Ahead of its expected multibillion-dollar initial public offering (IPO), Chinese handset maker Xiaomi has pledged to limit the net profit margin of its hardware business, including smartphones, to no more than 5 percent.
If, for some reason, the net income exceeds 5 percent after taxes over a calendar year, the company will “distribute the excess amount by reasonable means to its users”, founder and chief executive Lei Jun said in a statement.
The policy of putting a limit on hardware profits is in line with Xiaomi’s vision of “innovation for everyone”, he said.
“From the beginning, we embarked on a relentless pursuit of innovation, quality, design, user experience and efficiency advances, to provide the best technology products and services at accessible prices. We hope that our products and services will help our users to achieve a better life,” the CEO said.
Bloomberg notes that the profit cap signals that Xiaomi believes it can generate healthy profits from the services it provides alongside its hardware, such as video streaming, online financing, and advertising.
Based on the pledge, Xiaomi would keep only about US$10 from each US$200 device sold.
But the company earned an average profit of just US$2 per handset shipped in the third quarter of 2017, according to Counterpoint Research.
By comparison, Apple and Samsung made US$151 and US$31 respectively, while Huawei Technologies, another Chinese handset maker, earned US$15.
Xiaomi, often dubbed the “Apple of China”, is known for offering products at substantially lower prices. Its higher-end Mi phones sell from US$150 to US$300 each, roughly half the cost of comparable models from Apple and Samsung.
Back in 2016, Xiaomi’s former head of international division Hugo Barra told Reuters that Xiaomi “could sell 10 billion smartphones and [the company] wouldn’t make a single dime in profit”.
The company is essentially giving away its smartphones “without making any money” because it “care[s] about the recurring revenue streams over many years” rather than immediate margins on hardware, Barra said.
Xiaomi’s pledge comes as the company is preparing for its IPO, which is expected to launch this year. The offering would value the company as high as US$100 billion, Bloomberg said.
Chinese media recently reported that the company is planning a dual listing in Hong Kong and mainland China. It is rumored to be applying for a Hong Kong listing with an estimated valuation of US$65 billion to US$70 billion.
Xiaomi has been facing intense competition from other low-cost domestic rivals such as Oppo and Vivo since 2016.
But the company managed to stage a recovery last year with its big push in India, where its market share has risen to 31 percent in the first quarter of this year, according to Canalys.
In January, it announced that it has hit its 100 billion yuan (US$15.8 billion) revenue target for 2017 before the end of the year.
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