Will Xiaomi’s ecosystem dream come true?

In the eyes of venture capitalists, there are three typical entrepreneur types: those who dream big, those who do great things, and those who always get the job done.

LeTV’s founder Jia Yueting belongs to the first type, Alibaba’s Jack Ma can be classified in the second group, and Xiaomi’s Lei Jun represents the third type.

Lei Jun has a near perfect record of building new businesses. The 48-year-old entrepreneur made a name for himself in the technology world through the success of Kingsoft (03888.HK) in early 1990s.

He then founded other companies. There was Joyo.com, an online bookstore, which he sold for US$75 million to Amazon.com in 2004. UCWeb, another firm he invested in, was acquired by Alibaba.

He has achieved commercial success in almost every project and generated handsome rewards for his investors.

Lei Jun founded Xiaomi in 2010, a technology company that manufactures smartphones and a wide range of electronic gadgets.

Xiaomi's basic strategy is to offer consumers mid-tier products at highly affordable prices.

The company has pledged to cap the net profit margin for its hardware business at 5 percent from 2018 onwards, as stated in its IPO prospectus.

Xiaomi is banking on using the low-price strategy to build a big ecosystem, and make real money from selling other services, such as video, music, games and apps.

This is precisely what contributed to Apple’s strong earnings in recent quarters.

Software and digital content contributed US$9.2 billion revenue to Apple in the second quarter of this year, representing up to 31 percent of its total revenue. That has offset slowing growth of hardware sales.

Xiaomi sold 90 million smartphones last year, which makes it the world’s fourth-largest smartphone producer after Apple, Samsung and Huawei.

But can Xiaomi emulate a strategy very few companies have so far been able to successfully pull off?

Xiaomi reported sales revenue of 114.6 billion yuan (US$18.02 billion) last year, and over 90 percent stems from hardware sales. The company posted a net profit of around 5 billion yuan.

It is rumored that the company is aiming for a valuation of US$100 billion to US$120 billion in its upcoming initial public offering. That means a P/E multiple of over 100 times. That’s extremely aggressive for a hardware company.

Xiaomi has amassed 190 million active users, called “Mi fans”, worldwide as of March this year. But it would need to grow this user base much further to achieve an ecosystem big enough to justify its targeted valuation.

Xiaomi announced a strategic cooperation with CK Hutchison Holdings (00001.HK) on Thursday.

The latter will offer Xiaomi products to its 140 million retail customers and 130 million telecom customers through 17,000 outlets worldwide.

That is apparently the first step for Xiaomi to aggressively expand its user base by tapping the Asian and European market.

This article appeared in the Hong Kong Economic Journal on May 4

Translation by Julie Zhu

[Chinese version 中文版]

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