7 days ago
Xiaomi stores fuel to stoke China's car battles
HONG KONG, May 28 (Reuters Breakingviews) - Xiaomi ( opens new tab is primed to launch the next salvo in China's car wars. The smartphone-to-autos maker reported, opens new tab record first-quarter revenue on Tuesday, while adjusted net income rose by two-thirds to $1.5 billion. A 10% profit margin and deep pockets mean it can afford to be more ambitious. That bodes ill for Tesla (TSLA.O), opens new tab, Xpeng ( opens new tab and other rivals.
At first glance, founder Lei Jun's fast-paced strategy looks hard to sustain. His fledgling electric-car business is growing rapidly, but has yet to turn a net profit. At the same time, he is investing heavily in new technology and plans to splurge $7 billion on chips over the next decade.
The road ahead is treacherous. Xiaomi is rebuilding its reputation after three people died in a crash involving an SU7 car that had engaged its autopilot mode. Its vehicle sales fell in April as competitors took the opportunity to tout their own safety credentials. Rivals are also accelerating a brutal price war: over the weekend, BYD ( opens new tab, ( opens new tab announced a fresh round of incentives, effectively reducing the price of its cheapest model to less than $8,000 - a roughly 20% cut, opens new tab per Bloomberg.
Yet Xiaomi is not necessarily struggling – if anything, it is charging into the fray. Its debut sport utility vehicle, launched last week, is packed with features that set it apart from similar models, such as having lidar as standard. Analysts anticipate a price point around 250,000 yuan, or some $35,000, comparable to Tesla's Model Y despite additional specs and costs.
Lei has more leeway to take expensive risks because, unlike most EV startups and legacy automakers, he has a robust core business. Smartphones and appliances made up more than 80% of sales last quarter, and premium products lifted profits: the gross margin for their electronics and lifestyle business rose 5.4 percentage points compared to a year earlier. So investors can more readily tolerate a money-losing auto unit.
That is boosting Xiaomi's financial firepower, too. Annual free cash flow has topped $4 billion for two years straight. After raising a further $5.5 billion in a Hong Kong share sale earlier this year, it ended March with more than 100 billion yuan in net cash, or some $15 billion, according to Visible Alpha. With the share price near an all-time high, Xiaomi could consider raising funds again soon, reckons Morningstar analyst Dan Baker.
Xiaomi may be stoking China's car wars, but it can stand the heat.
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