Author | You Li

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Xiaomi Group CFO Shiwei Lin believes that Xiaomi rose to the forefront of the global mobile phone industry through its cost-effective philosophy, and this same philosophy will also apply to the company's electric vehicles.

In the field of new energy vehicles, Xiaomi is undoubtedly the king of attracting traffic. Any information involving Lei Jun and Xiaomi cars can quickly garner significant attention.

Xiaomi recently released its financial report for the second quarter of 2024, which quickly garnered attention from peers. The report revealed that Xiaomi's smart car and other innovative businesses lost 1.8 billion yuan in Q2 this year, with a total delivery volume of 27,307 vehicles in the quarter. By simple calculations, Xiaomi loses approximately 60,000 yuan for every car sold.

Xu Jiye, the PR director of Jiyue Automobile, blasted on WeChat Moments: "What do Xiaomi and Lei Jun call this? In the past, this would have been called dumping, which is the worst form of merchant behavior." Although verbal sparring among executives in the new energy vehicle industry has become common in recent years, it is rare for someone like Xu Jiye to name names so directly.

However, after Xu Jiye's remarks trended on Weibo, Jiyue Automobile softened its stance towards Xiaomi. On the evening of August 22, Jiyue Automobile CEO Xiaping Xia sent an email to all employees announcing disciplinary measures against Xu Jiye and reminding other employees to work diligently and work together with competitors to promote the development of China's new energy vehicle industry.

At this point, the dispute between Jiyue and Xiaomi has largely come to an end. However, Xu Jiye's questions remain unanswered. While it is true that Xiaomi has only been in the automobile manufacturing business for a short time, is a loss of 60,000 yuan per vehicle still within a reasonable range? The core goal of a business is ultimately to achieve profitability. When can Xiaomi Automobiles achieve a break-even point and even take over from smartphones to become Xiaomi's next growth pillar?

In 2021, Lei Jun stated that automobile manufacturing would be his last entrepreneurial venture. After three years of gestation, Xiaomi's SU7 has given him a good start, but the story has yet to unfold fully, and we must return to Xiaomi Group's financial reports for answers.

1

Tall Trees Attract the Wind

Before discussing whether Lei Jun, who loses 60,000 yuan on every car sold, can really keep accounts, many may wonder why Jiyue Automobile, among so many competitors, chose to confront Xiaomi.

An experienced practitioner in the PR industry believes that "weak communication" marketing involves leveraging public sympathy to create an image of vulnerability in public opinion, articulating emotional appeals, and resonating with disadvantaged groups to attract attention and support for the brand.

According to The Paper's report, during an interview after Jiyue's press conference on August 28, Jiyue CEO Xiaping Xia tearfully stated, "At first, sales were not good, and everyone was under a lot of pressure. We've gone through a lot, and it's been tough... It's difficult to break through. Many people think that Huawei and Xiaomi sell better than us. I believe there's nothing wrong with our underlying logic or product quality. Our intelligence is also industry-leading, and we have two strong shareholders supporting us in the background. Why aren't we selling well?"

According to Hexun News, on August 30, during the 2024 Auto Vanguard Thought Sharing Hub held during the 2024 Chengdu Auto Show, guests such as Ma Lin, Assistant Vice President of NIO, and Luo Gang, COO of Jiyue, shared their insights in a roundtable discussion. Ma Lin believed, "Products are important, but traffic is the key. For example, when Jiyue CEO Xiaping Xia teared up during the press conference, traffic and attention came flooding in. That's the key..."

According to the sales rankings of new-energy vehicle models released by Gasgoo, from January to July 2024, Jiyue Automobile 01's sales have never appeared on the list. Even the Xpeng G3, which sold only 34 vehicles per month, was included on the list. Jiyue Automobile's absence from the list may indicate not only low sales but also insufficient marketing investment, making it difficult for the industry to perceive its presence in the market.

In the fiercely competitive new energy vehicle market, the dimensions of competition have shifted from products and research and development to branding and publicity. Jiyue does not have an advantage in these areas. The aforementioned person believes that some enterprises unable to invest heavily in marketing need to find anchor points to "do more with less."

In a sense, this is an affirmation of Xiaomi's automobile manufacturing efforts.

According to Autohome data, Xiaomi SU7's monthly sales have surpassed Tesla's, and consumers' discussions about Xiaomi cars have shifted from "should I buy it?" to "how long will I have to wait after placing an order?"

Like most early new energy vehicle brands, Xiaomi urgently needs to address production capacity issues.

