Xiaomi – Cars, cars and cars.

Xiaomi could become a car company.

• Xiaomi appears to be planning to make at least 300,000 EVs per year which if successful could see EV revenue take over as its single biggest driver of revenue.
• Xiaomi missed expectations in its Q3 2021 results but still managed to grow by 8% YoY as supply shortages ate into its ability to manufacture devices to meet the demand that it had.
• At the same time, many of its investments took a large write-down in their value thanks to the general malaise in China technology driven by the regulatory crackdown.
• This is why net profit fell by 84% to RMB789m as the company wrote down its portfolio of investments by RMB3.5bn.
• It is important to remember that this is a key part of its strategy to build an ecosystem of devices that can all interoperate with each other.
• It does this by investing in start-ups that build devices for its ecosystem which is one reason why there are so many and varied devices available.
• However, its biggest device category may become EVs because it is planning to build a factory that will be able to make 300,000 vehicles per year.
• Many observers refer to Xiaomi as the Apple of China but I think that these two companies are polar opposites, and this is why EVs may work for Xiaomi where they will not work for Apple.
• This is for a number of reasons:
  • First, profitability: There is no fundamental reason why Apple could not make an EV, but given its market position and brand, I think that this would be detrimental to its profitability and hence, valuation.
  • Apple makes something like a 50% margin on the iPhones it sells and there is no way that would be able to repeat this with vehicles.
  • On the other hand, in Q3 2021, Xiaomi had gross margins of just 12.8% on its smartphones and I would estimate something like 3-4% at the operating level.
  • This is broadly in line with automotive profitability and so there would be no real hit to its brand or margins if it chose to go down this route.
  • Second, digital ecosystem. Xiaomi has built a large ecosystem of digital devices in China through a network of companies in whom it owns a minority stake.
  • These companies between them represent a large network of devices that are broadly interoperable.
  • This is something that none of the carmakers, not even Tesla have managed to achieve yet.
  • Third, user experience: Xiaomi will be approaching this from the digital perspective rather than as a vehicle maker meaning that the digital experience will be the biggest selling point of this vehicle.
  • This is something that is currently keeping Tesla way ahead of its competition and even the latest crop of EV upstarts have yet to really address this segment.
  • Ford is making real progress with its Mustang Mach-E but Tesla is still the gold standard in the sector.
  • Hence, there is an opportunity here for Xiaomi to close the gap on Tesla and also significant interoperability with the large number of smart home products that exist in its ecosystem.
• All of this assumes that Xiaomi is capable of making a decent vehicle which many are finding is much harder than it sounds even for EVs.
• Furthermore, its partner Great Wall is not exactly a titan of the automotive industry and has been trying and failing to make electric vehicles for some time.
• Hence, in order for this to work, I think that Xiaomi will have to hire some vehicle expertise on its side or find itself a more established partner.
• The vehicle is the next consumer device that is going to be digitised and I think that Xiaomi is reasonably positioned to have a credible go at this.
• Xiaomi has fallen a long way from its highs but given that its valuation compared to profits and cash flows remain pretty high and the dreadful sentiment for Chinese technology, I think it may fall further.
• It is only Alibaba’s bargain-basement valuation that keeps me hanging on.