Positive signals show that Xiaomi’s major household appliances category had a year-on-year increase of over 70% in Q3. Specifically, the shipping volume of air conditioning products exceeded 1 million units, with a year-on-year increase of over 70%, and the shipping volume of refrigerators exceeded 340,000 units, with a year-on-year increase of over 150%. This is related to Xiaomi’s intensive launch of new products in the related categories in Q3.

However, not all the old categories have performed well, and some businesses have been adjusted.

The revenue of Xiaomi’s smart TVs and laptops was RMB 5.8 billion, a year-on-year decrease of 18.5%. Regarding laptops, it may be related to the lack of new products in Q3 due to the launch of Xiaomi’s latest laptop Air 13 in October; Regarding TVs, Xiaomi explained that the decline in the prices of core components led to a decline in the average selling price (ASP) of TV, which was partly offset by the increase in shipping volume.

Affected by economic factors, the consumption market is under pressure, and the market share of old categories with entertainment attributes such as TV is facing impact. From Q4 to now, Xiaomi has only released one new product under its own brand, while Redmi has released as many as four new TV products. Redmi TVs have a higher cost performance ratio, and Xiaomi’s TV business may be trading the decline in ASP for an increase in shipping volume.

Among the old categories, household non-entertainment products are almost a necessity and play an increasingly important role in Xiaomi’s IoT business. Since Q3, new products such as air conditioners, refrigerators, washing machines, and sweeping robots have frequently appeared, and Xiaomi is expanding this product matrix to cater to consumer trends.

In addition to this, Xiaomi is accelerating the expansion of new categories.

New products that improve the quality of life, such as electric heaters, steam ovens, foot bath massagers, dishwashers, and water purifiers, are being launched one after another. Xiaomi’s IoT business is accelerating penetration into more areas of daily life to ease the pressure on old categories of business.

Among them, dishwashers and water purifiers, which have a higher price range, may boost the ASP, but they need to compete for market share in the market dominated by traditional manufacturers such as 3M, Gree, and Midea. This is a dual test for Xiaomi’s brand power and product power.

Xiaomi IoT is losing market share

Xiaomi started with “cost-effectiveness,” and its millet chain products also inherited this gene.

From growth to maturity, Xiaomi has shifted from pursuing market share to focusing on gross profit margins. As it was born with a cost-effectiveness positioning, it is difficult to reverse the consumption habits of a large number of Mi Fans in a short period of time, which has made it difficult to increase its revenue in recent years.

As the origin of IoT product transformation, the situation of the mobile phone is the same, and it is difficult for millet chain products to avoid being affected. On Xiaomi’s e-commerce platform with traffic and the ecological chain supported by the MIUI system, millet chain products have grown rapidly but soon encountered a “profit ceiling.”


The 9th company is Xiaomi's biggest investment in Milian, but it has become a threat to Xiaomi's ecology after growing up. In cooperation with Xiaomi, the 9th company needs Xiaomi's channels to acquire customers, while Xiaomi participates in profit sharing, and can only expand its own brands and categories to break away from low-profit constraints. In the prospectus, the 9th company clearly stated that it does not belong to the typical ecological chain enterprises defined by Xiaomi.

In the third quarter of this year, the gross profit margin of the 9th company was 25.88\%, far higher than the overall gross profit margin of Xiaomi of 16.6\% during the same period, and it was indeed not defined by Xiaomi.

And this is not an exception.

Shitou technology, Huami, Yunmi, Sushi, Qusleep, and Yilai almost followed the same path as the 9th company, and the meaning of "distinguishing boundaries" from Xiaomi in "ideology" is becoming more and more important. One side only takes out some bundled products with Xiaomi channels, while the other part of the products is digested by its own channels. However, without exception, the selling price and positioning of the latter is higher than that of the former.

What is different is that the 9th and the Shi Tou, who have already raised their gross profit margin, have completed the "high throw" earlier than Xiaomi, and have greater profit space during the market downturn, possessing good independent survival capabilities, and are no longer forced to share the honor and disgrace with Xiaomi channels.

For Xiaomi, the head companies of Milians they supported are both friends and opponents, occupying a place under the Milian's ecology, and taking the lead in higher price ranges. The cake is not getting bigger, but the sharers are getting stronger.

The internal problems it faces require time to adjust, while external competition is squeezing Xiaomi's time.

Also in the third quarter, Honor launched 5 products in one breath, headsets, laptops, mobile phones, tablets, and smart screens, continuing to improve its IoT ecosystem. The difference is that Honor's idea is that "the product used by consumers is the core product."

This means that Honor does not regard mobile phones as the single starting point of its ecology. Tablets, smart screens, etc. can all be "centers". Undoubtedly, the room for imagination is larger, and coupled with the brand effect, positioning IoT products higher, Honor has a certain innate foundation. 


According to Xiaomi's strategy for smartphone ×AIoT, the company still faces a long-term challenge: achieving high growth. In addition to improving gross profit margins to buffer against the uncertainty brought about by a sluggish market, raising brand positioning and changing the consumption habits of Mi Fans are also key to unlocking IoT business's potential for revenue and gross profit growth so that Mi Chain can retain more defined partners.

