Xiaomi's accumulation of momentum and climb

Xiaomi has also embarked on the path of cooperating with major camera manufacturers. On May 23, Xiaomi and Leica announced that they had officially reached a strategic cooperation in mobile imaging. The first imaging flagship mobile phone jointly developed by the two parties will be launched in July this year.

This is equivalent to a shot in the arm for the market. Last week, Xiaomi handed in its report card for the first quarter of 2022, but failed to maintain high growth, with both revenue and net profit not being so impressive.

The financial report shows that Xiaomi's revenue in the first quarter was 73.35 billion yuan, a year-on-year decrease of 4.6%. This is the first time that Xiaomi's revenue has declined year-on-year since its listing, mainly because the mobile phone business "drags down" the overall performance. The other two major businesses, IoT and consumer products and Internet services, are still in a growth trend, with revenues increasing by 6.8% and 8.2% year-on-year respectively.

Looking at the adjusted profit, Xiaomi's adjusted net profit in the first quarter was only 2.86 billion, which was related to factors such as the decline in gross profit of the mobile phone business and the increase in sales expenses.

In general, Xiaomi's first quarter report was under pressure, and the main reason was that the mobile phone business encountered severe tests. This is naturally inseparable from the superposition of multiple pressures in the macro environment. Since 2022, under the influence of factors such as the repeated global epidemic, the turbulent international situation, the tightening of the macro economy, and the weakening of consumer willingness, the mobile phone market has shrunk significantly. The global mobile phone shipment data of major statistical agencies in the first quarter are all declining. In the context of the sluggish global mobile phone market, Xiaomi is inevitably affected.

From a vertical perspective, Xiaomi's first quarter data is certainly not as good as in previous years. So, from a horizontal perspective, in the macro environment of the first quarter, how should we evaluate Xiaomi's mobile phone business? What signals does this financial report release? What is the prospect of this company?

01 Unprecedented Complexity

In the first quarter, Xiaomi's mobile phone business did not grow at the same high rate as before. The financial report showed that the revenue of the smartphone business was 45.76 billion yuan, a year-on-year decrease of 11.1%; the mobile phone shipments decreased by 22.1% year-on-year to 38.5 million units.

Xiaomi's quarterly revenue structure chart/ Shenran

Globally, the impact of the epidemic has not yet dissipated, coupled with the weak economy and sluggish consumption under the background of global inflation. Xiaomi President Wang Xiang mentioned that the epidemic has caused many stores to be closed, which has had a great impact on consumers' purchasing desire.

The epidemic has affected operations and production. For example, in Shanghai, the epidemic has caused a shortage of parts in many parts and components in the vicinity of Shanghai. Earlier, Apple CEO Cook said in a financial report conference call that the main factor causing Apple's supply shortage is the supply chain in Shanghai, and the impact of supply shortage on Apple will reach 4 billion to 8 billion US dollars.

The shortage of core components such as mobile phone chips has greatly limited the shipment of Xiaomi mobile phones. In the earnings call, Wang Xiang said that the shortage of 4G chips has had a great impact on Xiaomi, and the chip gap for Xiaomi models below $150 exceeds 10 million units. This has directly affected the shipment of Xiaomi's entry-level mobile phones in markets such as India and Europe.

During this process, the international situation has been partially turbulent. The conflict between Russia and Ukraine has affected mobile phone consumption in the Eastern European market, and the volatile business environment in India has further deteriorated the survival of Chinese mobile phone companies in the local market. India has gradually become a market that domestic mobile phone manufacturers love and hate.

Under the influence of multiple factors, the global mobile phone market has shrunk. According to Canalys data, global smartphone shipments in the first quarter of 2022 were 310 million units, a year-on-year decrease of 11%.

The China Academy of Information and Communications Technology disclosed that the domestic market's mobile phone shipment data for the first quarter was bleaker every month. In January, shipments were 33.022 million units, down 17.7% year-on-year; in February, shipments were 14.864 million units, down 31.7% year-on-year; and in March, shipments reached 21.460 million units, a drop of more than 40%.

It is not surprising that Xiaomi has not been able to keep growing despite multiple black swan events. However, judging from this financial report, Xiaomi's fundamentals are still relatively stable.

From the revenue structure, Xiaomi's mobile phone business is still the company's absolute main force, accounting for more than 60%; overseas revenue accounts for about half of the total revenue (51.1%), and there has been no significant change. Hu Qimu, chief researcher of the China Iron and Steel Economic Research Institute, analyzed that if only the main business of the current period is considered this quarter, from an operational perspective, the changes are not too big.