Many netizens have shared their purchase experiences on social media. One car owner in Tianjin said he placed an order on April 14 and has yet to receive any updates. The comment section is filled with netizens from all over the country who have been waiting for more than four months.

To expedite deliveries, Xiaomi announced at the end of May that its factory would switch to a "double-shift" mode. In July, media reported that Xiaomi had acquired the industrial project usage rights for a plot in Yizhuang, Beijing. This land was later confirmed to be the location of Xiaomi's second-phase factory, and a parts factory with an annual capacity of 5.7 million units will also be built in nearby Baoding City.

According to local netizens in Baoding, Xiaomi is not only ramping up production but also keeping its customer service team busy around the clock.

Recently, northern China has experienced heavy rains, leading to frequent power outages due to electrical faults in pipelines. Whenever there's a power outage, Building 1, where Xiaomi's customer service headquarters is located, is always the first to request repairs. A few days ago, they even brought in generators to ensure uninterrupted power supply. Netizens joked that Xiaomi doesn't want to miss a single minute and is determined to fulfill every consumer's request.

Regardless, for a fledgling automaker, Lei Jun has already achieved his interim victory.

2

Research and Development First, Profitability Later

Judging from the stock market reaction, most investors seem satisfied with Xiaomi's performance in this quarter.

The day after the financial report was released, Xiaomi Automobile's share price surged by 9%, reaching 19.1 Hong Kong dollars per share, with a market value increase of over 39 billion Hong Kong dollars, bringing the total market value to 487 billion Hong Kong dollars.

Industry insiders consistently agree that Xiaomi's supply chain management capabilities are top-notch. According to the financial report, Xiaomi Automobile's gross margin reached 15.4% in the second quarter, exceeding market expectations of 4.7%.

For comparison, among domestic players known as "WEI-XIAO-LI" (NIO, Xpeng, and Li Auto), NIO's gross margin was only 4.9%, while Xpeng's was 12.9%. Even Tesla, known as the "cost maniac," currently has a gross margin of only 18%.

This does not necessarily indicate operational issues. In the new energy vehicle industry, where economies of scale are evident, the growth path typically involves investing in research and development before pursuing profitability. Fellow new energy vehicle industry insider Xu Jiye is likely aware that the logic behind manufacturing new energy vehicles differs significantly from that of consumer electronics such as smartphones, iPads, and computers. Investing upfront for stable revenue later is standard practice.

Lei Jun once gave an example, stating that before the launch of Xiaomi SU7, the inability to mass-produce parts on assembly lines led to increased expenses through customization or handcrafting. The testing cost alone for each vehicle exceeded 2 million yuan.

The good news is that once electric vehicle development is on track, research and development can quickly form a system. The bad news is that since no electric vehicle technology has yet achieved a significant lead, raw material quality significantly impacts product quality. The high upstream concentration results in equally high raw material costs.

The aforementioned industry insider mentioned that premium products like CATL batteries command at least a 10% higher price than ordinary batteries, and this is just one of the tens of thousands of parts in a car. It's no wonder Lu Weibing thanked suppliers for their support during the earnings call, which helped Xiaomi secure better business terms.

As of the end of June, Xiaomi's cash reserves stood at 141 billion yuan, an increase of 38 billion yuan from the previous period. Compared horizontally, Xiaomi's current cash flow situation is second only to SAIC Motor Group among domestic automakers, and its ample ammunition is a reason why investors are optimistic about Xiaomi.

However, some voices suggest that Xiaomi's relationship with suppliers may have a new impact on performance after the "honeymoon period." Suppliers must make a profit; otherwise, they may follow the path of Xiaomi's ecosystem partners like Shida Technology and Ninebot, seeking to "de-Xiaomi-ize" their operations.

To maintain cooperation, Xiaomi may have explored new collaboration models with suppliers, such as securing bargaining power through advance bulk orders, which manifest as prepayments on the financial statements.

Analyzing Xiaomi's financial report data reveals that prepayments were generally down year-on-year for most of 2022 and 2023. A turning point occurred in the fourth quarter of 2023, when Xiaomi's prepayments surged to 20.08 billion yuan, continuing to increase in the following two quarters by 47.71% and 21.64%, respectively.

As of the end of June this year, Xiaomi's prepayments and other receivables reached 24.11 billion yuan, a new high in the past eight quarters. Pushing back from Xiaomi SU7's launch on March 28, this trend aligns with the production and delivery curve for the automotive business.

Perhaps to address investors' concerns, Lu Weibing implicitly explained during the earnings call that the peak period for bill of materials (BOM) costs has passed. Coupled with declining costs across the supply chain and the industry as a whole, as well as reduced benefits for subsequent orders, Xiaomi Automobile's gross margin is poised for improvement.

