November 17, 2014 by ...
An article here goes into depth about how Xiaomi is not a software play, as they like to profess. In fact, according to that website, 92% of Xiaomi profit comes from hardware. That is right, Xiaomi made $564 in profit from cell phones. This runs contray to Lei Jun’s claim that Xiaomi is an internet play, however.
The proof comes from a Wall Street Journal article based on leaked Xiaomi bank documents which show that the company had :
Revenue of $4.4 billion in 2013
$44 million revenue from service
Assume all services are pure profit so $44 milliom
= net profit from hardware of $520 million
= profit margin at least 12%
So how do they do it?
The author of the post referenced above posits several reasons why Xiaomi makes money on hardware which sells for 1/2 the cost of Samsung and Apple devices. Click that link to get his take on the four reasons this is true. Two of the four of his arguments piggyback off several of my own which can be found here and here. I will now expound on those for you.
How does Xiaomi make money by selling on the cheap?
1- Xiaomi only offers phones it knows it can sell by ‘aping’ proven designs
There are two benefits to this method. First off, Xiaomi uses designs which are proven money makers. They do not have to go through the process of R&D and market testing their products, Apple has already done it for them. For example, Xiaomi would never produce a Lisa, as it bombed. Apple had no idea this would be the case and lost tens of millions on that project. Apple’s loss is Xiaomi’s gain.
The bottom line is that Xiaomi pirates proven design from Apple, HTC and or others. In so doing, they have virtually no cost in product development. They merely ‘cut’, ‘copy’ and ‘paste’.
Or as I posted here ‘Case-in-point, say many, is Xiaomi. In fact it would appear that little if anything Xiaomi sells, really belongs to them. Many sites have detailed why this is so and I will not belabor the point here. What. I will address, however, is what an Apple designer had to say about their ‘piracy’, ‘It is theft and it is lazy.’
He makes a pretty good point. Apple can spend years on designing and bringing a product to market. In that timeframe they invest millions of dollars and man hours in coming up with a perfect solution. By copying Apple designs, Xiaomi and others cherry pick only the best and do not have to fund innovation, essentially they steal it.’
2- Xiaomi pays nothing on intellectual property licenses
Related to this point, Xiaomi pays nothing on intellectual property licensing costs. The past above quotes Stratchery which says that such costs equate to 30% of revenue. If this is true then Xiaomi saves approximately $132 million by breaking the law.
As posted here ‘So far the four year old company Has hidden their ‘not so subtle‘ borrowing, behind China’s ‘not too good‘ anti-piracy laws, which prove if nothing else, that crime does pay.’
To put it kindly, Beijing takes a hands off approach when it comes to protecting foreign IP rights in China. This allows Xiaomi to obtain profit margins they would not be able to achieve if they followed the law. China selectively applies laws which usually protect the interests of a local firms. Xiaomi was a direct beneficiary of this lax enforcement to the tune of $132 million at least.
Aside from this, Xiaomi does not assume R&D costs associated with product development. They merely ape proven designs and thus have no product failures. Their whole advertising pitch is ‘Buy an Apple on the cheap’. Of course, such blatant copying could never happen in the west and thus Xiaomi would have to create a real brand and products on its own, just like everyone else. Hiding behind the protective cocoon of protectionist communist party machinations, Xiaomi is able to thrive.
So what is the big deal?
The point is that Xiaomi proves ip theft pays, sure the company is making good moves, but its profit margins show how much Xiaomi saves by disobeying the law. Lei Jun calls Xiaomi an internet play because it is sexy and gives Xiaomi cred; prevents it from being seen as just another cheap Chinese manufacturer.
Lei Jun also does not want us to know just how much money their is in IP theft. Hell, he’s built one of the world’s largest cell phone companies by doing it. He would prefer that we buy the party line that he is selling services and giving the phones away. For if Lei Jun admitted that at least 92% of his profit came from hardware, then he would have to admit that it essentially comes from pirated designs. He would also have to admit that his ‘Xiaomi exosystem’ is not as profitable as he would like us to believe. And if this is true, then Xiaomi is merely another copycat company with little-to-no indigenous value add.