In vertical comparison, Xiaomi's performance in the first quarter was not as good as in 2021 when consumption rebounded. In horizontal comparison, Xiaomi's leading position in both the global and domestic markets remains solid. Canalys data shows that in the first quarter of 2022, in terms of smartphone shipments, Xiaomi's global market share remained third with a market share of 12.6%; in the Chinese market, Xiaomi's smartphone shipments ranked fifth with a market share of 13.9%.

Xiaomi's high-end and globalization strategies have been proven.

This quarter, the ASP (average selling price) of Xiaomi mobile phones further increased from 1,042.1 yuan in the same period of 2021 to 1,188.5 yuan. At the same time, according to third-party data, in the first quarter of 2022, Xiaomi's market share in the smartphone price range of 4,000 yuan to 6,000 yuan in mainland China ranked first among Android smartphone manufacturers.

Xiaomi also maintains its advantage in the global market. According to Canalys data, in the first quarter of 2022, Xiaomi Group ranked in the top three in smartphone shipments in 49 countries and regions around the world, and ranked in the top five in shipments in 68 countries and regions around the world. Its overseas market operator channel smartphone shipments exceeded 5.7 million units, a year-on-year increase of more than 10%. According to a related report from Chaodian Think Tank, in the first quarter of 2022, Apple, Samsung and Xiaomi ranked in the top three in the market share of the world's best-selling models in the $600-799 segment.

Regarding the performance of Xiaomi's mobile phone business in the first quarter, Sun Yanbiao, director of the First Mobile Phone Industry Research Institute, believes that in the first quarter when uncontrollable factors piled up and the entire mobile phone industry was struggling in the quagmire, Xiaomi can be said to have "held on."

Although there are many uncontrollable factors in the changes in the macro environment, the impact of the epidemic and supply shortages are only short-term phenomena and have begun to ease. Therefore, despite the decline in revenue and net profit, Xiaomi's stock price rebounded on the second trading day after the release of Xiaomi's financial report, which to some extent also shows the market's confidence in Xiaomi. As of the close of May 20, Xiaomi's stock price was HK$11.74, up 6% from the previous day's closing price.

02 How does the smart ecosystem feed back to the mobile phone business?

While the mobile phone business encountered resistance, Xiaomi's IoT and consumer products business, as well as Internet service revenue, brought good news, with both businesses on an upward trend.

Among them, the IoT and consumer products business achieved revenue of 19.48 billion yuan in the first quarter, a year-on-year increase of 6.8%, and the gross profit margin increased to 15.6% year-on-year, setting a new record for Xiaomi in a single quarter.

Xiaomi explained in its financial report that the growth in the business was mainly driven by sales of smart TVs, laptops, and smart home appliances (including smart air conditioners, refrigerators, and washing machines). By the end of the first quarter, the number of Xiaomi AIoT connected devices (excluding smartphones, tablets, and laptops) had exceeded 478 million, a year-on-year increase of 36.2%.

Xiaomi's Internet service business had revenue of 7.11 billion yuan in the first quarter, up 8.2% year-on-year, setting a new record for a single quarter. The revenue growth of this business was mainly due to the growth of advertising business revenue. In terms of specific regions, the main force of Internet services is still in mainland China, contributing up to 80% of the revenue, but the overseas Internet business has great potential, with revenue of 1.6 billion yuan in the first quarter, up 71.1% year-on-year.

Under Xiaomi's "mobile phone xAIoT" strategy, Xiaomi's huge hardware shipments can maintain the growth of Xiaomi's Internet user base and bring about an increase in Internet service revenue, while the IoT and consumer products business and Internet services will also feed back to the mobile phone business.

In 2019, Xiaomi initially released the dual-engine strategy of "smartphone + AIoT" to highlight the status of the AIoT business. By 2020, Lei Jun, the founder of Xiaomi, upgraded the core strategy to "smartphone x AIoT", upgrading from addition to multiplication, and placing more emphasis on the strategy of mutual amplifiers. The AIoT business should become a catalyst and fuel for the mobile phone business.

Under this strategy, Xiaomi uses hardware as the entry point to build an intelligent ecosystem and find a new growth curve. For example, its "one-finger connection" Xiaomi UWB (Ultra Wide Band) technology released in 2020 can realize the "one-finger control" and "one-finger delivery" functions of mobile phones for smart home appliances and smart devices, further strengthening the interconnection between mobile phones and smart hardware.

When a mobile phone is equipped with UWB technology and other auxiliary technologies, it can have spatial perception between smart devices. For example, when a user points the mobile phone directly at a smart device, the corresponding control interface will pop up automatically. When the mobile phone is pointed at the air conditioner, the air conditioner will turn on automatically. In addition, users can also directly project the screen of the mobile phone to devices such as TVs and laptops, or project the playing music to speakers.

