How India And Ratan Tata Helped Xiaomi Set Up Biggest IPO Since Alibaba
Ratan Tata acquired a tiny stake in Xiaomi Corp. in April 2015 as the smartphone maker, once called Apple of China, was trying to regain ground it had ceded to compatriot brands like Oppo, Vivo and Huawei. Its billionaire co-founder Lei Jun, having launched the first phone in India about a year earlier, was also building operations in Asia’s third-largest economy.
Both bets paid off. Xiaomi is now the country’s biggest smartphone maker, and No. 4 globally after Samsung Electronics Co., Apple Inc. and Huawei. India is its biggest market outside China, driving international sales that contribute more than a quarter of its revenue.
India’s biggest role in reviving the fortunes of Xiaomi is that it provided the much-needed momentum, Tarun Pathak, associate director at Counterpoint Research, told BloombergQuint over the phone. “In 2015-16 when the market slipped for Xiaomi, it was India which started gaining business because of Redmi 3 and then its momentum was carried by Redmi 4, which in turn helped the company to regain confidence to venture into new countries.”
The Chinese maker of smartphones to electric scooters now plans to raise up to $10 billion in an initial public offering that, according to a JPMorgan Chase & Co. report, is expected to value the company as much as $92 billion. That will make it the biggest IPO since the Alibaba Group’s $25-billion offer in 2014—the year Xiaomi (pronounced ‘SHAO-me’) entered India.
The India Foray
Xiaomi launched its first flagship smartphone Mi3 in July 2014. And it came up with an unconventional strategy of selling it only online through flash sales. That helped create a hype as buyers waited to buy the phones that offered better specs than similar-priced models of rivals.
Till about 2016, Xiaomi ranked fifth in the country, according to International Data Corp. Globally, it fell from the third to the sixth spot. The company struggled to manufacture phones on schedule and missed the target of 100 million units for 2015. With the Chinese market getting saturated, Oppo, VIVO and Huawei raced ahead.
Xiaomi came under pressure to scale back operations outside China in markets like Brazil and Indonesia. Lei, in a letter to employees last year, admitted the company had lost focus as it attempted rapid expansion, into both new products and countries. “That’s why we must slow our pace, and seriously learn from our mistakes.”
In India though, the company renewed the focus to target first-time phone buyers by tailoring devices to their needs. One of them was phones with dual SIM card slots, allowing users to switch from one operator to another.
Xiaomi spent more than $500 million in the first three years in the country, Lei had told Bloomberg last year. The investment started to pay off as the Indian unit turned profitable in the year through March 2017.
Handsets like Mi 3, Redmi 1S and Redmi Note created a huge demand. Xiaomi said it sold close to 25 million devices in the first three years of its launch in India. From about 100,000 units in the third quarter of 2014, the company, according to data from the analytics firm Canalys, shipped over 9 million in the first three months of 2018.
The company now has six manufacturing plants in Tamil Nadu, Andhra Pradesh and Noida, three of which were added only this year.
The “success and the model” Xiaomi applied in India is being replicated in other markets such as Philippines, Vietnam, Thailand where it had stalled its expansion, Pathak said. “India growth happened at the much critical time for Xiaomi.”
In the meantime, it also scripting a turnaround in China, going beyond smartphones. Its phones now come preloaded with music, video, and browser apps on its custom Android operating system MIUI. It also launched Xiaomi-branded scooters, chargers, air purifiers, and suitcases.
And Xiaomi re-tooled its old online-only sales model that originally led it to the top. Brick-and-mortar-stores shoulder an increasing amount of the sales burden.
Ahead Of Samsung In India
That strategy worked in India as well. The company started selling through offline stores and launched its own network of Mi outlets. “We have built a robust new retail infrastructure for the distribution for our products and services…,” its IPO filings said. “We are also expanding our internet service offerings to users in India through collaborating with and investment in local partners such as video content providers.”
Xiaomi is now India’s top-selling smartphone, ahead of all local and international rivals including Samsung Electronics, according to data compiled by research firms IDC and Counterpoint. Three of its models remained among the top five bestselling smartphones of 2017.
From a 3 percent market share in 2014, Xiaomi leapfrogged to a 30.3 percent for the first three months of 2018, followed by Samsung with 25.1 percent, OPPO, 7.4 percent, and VIVO, 6.7 percent, in terms of unit shipment, as per the data from IDC’s quarterly Mobile phone tracker.
Sales surged 696 percent to Rs 8,379.3 crore (about $1.2 billion) with a net profit of Rs 163.9 crore in the year ended March 2017, according to documents filed with the Registrar of Companies.
Xiaomi said in its IPO filings that 28 percent of the $17.8 billion (114.6 billion renminbi) revenue came from international sales in 2017. India is the largest market for Xiaomi outside China.
In response to BloombergQuint’s emailed queries, a Xiaomi India spokesperson said the “company wouldn’t be able to comment on anything related to IPO or financials”.
Ratan Tata has backed about two-dozen startups, including Ola, Snapdeal and Urban Ladder. More than the funds, his investments are seen as sign of trust and confidence.
Tata, according to Xiaomi’s IPO filings, is the only Indian investor in the smartphone maker. The former head of India’s largest conglomerate Tata Group routed investments through RNT Associates International Pte in 2015. BloombergQuint awaits a response to emails sent to Tata’s office about the investment.
He picked a 0.0024 percent stake (49,583 shares), IPO documents show. As per BloombergQuint estimates, he invested about $1 million then. At Xiaomi’s estimated valuation of over more than $90 billion, that’s now worth $2.1 million—a twofold jump in four years.
For Xiaomi, Tata’s backing proved to be fortuitous.
Yet, Xiaomi’s biggest challenge in India may be yet to come. Till 2017, the company didn’t have a formidable competitor and that led to massive growth, Karn Chauhan, research analyst at Counterpoint Research, said. “Now with players like Huawei and Oppo targeting the Indian market more aggressively and Samsung too refreshing its portfolios, all this could slow down its growth in the country.”
The company’s biggest challenge in India will be to ensure that its existing users don’t shift to an Oppo or a Huawei. For that, it will have to create a differentiator in terms of design and camera to attract more users and retain the existing ones, he said. “The pressure on Xiaomi will begin to show in the coming three to four quarters.”