Xiaomi, on the eve of a breakout or on the brink of falling?

"Good student" Xiaomi handed in a financial report that didn't look very good.

Xiaomi recently released its 2022 financial report, and data showed that Xiaomi's revenue and profits both fell by double digits in 2022. This is the first time since Xiaomi went public.

If we put this achievement in the context of the mobile phone market, it is not surprising. The difficulties in the mobile phone market have become a commonplace topic. Quantum tunneling has shattered Moore's Law and significantly slowed down the upgrade of mobile phones. Coupled with factors such as market saturation and a decline in macro consumption, many mobile phone manufacturers will not have an easy time in 2022.

But similar difficult situations can point to completely different futures. For Xiaomi, this is a critical time of pressure. One of the factors that led to the decline in profits is the planned mass production of cars next year. Although the burning R&D funds dragged down the financial report data, it is also nurturing new stories.

Xiaomi has staged a comeback against all odds. "No mobile phone company in the world can successfully reverse its sales decline, except Xiaomi." This was Lei Jun's bold statement in 2017. Six years later, Xiaomi once again entered the familiar examination room, and this time, more people chose to believe in it.

01 Industry downturn

Financial report data that is studied out of historical and industry context is often meaningless.

Xiaomi’s “poor” performance is almost inevitable.

The downward trend in the mobile phone industry that is now painful to the public actually showed signs as early as 2015. In the first quarter of that year, domestic mobile phone shipments fell by 4.3% year-on-year, the first decline since the mobile Internet era, and the warning light of market saturation was on.

In the seven years since then, although technological innovations such as 5G, full-screen, and facial recognition have continued to keep mobile phone shipments steady, the two major problems of market saturation and cessation of technological innovation have always hung over the heads of manufacturers.

By 2022, the downward trend will be difficult to stop. According to IDC data, China's total smartphone shipments in 2022 were 286 million units, a year-on-year decrease of 13%, the largest drop in history, and the first time in ten years that it has fallen below 300 million. The situation in the international market is similar. In 2022, the global smartphone market fell by 12% year-on-year, the lowest point in nearly nine years. Apple was not immune to this, with shipments falling by 13.3% in the fourth quarter.

Only by looking at Xiaomi's financial report based on this background can we draw a relatively objective conclusion.

The financial report shows that Xiaomi's total revenue in 2022 was 280 billion yuan, with a gross profit of 47.6 billion yuan, a year-on-year decline of 18.3%, and an adjusted net profit decline of about 60%. However, because the investment in innovative businesses such as new energy vehicles was as high as 3.1 billion yuan, after excluding this part of the interference, Xiaomi's profit is not that bad.

The mobile phone business accounts for 60% and is still Xiaomi's core business. Xiaomi's global smartphone shipments in 2022 were 150 million units, compared with 190 million units in the same period of the previous year. In the global mobile phone market, Xiaomi still ranks third with a market share of 13%. Third-party data shows that 50.1% of users will continue to choose the Xiaomi brand when changing their phones, and its loyalty ranks first in the Android camp - this shows that Xiaomi has not lost its competitiveness in the cold winter.

In a horizontal comparison, according to IDC data, in addition to Honor, the year-on-year declines of the other two domestic mobile phone giants, OPPO and vivo, were higher than Xiaomi last year. Honor is in its development stage, with a low base before, so its growth rate is naturally higher.

In contrast to Honor, Xiaomi in 2022 will face a high base in 2021. In 2021, Xiaomi's revenue increased by 33.5% year-on-year, and its adjusted net profit increased by 69.5% year-on-year, which was also the high point of Xiaomi's stock price. In the second quarter of that year, Xiaomi's mobile phone sales ranked second in the world. Such good results also determine that even without external interference, it will be quite difficult for Xiaomi to continue to achieve substantial growth on the base in 2021.

It is worth noting that under the background of overall pressure, Xiaomi's performance in 2022 is not without highlights, such as high-end mobile phones, tablet computer business, mobile Internet and home appliances.

In the mid-to-high-end market, where Xiaomi has focused its efforts, its position has become increasingly solid. In the fourth quarter, Xiaomi ranked first in the domestic 3,000-4,000 yuan mobile phone market share. By January of this year, Xiaomi also topped the 4,000-5,000 yuan price range. In terms of tablets, Xiaomi achieved a full-year shipment growth of more than 160% in 2022, and its domestic market share rose to third. The Redmi Pad released in October last year was well received by the market, with first-sale sales exceeding 75,000 units.

lot business, smart home appliances revenue increased by more than 40% year-on-year, and the shipments of air conditioners, refrigerators, and washing machines all achieved significant growth. In addition, the number of Internet users reached a new high. In December 2022, the global MIUI monthly active users exceeded 500 million, a year-on-year increase of 14.4%.

Overall, in an environment full of pessimism, although Xiaomi's report card is not good, it has both core competitiveness and future potential, which also creates room for imagination in the capital market.

02 A copy

A large part of Xiaomi's imagination is provided by its past.

Xiaomi has encountered worse situations. In 2016, after five years of rapid growth, Xiaomi began to be "bitten back" by its speed. In the first quarter of that year, Xiaomi, which had long been among the top three in the world in terms of shipments, fell out of the top five. In the middle of the year, Lei Jun personally took over R&D and supply chain and began to help Xiaomi catch up. A year later, in the second quarter of 2017, Xiaomi set a record for single-quarter shipments in history. In 2018, its mobile phone sales exceeded 100 million, returning to the top five and ushering in its second peak.

What is more difficult than going from 0 to 1 is climbing back to the top after falling to the bottom. Compared to the novice who is fearless, the latter requires many times more courage and endurance.

However, it is easy to repeat failure, but it is difficult to replicate success. The same is true for Xiaomi itself.