In order to further strengthen the interconnection between mobile phones and laptops, Xiaomi issued an announcement on May 20 that it would incorporate laptops into the mobile phone department.

As the layout of the smart ecosystem deepens, the mobile phone is not only one of the terminals in the entire smart ecosystem, but also the "Internet integration and service capabilities behind the mobile phone" has become Xiaomi's moat. When users enter the Xiaomi smart ecosystem, they can achieve interactive collaboration with the terminals, and it is no longer easy to leave the Xiaomi smart ecosystem. This forms a virtuous circle, driving the development of the mobile phone business with the IoT business.

03 Entering a new climbing period

Overall, the growth of some of Xiaomi's businesses slowed down in the first quarter, but at the same time, some positive signals have emerged.

As for the mobile phone business, the entire industry is looking forward to the mid-year promotion 618 and the upcoming summer vacation, hoping to stimulate a wave of consumption. At the earnings conference, Wang Xiang also pointed out that 618 is a very important node, and Xiaomi will seize these nodes to carry out corresponding promotions and increase shipments.

Xiaomi is also preparing new high-end products, such as the cooperation with camera manufacturer Leica to produce new phones. On May 23, Xiaomi and Leica officially announced that the two sides have reached an unprecedented depth of strategic cooperation in mobile imaging, and the first jointly developed imaging flagship phone will be launched in July this year.

Cooperation with major camera manufacturers has become part of the high-end strategy of domestic mobile phone manufacturers. As early as 2016, Huawei made its photography a highlight after reaching a cooperation with Leica. It can be said that the establishment of Huawei's high-end brand is closely related to this.

Whether it is the improvement of camera performance or chip performance, Xiaomi's high-end route is getting deeper and deeper.

As for the supply of low-end chips that was a "bottleneck" in the first quarter, Wang Xiang said that the situation will be alleviated in the second and third quarters, and there may even be a surplus in the second half of 2022.

It is understood that Xiaomi has invested in more than 300 companies since it began to quietly lay out its supply chain in 2020, covering all aspects of smartphones and the Internet of Things. Xiaomi Yangtze River Industry Fund has currently invested in 100 domestic companies, fully covering the core components of mobile phones.

Sun Yanbiao pointed out to Shenran that Xiaomi has been investing in the supply chain for some time, and now the effect has come. The negative impact of the supply chain on mobile phone sales is expected to be gradually eliminated in the third and fourth quarters.

From a long-term perspective, Xiaomi is currently in an important period of transformation and development, and is accumulating strength for a new round of explosive growth.

Judging from the financial report, Xiaomi's investment in R&D is still growing significantly. Its R&D expenditure in the first quarter reached 3.5 billion yuan, a year-on-year increase of 16%. This was mainly due to increased salaries of R&D personnel and increased R&D expenses related to innovative businesses such as smart electric vehicles. The expenditure on innovative businesses reached 425 million yuan.

In the core mobile phone business, Xiaomi's route to high-end will not change. In the mobile phone market, which is full of stock competition, grabbing more high-end mobile phone users means high gross profit and drives the development of IoT and Internet service revenue.

To this end, Xiaomi began to develop the core SoC chips for mobile phones while also building a new smart factory.

Xiaomi released its self-developed imaging chip Surge C1 and self-developed charging chip Surge P1 in 2021, but it did not stop there. In the 2021 CCTV documentary "The Foundation of a Strong Country", Xiaomi ISP chip architect Zuo Kunlong revealed that Xiaomi will use Surge C1 as a starting point to return to the core "heart device" SoC design of mobile phones.

At the same time, according to Lei Jun, the second phase of Xiaomi's smart factory will also start production at the end of next year. The new smart factory is expected to produce 10 million high-end mobile phones per year. Most of the equipment and systems are self-developed by Xiaomi and companies invested by Xiaomi. The full implementation of the smart factory also shows that Xiaomi wants to improve the advanced technology application and product quality of high-end mobile phones from the manufacturing end.

If we look at the medium and long term, the outside world can also see Xiaomi's continued investment in innovative businesses including smart car business. Among the 102 companies invested by Xiaomi through Xiaomi Industrial Investment Fund, more than 40 companies are related to automotive technology, covering power batteries, autonomous driving, laser radar and other fields. At the earnings conference, Wang Xiang said that Xiaomi is continuing to invest resources in core technology research and development, and currently maintains the original delivery plan unchanged.

In 2022, as the global economic environment tightens, technology companies, especially mobile phone companies, need to fight a tough battle. However, the current "crisis" is more of an opportunity than a danger. For Xiaomi, seizing the current opportunity, lying dormant and accumulating strength, and practicing internal skills can usher in a new round of real explosion.

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.