At the beginning of the third quarter, Xiaomi quickly released the 12S Ultra with a starting price of 5,999 yuan. According to Counterpoint Research, the material cost was about $516 or RMB 3,486. It is hard to believe that Xiaomi would only make "profit not exceeding 5\%" when taking into account human resources, storefronts, advertising, logistics warehouses, and R&D design costs.

Perhaps this product has succeeded in achieving a win-win situation, with a score of 9.6 on Coolapk, making it likely to become a milestone product for Xiaomi's aggressive push. In the future financial reports, the "exception" might showcase its potential long-term impact on the Xiaomi brand, smartphone business, and IoT.

## Car-making: Ample funding, but automatic driving needs acceleration

Xiaomi recorded a net loss of RMB 1.47 billion this quarter, and its core business revenue continues to decline. As a result, the extent to which Xiaomi's car-making business is affected has become a focus of external attention.

According to the financial data in the third quarter report, as of September 30th, Xiaomi's cash resources amounted to RMB 94.3 billion. Wang Xiang, President of Xiaomi, said that the current car production progress was smooth, and he was confident that it would start production in the first quarter of 2024.

At present, Xiaomi's car is still five quarters away from mass production. Based on a rough estimate comparing a loss of RMB 1.5 billion per quarter, it will require a total of RMB 7.5 billion for these five quarters.


Looking at spending, Xiaomi's R&D expenses increased 8.1\% QoQ this quarter, and the next five quarters will incur around RMB 1.95 billion in cumulative R&D expenses with this growth rate.```
<p>With the combination of increased R&amp;D costs and losses, theoretically Xiaomi will need about 10% of its current cash resources or approximately 10 billion yuan over the next five quarters, but the environment for car manufacturing is still comfortable. </p>

<p>Xiaomi's technology and R&amp;D team expansion are also progressing steadily with no worries about funding. </p>

<p>Xiaomi's R&amp;D team size has reached 1800 people, while as of the end of last year, Li Huidi's R&amp;D team had 4809 people, 3415 people, and 5271 people respectively. In terms of numbers alone, there is still quite a gap compared to the leading new forces. This may be related to Xiaomi's early focus on relatively concentrated technology and layout fields. </p>

<p>In upstream raw materials and self-developed three-electric fields, Xiaomi has no major initiatives, but is focusing on increasing its investment in autonomous driving R&amp;D. </p>

<p>So far, the team responsible for autonomous driving R&amp;D alone has reached 500 people, and is expected to reach 600 people by the end of the year. Although there is still a gap compared to the leading new forces, combined with the dozens of intelligent driving companies it has acquired or invested in, the R&amp;D scale is already considerable. </p>

<p>Xiaomi has invested more than 1.8 billion yuan in car R&amp;D in the first three quarters of this year. Based on this estimate, the total investment for the year is about 2.4 billion yuan. Currently, Xiaomi is increasing its investment, and the year-end data may be slightly higher. However, it still lags behind the leading companies in the industry. For comparison, Xiaopeng's R&amp;D investment in the first half of the year has reached 2.91 billion yuan. </p>

<p>In the third quarter, Xiaomi showed its latest progress in autonomous driving cars to the outside world for the first time. The highlight is that Xiaomi's car completed autonomous driving between two points in the city with zero handover, but the shortcomings are that there are significant differences between the software and hardware and the mass-produced version, and the judgment and response to different traffic conditions are still somewhat rigid compared to conventional driving behavior. </p>

<p>In fact, Xiaomi's city zero-handoff performance is similar to Xiaopeng's NGP concept, which has already been fully opened in Guangzhou and become a "final version" product. Xiaomi's autonomous driving still needs to go from the "beta version" to the "final version" and then catch up with the leading companies in the industry. And during this time, how far the technology of the leading companies will advance. </p>

<p>This is a big challenge and tight deadline for Xiaomi. If it wants to become a first-tier player in autonomous driving by 2024, it may need to increase its investment. </p>

<p>Overall, Xiaomi's performance in the third quarter did not exceed market expectations, with its two main businesses, mobile phones and IoT, continuing to hover at a low level of revenue. </p>

Before the market recovers, it is difficult for Xiaomi’s data performance to undergo a qualitative change. Even if it returns to its peak, it is still in the midst of stock competition.

In “Thoughts on Xiaomi’s Entrepreneurship,” Lei Jun once talked about how smart electric cars have changed the business model of the automotive industry, and Xiaomi has rich experience in software and hardware integration and internet service models.

The determined Xiaomi car may bring a milestone expansion to its entire ecosystem, thereby driving other businesses out of the predicament. There is no doubt that it is the biggest breakthrough for Xiaomi to seek high growth in the future.

The current trough period has no substantive impact on Xiaomi’s car manufacturing, what Xiaomi needs to do is to accelerate again in the new track.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.