Xiaomi’s overseas growth engine threatened by pandemic

Other Chinese companies might be facing difficulties in this aggressive political climate, but Xiaomi seems to be getting on just fine if 2019’s numbers are anything to go by.

What is worth noting is this is the financial period prior to the disruptions caused by coronavirus, running through to December 31. Xiaomi noted there was certainly an impact to offline sales and manufacturing capabilities are only running at 80-90% of capacity, but it seems to have weathered the storm quite well. However, the most promising growth is coming in the markets where COVID-19 is causing chaos today.

As you can see from the numbers below, Xiaomi had a very good 12 months.

Q4 2019 Year-on-year FY 2019 Year-on-year
Revenue 7,956 +27.1% 29,001 +17.7%
Gross profit 1,105 +38.5 4,023 +28.7%
Smartphone 4,339 +22% 15,968 +6%
IoT and lifestyle 2,746 +30% 7768 +40%
Internet services 802 +41% 985 +23%
Others 68 +31% 255 +85%

Figures in millions (US$)

Xiaomi is of course primarily a smartphone business, but ventures into parallel segments are starting to look very successful. The IoT and lifestyle segment is an obvious move, these are hardware products which are increasingly based in the connectivity world, though internet services are an interesting one. Few companies have been successful when attempting to wrestle profits from internet giants, though Xiaomi seems to be gathering momentum.

In the internet services business, Xiaomi is pushing very aggressively into multiple segments. News services, advertising, gaming, the Youpin e-commerce platform, fintech and TV internet services are just some of the areas. Naturally, some of these efforts will fail, but Xiaomi only needs a few to succeed to gain a foothold in the software and services world. These successes will allow Xiaomi to build credibility, the critical foundation for expansion and diversification.

And while these numbers are very promising for a business which has seen rapid growth over the last few years, much of this has been fuelled by the international markets. This could present a problem for those shareholders who might expect the same results in 2020.

Over the course of 2019, the overseas markets accounted for 46.8% of group revenues. At any other time, having the international business unit as the growth engine would be a very positive thing, but at a time where COVID-19 is set to take a considerable bite out of industry profits, the domestic business unit will have to accelerate to pick up the slack.

Western Europe, India and LATAM are three areas where Xiaomi has seen considerable success in recent memory, though these are all the markets which are facing the prospect of a coronavirus encouraged recession. Looking at the individual markets in the final three months of 2019, Xiaomi was the leading smartphone brand collecting 28% market share, the second largest in Spain were 65.7% year-on-year growth made 22.8% market share, while it ranked fourth in both France and Italy where shipments increased 69.9% and 206.2% respectively.

The Chinese domestic market is a very interesting one. Although this is a country where 5G got off to a sluggish start compared to some, the deployment of 5G base stations from the three major MNOs is accelerating at an unprecedented pace and consumers have seemingly bought into the craze; China Mobile recently said it has secured 15 million 5G subscriptions. This momentum will force China through a smartphone refreshment cycle, and with Xiaomi owning roughly 9% of market share, this could prove to be a very profitable period, even more so if success in the overseas markets can be brought to China.

With reports in China suggesting society is resisting a second wave from the pandemic, consumer spending might well recover adequately, though whether this is enough to compensate from what would appear to be a downturn in Xiaomi’s international markets remains to be seen. Western Europe and India are important growth engines for the ambitious firm, though these are two regions where the risk of COVID-19 is significant.

Google has another run at the AR world

Google is taking another crack at the growing augmented reality segment with the launch of Glass Enterprise Edition 2.

While the first enterprise product has seemingly trundled along without fanfare, Google will be hoping the segment is ripe enough to make the desired millions. Although this is a technology area which promises huge prospects in the future, sceptics will suggest society, networks and the supporting ecosystem isn’t quite ready to make this dream a reality.

“Over the past two years at X, Alphabet’s moonshot factory, we’ve collaborated with our partners to provide solutions that improve workplace productivity for a growing number of customers – including AGCO, Deutsche Post DHL Group, Sutter Health, and H.B. Fuller,” said Jay Kothari Project, Lead for Glass. “We’ve been inspired by the ways businesses like these have been using Glass Enterprise Edition.

“X, which is designed to be a protected space for long-term thinking and experimentation, has been a great environment in which to learn and refine the Glass product. Now, in order to meet the demands of the growing market for wearables in the workplace and to better scale our enterprise efforts, the Glass team has moved from X to Google.”

This is a massive step for any Google idea. Graduating from the moonshot labs to be listed as a genuine brand in the Google family is a sign executives think there are profits to be made now, not in the future. Over the last couple of months, we’ve seen the likes of Loon and Fi make their way into the real world, and now it is time for Glass to hit the big time.

Google Glass was first brought to the market in 2013, though this wasn’t exactly a riveting success. Perhaps it was just a sign of the ecosystem and society at the time; people just weren’t ready for this type of innovation. However, Google is a company which often demonstrates innovation leadership and it was never going to completely give up on this idea. The products were taken back to the labs and refined.

What you have now is an enterprise orientated product which has the potential to run into the mass market. This makes sense for two reasons; firstly, there are more immediate usecases for the enterprise world, and secondly, businesses have more money to spend on these types of products than the consumer.

What remains to be seen is whether Google has any long-term interest in the hardware space or whether this is a game-plan to generate momentum in an embryonic segment.

When you look at the smart speaker segment, Google was always set to make more money in software and services than the hardware space. As soon as the traditional audio brands got the idea, its products were going to come up short. However, selling the hardware cheap to gain consumer buy-in while simultaneously demonstrating market appetite to the traditional brands was an excellent move.

Now there are more mainstream brands starting to develop their own smart speakers, Google can create partnerships to ensure its virtual assistance is exposed to the consumer and make money through means which are embedded in its corporate DNA; third-party relationships and online advertising.

Google might well have ambitions to take a leadership position in the AR glasses space, but you can also guarantee it has bigger plans to make profits through the supporting software and services ecosystem.