Xiaomi – Circumnavigation.

Xiaomi must have exclusive services to succeed.

• Xiaomi is following in the footsteps of its rivals in building an ecosystem via purchasing small shareholdings but this is not enough.
• Most recently, Xiaomi has purchased 2.98% of productivity software company Kingsoft for $68m.
• This is in addition to a $205m purchase of a 1.98% stake in home appliance maker Midea and participation in the most recent fund raising of wearables maker Misfit.
• Kingsoft is a producer of freemium software that competes against Microsoft Office and Google Docs.
• Kingsoft also has a web browser called Leibao and a position in Internet security (Cheetah Mobile).
• When I look at Xiaomi’s position, it is clear it has embarked on a trip around the Digital Life Pie.
• RFM research shows that Xiaomi’s services currently covers just 17% of the activities that users do on their smartphones.
• In order to have a successful ecosystem and to be able to command premium pricing (and hence margin), it needs to expand this offering.
• Users need to identify with Xiaomi as the place where they want to live their digital lives in order for Xiaomi to earn a premium return on hardware in a similar vein to Apple.
• This is why Xiaomi (and many of the other Chinese players) are actively engaging in M&A which is unlikely to stop until it has solid coverage of the pie.
• Xiaomi is also looking at making its ecosystem available on many different form factors and devices explaining its interest in Misfit and Midea.
• Kingsoft provides Xiaomi the opportunity to cover the Enterprise Digital Life pie and to compete against Microsoft and Google’s offerings.
• This is all well and good but in order to make this work, Xiaomi needs to offer exclusive services.
• Kingsoft is also part owned by Tencent, which I believe will be one of Xiaomi’s fiercest rivals in the coming years.
• Hence, anything that Kingsoft delivers to Xiaomi will also be available to Tencent meaning that there will not be a sustainable competitive edge for Xiaomi should Kingsoft become important in mobile.
• This is where Xiaomi’s biggest weakness lies.
• Its main rivals, Tencent Alibaba and Baidu are all much bigger and much stronger meaning that they can out bid and out-invest Xiaomi is almost anything.
• This is why it will be very difficult for Xiaomi to develop a thriving ecosystem in its home market unless it creates its own services from scratch.
• This will take huge investment which will keep margins under pressure in the medium term even if the strategy is wildly successful.
• This is why I think Xiaomi is a real stretch at $45bn and why Lenovo’s IPO will offer its investors much better value at 5% of the valuation (see here).