Comparing the two crises seven years apart, there are both good news and bad news.

The bad news is that the industry is getting more difficult. Although the mobile phone market encountered problems in 2016, it was still growing overall. But now the overall growth of the market is already very difficult.

The good news is that Xiaomi is no longer what it was seven years ago.

On the one hand, the direct cause of Xiaomi's crisis has changed. The decline in 2022 is the entire mobile phone market. The competitiveness of Xiaomi's own products has not diminished, but has become stronger. Once the consumer market recovers, it will also drive Xiaomi's performance to recover.

At present, this recovery has begun. Data released by the National Bureau of Statistics and the General Administration of Customs showed that the total retail sales of consumer goods in January and February this year rebounded from a year-on-year decline of 1.8% to a year-on-year growth of 3.5%.

The recovery was first transmitted to Xiaomi's channel end. In 2022, the offline channels were affected by force majeure, and the customer flow of Xiaomi Home declined, but the payment amount of offline channels still increased. In 2023, with the recovery of consumption, Xiaomi's offline channels also recovered strongly. In January and February, the GMV of offline single stores increased by 30%. At the end of February 2023, offline channels contributed about 55% of the sales of the Xiaomi 13 series.

Offline channels are the key to Xiaomi's recovery from the lows in 2016 and are also Xiaomi's basic foundation today. They can be seen as a weather vane for Xiaomi's entire recovery.

On the other hand, after several years of business adjustments, Xiaomi now has more explosive points. In 2022, Xiaomi's non-mobile phone revenue accounted for more than 40%.

The wide range of business lines has shared Xiaomi's risks and provided more growth possibilities. Xiaomi has made significant progress in the fields of Internet, AloT, wearable devices and car manufacturing. The highly anticipated car manufacturing business is progressing smoothly. According to Lei Jun, Xiaomi's car manufacturing plan has progressed beyond expectations and will be mass-produced in the first half of next year as originally planned. After the mass production of cars, the ecosystem with AloT and mobile phones will be connected, which is expected to promote the entire business line.

The new growth lines that are taking shape give Xiaomi more room to maneuver and survive. When it is no longer solely dependent on the mobile phone business, there are more possibilities for recovery.

03 The Eve of the Outbreak

Lei Jun was once the key figure in leading Xiaomi out of the trough in 2016. He personally managed the supply chain and R&D.

In 2019, Xiaomi encountered sales problems again and its stock price fluctuated. Xiaomi made the Redmi brand independent, raised the price of the Xiaomi brand, and implemented the mobile phone + AloT strategy. In 2020, the strategy was upgraded to mobile phone xAloT. The direct change brought about was that Xiaomi emerged from the crisis and created the miracle of becoming the second best-selling smartphone in the world.

Similar stories continue to unfold.

On January 30, 2023, Lei Jun released an internal letter from Xiaomi announcing that two professional group governance committees would be established, namely the Operation and Management Committee (abbreviated as the Operation and Management Committee) and the Human Resources Committee, to coordinate the management of human resources strategies, etc., with Lei Jun as the director. In addition, the car-making project, which is regarded as Xiaomi's new focus, is also led by Lei Jun himself.

Overall, Xiaomi is fully prepared for a new development cycle. In an internal letter in January, Lei Jun said that 2023 is the year when Xiaomi will start a new development cycle, and it is also necessary to be fully prepared for a new round of explosion in the next 2-3 years.

Before the troops move out, the food and fodder must be sent first.

Xiaomi recently announced a strategy of "giving equal weight to scale and profit", which means that it will not give up possible growth opportunities, but will also store energy for the next opportunities. In terms of financial data, the health of operations has been significantly improved. In the fourth quarter of last year, Xiaomi's overall inventory amounted to 50.4 billion yuan, a year-on-year decrease of 3.7% and a month-on-month decrease of 4.8%. The inventory data decreased by nearly 2 billion yuan compared with 2021.

Despite the pressure on profits, Xiaomi still maintains a gross profit margin of 9%, with an overall gross profit margin of 17.0%, exceeding the average gross profit margin of 15.2% in the past five years. Lu Weibing said that if external factors such as exchange rates can remain stable, Xiaomi's gross profit margin is expected to increase to more than 10%.

The increase in gross profit margin benefited from the improvement in sales structure. Despite the overall decline in sales, Xiaomi's average unit price hit a record high of 1,111 yuan, indicating that the overall sales share of high-end phones increased. At the same time, there was also a reduction in expenses. In the fourth quarter, Xiaomi's marketing expenses decreased by 400 million yuan year-on-year, and administrative expenses also decreased.

But at the R&D level, Xiaomi still maintains active investment.

Obviously, R&D is the key foundation for Xiaomi to achieve "a new round of explosion in the next 2-3 years". In 2022, Xiaomi's R&D expenditure exceeded 16 billion yuan, a year-on-year increase of more than 3 billion yuan. According to Lu Weibing, Xiaomi is expected to invest more than 100 billion yuan in R&D in the next five years.

Increasing R&D investment has been Xiaomi's consistent strategy in recent years. In 2018, Xiaomi's R&D investment increased by more than 80% year-on-year after it went public. In the past five years, the compound growth rate of Xiaomi's R&D investment has exceeded 38%. Xiaomi's breakthroughs in high-end mobile phones, IoT and other businesses are largely due to this.

Of course, this is also the overall trend of the technology industry. Reducing marketing expenses, improving profit structure, and increasing R&D investment, against the backdrop of slowing growth, technology companies are beginning to learn to slow down, be more stable, and invest more money in the longer-term future.

Financial report data can still reflect a company's operating conditions to a certain extent, but if you only focus on them and deny a company's future because of short-term data, it is obviously not rational.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.