It Took a Pandemic for Xiaomi to Realize Its Vision

(Bloomberg Opinion) -- For at least two years, I’ve been calling out Xiaomi Corp. for pretending be an internet player when it really just makes smartphones. It took a global pandemic and economic meltdown for the Chinese company to finally realize its vision, sort of..A heady startup valuation and an initial public offering in 2018 were predicated on the idea that Xiaomi’s ecosystem of devices, sold at minimal profit, would drive demand for a more lucrative array of internet services, such as games and advertising. .This didn’t bear fruit. Smartphones consistently contribute more than half the company’s revenue, while gross profit has primarily been driven by the devices catalog — including phones, smart speakers and TVs..With the Covid-19 outbreak and resultant economic downturn crimping demand for its namesake handsets, Xioami’s internet-services business has now become the chief contributor to growth for the first time. It’s finally looking like the company founder Lei Jun claimed, but it took a major global upheaval to get there..Overall, second-quarter revenue climbed 3.1%, Xiaomi reported late Wednesday, the slowest on record. The smartphone division dropped 1.2%, while internet of things and lifestyle products added 2.1%. Internet services climbed 29%; within that category, advertising delivered more than a third of the company’s incremental sales compared to the previous year..My analysis on a range of companies, including Netease Inc., Baidu Inc., Tencent Holdings Ltd., Alibaba Group Holding Ltd. and even Lenovo Group Ltd., shows that those reliant on selling a product directly to Chinese consumers fared comparatively well in the second quarter, while those dependant on the marketing budgets of other companies struggled..On the surface, it would appear that Xiaomi’s charge-leading advertising business bucks this trend. But that’s not quite the case. According to management, the 23.2% increase in revenue from that category came primarily from outside mainland China — chiefly India and Europe — though a “gradual recovery” in home-market ad budgets was noted. (In an investor call, President Wang Xiang declined to answer a question about any possible impact from India’s ban on Chinese apps following a border clash.).The broader picture is that for the third time in the past four quarters, Xiaomi’s China sales fell while overseas revenue rose. This growth means that foreign markets account for 45% of business, a rare phenomenon for Chinese companies that generally get more than 80% of sales from their home market. .Prior to its IPO, a belief among venture capital investors that Xiaomi wasn’t really a hardware maker (suffering from the vagaries of tight margins and brutal competition), but an internet services company (enjoying the spoils of scale and reach) pushed its value toward $100 billion. Reality struck when investors saw the truth and the stock debuted at half that price. .Two years and one pandemic later, the company is finally being proven right. But like the viral outbreak, this might not last..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News..©2020 Bloomberg L.P.

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It Took a Pandemic for Xiaomi to Realize Its Vision

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