May 23, 2018 - 4 minutes read time
Whether Xiaomi can achieve a $100 billion valuation depends on if it can destroy an industry as fast as Google.
Earlier this month on May 3, Xiaomi—the world’s fourth-largest mobile phone maker—filed for an initial public offering (IPO) to sell shares in Hong Kong with the goal of raising $10 billion at a potential valuation of $100 billion, making it the world’s biggest debut since Alibaba’s in 2014. $100 billion was what Facebook was worth at its IPO in 2012. It was also what Netflix was worth in 2018. Of the S&P 500, only 59 companies are worth more than $100 billion.
Observers were quick to benchmark comparable ratios at other high-tech companies—price-to-earnings (P/E), which measures share price relative to annual net income, or price-to-sales (P/S), which measures share price relative to annual sales revenue. Using Tencent’s P/S of 14 would give Xiaomi a market valuation of $250 billion. Using Apple’s P/E would give Xiaomi a $35 billion valuation. A $215 billion difference doesn’t exactly inspire confidence in any financial analysis. But adding to the confusion is that profitability seems not to matter much in the high-tech world. Tesla is losing money; its valuation is higher than Ford Motor’s. Over the past 20 years, Amazon has made less than half the profits of the now-struggling Macy’s department store. “Your margin is my opportunity,” CEO Jeff Bezos likes to say, but Amazon is the world’s third–most valuable company. So, is Xiaomi a good buy?
If it is hard to evaluate how much value a company can create, maybe we should look at how much value a company manages to destroy. In a most intriguing exposition, Scott Galloway of NYU’s Stern School describes just how Google and Facebook have redrawn the media industry. Facebook and Google combined control more than half the world’s advertising spending on all mobile devices, and since 2006, the two firms have accounted for 103 percent of all digital media revenue growth. That is, except for Google and Facebook, digital media “now joins newspapers, radio, and broadcast TV as sectors that are in decline.” In other words, to be in the $100 billion club, it’s no longer enough to beat the competition—you need to destroy an industry. Can Xiaomi not only outcompete Huawei and Samsung and Oppo and Vivo but radically reshape an industry with new rules to favor itself?
At the heart of a Xiaomi phone is its preinstalled Android-based operating system (OS), MIUI, which allows consumers to customize the user interface (UI) and advanced users to tweak the otherwise hard-coded firmware of their handsets. For CEO Lei Jun, Xiaomi’s success lies in its ability to rely on its “hardcore fans” to generate word-of-mouth marketing. Every week, the company releases a new version of MIUI that it co-develops with leading users, responding to their feedback via the internet and online user forums, a feature that resonates especially with young users. By outsourcing the design and features of its OS to an online fan base, Xiaomi can lower the cost of software development and keep its end users excited. “When Apple develops its iOS 7, you have no idea what they will do with it before the release. It’s not like that for us. We will first ask what you want. […] Xiaomi is not selling a product, but an opportunity to participate,” Lei Jun said in an interview in 2013.
Xiaomi’s greatest achievement thus lies in the cultivation of an online following that relentlessly contributes to new phone features in creative ways, making the company’s mobile phone a continuous delight for its fan base and thereby catapulting the Beijing startup into the position of world’s fourth-largest mobile phone maker in less than eight years.
But most profound, perhaps, is Xiaomi’s taking the open innovation approach to other product categories. By March 2016, Xiaomi had invested in 55 startups making products from power banks to air purifiers. Of these companies, 29 were incubated from the ground up by Xiaomi, and four are already unicorns worth with over $1 billion. What Xiaomi offers to startups is a combination of funding and incubation by “taking non-controlling shares” and “leaving maximum interests to the startups” so that “they are much more incentivized and willing to fight on the front line,” explained Liu De, co-founder and vice president of Xiaomi.
Startups typically get access to Xiaomi’s brand and distribution—its online channel, its app, and its 300 offline stores. As a result, Xiaomi is poised as not only a low-cost phone maker but an emerging powerhouse among the makers of all-important “connected home devices.” “Our ecosystem even gives customers unusual new products that they never knew existed,” said Wang Xiang, Xiaomi’s senior vice president, while referring to the company’s Bluetooth speaker, an internet-enabled rice cooker, and the first affordable air purifier in China—products that the company claims are not only best in class but cost less than the existing products. This is why CEO Lei Jun believes customers will “keep coming back to Xiaomi’s Mi Home Store to see what we’ve got.”
Xiaomi’s grand vision is, of course, to reinvent the electronics and home appliance industry as we know it, and in its wake, it will also reshape the retailing landscape, much like how Apple reinvented the shopping experience for its iPhone. That’s a lot to ask, but it’s also a requirement of becoming a $100 billion company. A risky proposition? A full 45 pages of Xiaomi’s IPO application are dedicated to the topic of “risk factors.”
Outlast your competition and thrive in an ever-changing world
In Leap, Howard Yu, LEGO professor of strategy and innovation at IMD, explains how companies can prosper, not just survive. Leap identifies five fundamental principles that allow companies to stay successful in the face of such competition.
Comments for this post are closed
Mar 05, 2021
Everyone wants to tell their own version of the story. That’s the trouble with autobiographies. And especially troubling is a CEO’s memoir. How much truth is in there? That’s my…
Mar 02, 2021
Boeing is in the hot seat again. Its 777 airliner made an emergency landing in Moscow last Friday after the pilot saw an engine problem. This came less than a…
Feb 26, 2021
Fintech is all the rage. And the big accelerant for this has been the pandemic. When people shop at home, mobile payments take off. When people stop visiting banks, they…