Chinese handset vendor Xiaomi pledged to cap its net profit margin after tax for its hardware business to no more than 5 per cent “forever” and return any excess amounts it generates to its customers.
In a tweet, the company said the policy will be applied to money it makes from smartphones, currently its biggest market, and other devices it manufactures.
Today our CEO Lei Jun announced a promise to all our fans…#Xiaomi will forever limit the net profit margin after tax for our entire hardware sales (including smartphones, IoT and lifestyle products) to a maximum of 5%.
Do you like the sound of that? pic.twitter.com/ZbEjaVeBLf
— Mi (@xiaomi) 25 April 2018
Bloomberg noted Xiaomi made the pledge as it prepares for an IPO which could value it at $100 billion, adding the move suggests Xiaomi is confident it can generate good returns from other services it provides alongside hardware, such as video streaming and advertising.
“It means Xiaomi is not only confident about recurring service revenue, but also optimistic about Chinese consumers’ consumption of digital services,” Nicole Peng, senior director of mobility at research company Canalys, told the news agency.
However, while such a unique offer to share profits may sound attractive to potential and existing customers, TechCrunch warned most companies struggle to make a big profit from hardware, apart from Apple.
For example, in Q4 2017 Apple captured 87 per cent of smartphone industry profits despite accounting for 18 per cent of total units sold in the period, figures from analyst company Canaccord Genuity show. This was due to premium pricing of its products, while rival smartphone vendors Samsung and LG rely on their component businesses for the bulk of their revenues.
Notably, Xiaomi also sells its hardware at relatively low prices, which is considered to be a key part of its strategy. Indeed, the company’s former global vice president Hugo Barra said in 2016 the company was unaffected by a sharp drop in smartphone sales at the time because its profitability is more dependent on smart home devices and its software ecosystem.
In another announcement, Xiaomi also launched the Mi6X, a new phone for the Chinese market.
The device has an 18:9 display, dual camera and is powered by a Snapdragon 660 processor. It comes in five colours and is priced at around $250. The Verge reported Xiaomi is using the device to bring the 18:9 display to the middle tier of the market, following the recent launch of Redmi 5 and high end Mi Mix 2S.
Although Mi6X is initially launching in China, the device could reportedly also be rolled out in India.