China’s fast-growing Xiaomi – until recently the third largest smartphone maker in the world before being displaced by the $2.9B Motorola/Lenovo deal – saw its net profit jump 84 per cent last year and expects 75 per cent growth this year.
The company is also reportedly holding discussions with a number of firms to raise $1.5 billion in funding. The Financial Times reported that the additional capital would value the company at more than $40 billion. Xiaomi is also mulling an IPO early next year, according to the South China Morning Post, citing sources close to the company. Last month it closed a $1 billion loan agreement with a syndicate of 29 banks.
The privately-held company, just four years old, shipped 17.3 million smartphones in Q3 – that’s a 211 per cent increase from Q3 2013. Its global market share almost doubled during that period, from 2.1 per cent to 5.6 per cent, according to IDC. Market leader Samsung’s dropped 8.5 percentage points to 24 per cent.
The overall smartphone market grew 25 per cent during the quarter to 327 million units.
The Wall Street Journal, citing confidential documents from the company, reported Xiaomi’s 2013 profit increased 84 per cent to CNY3.46 billion ($563 million) with revenue of CNY27 billion.
Given the low cost of most of its phones, the huge profit jump comes as something of a surprise.
Falling prices have driven overall volumes, but IDC’s Ryan Reith said the challenge is how to make money on devices that are quickly becoming commodity products. “Outside of Apple, many are struggling to do this,” he noted.
While Apple has more than 50 per cent gross margins on the iPhone, Samsung’s margins reportedly are in the mid-teens. And with Samsung offering models across all price tiers, presumably the majority of the profit is coming from its high-end devices. Many of the other makers don’t report profitability or margins of their handset groups. Huawei and ZTE both have said they make a profit on their devices, but don’t support those claims with figures.
IDC said the key to Xiaomi’s success has been the launch of its Mi4 smartphone, which was positioned as a high-end alternative to the models from the top two players. It is priced at $327 while its low-end phones go for about $115.
Xiaomi has not been alone in taking market share off the leaders. Both Lenovo and LG gained in Q3 (although less than 1 percentage point each), which shows that there is still room to compete in this market, said Ramon Llamas, IDC’s research manager of mobile phones.
But with smartphone growth in developed markets now experiencing single-digit growth, Xiaomi’s focus will likely continue to be on emerging markets that are still growing at more than 30 per cent.