The Smartphone Company Doing What Apple Couldn't

Read time: 5 minutes

Good morning! It's Tuesday, March 19th. This post dives into the Chinese smartphone producer taking market share from Apple and releasing its first line of EV cars this month!

THE FEATURE

The Smartphone Company Doing What Apple Couldn't

2024 hasn't been a good year for Apple— its stock is down 12% since January and recently had its longest losing streak since early 2022. 

What's the cause? Well… there's a few: 

• Chinese iPhone sales dropped 24% in the first six weeks of 2024, while local competitors saw sales jump 64% during the same period. 

• Apple recently paid $490M to settle a class-action lawsuit alleging CEO Tim Cook defrauded shareholders by concealing falling demand for iPhones in China.  

• Investment strategists believe Apple and other companies with Chinese exposure could see "major ramifications" from a TikTok ban.

However, one of Apple's biggest thorns is Chinese smartphone producer Xiaomi. The company has seen 15% YoY growth in smartphone sales and is accomplishing what Apple couldn't: entering the EV industry. 

Let's dive in!

So, What's the Business?

Xiaomi became a viable competitor in the Chinese smartphone market by providing affordable devices with high-end features. 

They primarily pulled this off through low margins, with a capped 5% profit margin on all hardware sales. In 2018, Xiaomi earned a measly $2 profit for every phone shipped. For comparison, there's a ~40% profit margin on iPhones.

But, if we take a look at the company's explosive revenue growth in recent years, they're obviously doing a lot more than simply selling smartphones: 

• 2016 $9.5B

• 2018 $24.3B

• 2020 $34B

• 2022 $39B

All that growth comes from expanding beyond online smartphone sales, tapping into higher-margin sectors and lifestyle products.

Internet Services

While Xiaomi's hardware sales are capped at 5%, its internet services aren't. Becoming an internet service provider has been the company's biggest profit boost, as it enjoys a 64.7% margin!

Physical Stores

In 2015, Xiaomi opened its first brick-and-mortar store in Beijing, marking the company's entry into lifestyle products. Today, it has tens of thousands of stores worldwide, including 18,000 in India alone. 

These stores sell everything from smart TVs and electric scooters to vacuum cleaners and cameras. 

Creating a Consumer Ecosystem

Through partnering and acquiring startups, Xiaomi quickly developed a range of internet-connected home and tech products. They did this to become the consumer brand for every tech need. 

Xiaomi Senior Vice President Wang Xiang explained the strategy this way: 

"Buying a phone or TV is a low-frequency event. How many times do you need to go back to the store? But what if you also need a Bluetooth speaker, an internet-enabled rice cooker, or the first affordable air purifier in China? Our ecosystem gives consumers new products they never knew existed. So, they keep coming back."

In 2022, Xiaomi's IoT and lifestyle products generated half of the company's revenue, proving they successfully expanded beyond smartphones. 

How They Win: Accomplishing What Apple Couldn't

This month, Xiaomi is releasing its first line of EV cars. In doing so, it's closing their consumer ecosystem loop— smartphone, to smart home, to smart car. 

This feat is more impressive considering Apple, a company roughly 6X larger than Xiaomi, was forced to cancel its decade-long EV project in February. 

With Apple on the decline in China and Xiaomi rapidly expanding into every consumer tech need, the Chinese smartphone market has become a whole lot more competitive. 

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