3

Relying on the Shade of Mobile Phones

After discussing Xiaomi Automobile at length, it's worth noting that Xiaomi's mobile phone business remains its largest revenue generator.

Overall, Xiaomi Group's performance in the second quarter contrasted sharply with that of last year. While Xiaomi's revenue decreased by 18.9% year-on-year in the second quarter of last year, with total annual revenue declining by 3.2%, this year's second quarter saw a 32% revenue growth and an adjusted net profit of 6.2 billion yuan, up 20.1%.

Of the 88.9 billion yuan in revenue, mobile phones and AIoT contributed 92.8%, generating a total revenue of 82.5 billion yuan, up 22.5% year-on-year. Xiaomi sold 42.2 million mobile phones in the second quarter, an increase of 28.1% year-on-year.

Canalys data shows that Xiaomi mobile phones accounted for 15% of the global market share in the second quarter, ranking third behind Samsung and Apple. Vivo and Transsion, which follow Xiaomi, each accounted for 9% of the market, solidifying Xiaomi's position as the world's third-largest mobile phone brand.

In terms of automobiles and innovative businesses, the second quarter revenue was 6.37 billion yuan, accounting for 7.2% of total revenue. Considering that Xiaomi Automobile is purely an incremental business, achieving this level of performance in less than half a year is a testament to its strength.

This success is also attributable to Xiaomi's previous achievements in mobile phone manufacturing, supply chain management, talent, technology, and resource management, which have accelerated Xiaomi Automobile's progress.

The dual growth of mobile phones and automobiles has exceeded Xiaomi's expectations. In the first half of the year, Xiaomi Group generated a total revenue of 164.395 billion yuan, with an adjusted net profit of 12.67 billion yuan, up nearly 30% and approximately 50%, respectively, year-on-year.

Confidently, Xiaomi stated in its financial report that it may deliver 100,000 Xiaomi Automobiles ahead of schedule in November, with the next goal being 120,000 units. Based on the current unit price of 229,000 yuan, Xiaomi Automobile's revenue is expected to reach 27.5 billion yuan in 2024, a competitive level even among the "WEI-XIAO-LI" trio.

In 2023, among the top three new energy vehicle manufacturers, Li Auto generated the highest revenue of 52.77 billion yuan, followed by NIO with 49.27 billion yuan. Xpeng, with the lowest revenue, generated only 26.86 billion yuan.

Considering that Xiaomi currently offers only the SU7 model, once production capacity issues are resolved and subsequent models are launched to form a product matrix, the explosive growth potential may be even more remarkable.

Another expectation the market holds for Xiaomi is whether a "Redmi Automobile" will emerge. In 2013, Redmi redefined the budget smartphone market with its 799 yuan price point, and almost everyone hopes to see this level of excellence replicated in new energy vehicles. This is both a vote of confidence in Xiaomi and Lei Jun and a yearning for breakthrough innovations long overdue in the industry.

Although Xiaomi SU7's cost optimization is currently focused on the mid-to-high-end range, leading automakers like NIO and Xpeng are experimenting with more affordable options through new brands or models, suggesting a shift from high prices to volume sales.

As Xiaomi Automobile gains momentum, producing a "Redmi Automobile" will become more feasible.

Xiaomi Group CFO Shiwei Lin told the media that at this stage, the company is willing to sacrifice profits to develop its nascent electric vehicle business. Xiaomi aims to become one of the world's largest automakers in the next one to two decades, alongside companies like Tesla and BYD. Lin also believes that Xiaomi currently prioritizes growth over profitability in its electric vehicle business, which has only been established for five months and needs time to curb losses.

Lin emphasized, "We are confident that scale will lead to profits in the future. Currently, I only have one model, which is far from our profitability goals. We need to continue investing in this business."

In a sense, Xiaomi Automobile's losses are proactive rather than passive. After all, among its peers, Zero Run Automobile lost 5.1 billion yuan in 2022 and 4.2 billion yuan in 2023, while Xpeng Automobile even expanded its losses, rising from 4.863 billion yuan two years ago to 10.38 billion yuan in 2023. Rather than hesitating due to lack of profitability, it's better to take bold steps forward.

For the capital market, imagination is key. There is a gap between a brand's listing and profitability, and investors are willing to accept its growth as long as it continues to deliver new and groundbreaking products. Behind Xiaomi stands Lei Jun, who is likely one of the few people in the market who can live up to such expectations.

The article reflects the author's personal views. For any questions or feedback, please leave a comment below.