Xiaomi profits collapse as fortunes reverse

The Chinese smartphone maker faces a components crunch, domestic competition and souring technology investments.

Iain Morris, International Editor

November 23, 2021

4 Min Read
Xiaomi profits collapse as fortunes reverse

Xiaomi sounds like "show me" on the lips of a Westerner, a gift to the punning reporter. But if "Xiaomi the money" was previously a throwaway line, investors may actually be wondering where the profits have gone. After soaring 84% year-on-year for the second quarter, they crashed by the same percentage for the third, to just 788.6 million Chinese yuan ($123.4 million).

The rate of year-on-year sales growth has collapsed, too, down from 64% for the second quarter to around 8% for the third. That delivered nearly RMB78.1 billion ($12.2 billion) into Xiaomi's coffers, but it was not enough to prevent a major income slump. Markets were obviously not taken unawares: Xiaomi's share price dipped just 1% today in Hong Kong, to HK$20.70. But it has lost 37% of its value since the high point in December last year.

This still makes Xiaomi far more valuable than it was as recently as April last year, when its share price stood at HK$10.20. It spent the rest of 2020 buoyed by consumer demand for its gadgets and US sanctions against Huawei, previously China's most popular smartphone maker. By the second quarter of 2021, Xiaomi had soared up the smartphone rankings to become the world's number-two manufacturer, behind Samsung, with 17% of all shipments, according to data published by Canalys. Huawei, the number-three player in 2020, did not even make the top five.

Xiaomi finds itself back in third place for the July-to-September quarter, overtaken by Apple, and its problems are stacking up. On the supply side, what Canalys called a "blockbuster performance" in the second quarter led to a depletion of its available stock during the third. It sticks out as one of only two vendors in the top five (the other being Samsung) whose shipments declined year-on-year, dropping 7%, to about 44 million.

In its own quarterly update, Xiaomi blames the industry-wide shortage of components for some of its problems, pointing out that system-on-a-chip technology has become difficult to procure. President Wang Xiang is said to have told local reporters that he expects component shortages to persist in the fourth quarter but start to ease in 2022.

Honor revival

Unfortunately, a components crunch is not the only setback. Competition has grown, thanks partly to Huawei's sale of Honor, a smartphone brand, in late 2020. That divestment freed Honor from the crippling US restrictions, allowing it to buy components from critical suppliers. Counterpoint Research, another analyst firm, says Honor was the fastest-growing manufacturer in the Chinese market for the July-to-September quarter, ranking third on volumes.

Honor's success was particularly bad for Xiaomi, said Ethan Qi, a senior research analyst at Counterpoint. "Xiaomi's position is expected to be challenged the most by Honor as both OEMs [original equipment manufacturers] have a higher sales contribution from online channels when compared to other major Chinese OEMs," he wrote in a press release.

Still, Xiaomi's revenues grew as consumers opted for pricier gadgets. And its profits would not have plummeted as they did without a sharp rise in costs. As the company expands outside its core smartphone market, into sectors including electronic vehicles, it is plowing much more into its research and development function, where expenses were up about 40% year-on-year, to around RMB3.2 billion ($500 million). Sales, marketing and administrative fees also rose markedly.

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What hurt Xiaomi more than any of that were the write-downs it had to book on its investments in other Chinese technology firms. For the third quarter of 2020, it was able to book a RMB3.4 billion ($530 million) profit gain on those investments. A year later, that had turned into nearly a RMB2 billion reduction for the corresponding period. Xiaomi laid the blame squarely on the "global macroenvironment as well as market sentiment towards technology sector in China." Listed investee companies generated total losses of RMB3.5 billion ($550 million), it noted.

Market sentiment toward Xiaomi is still relatively positive, judging by the firm's share price performance. But it can no longer count on easy growth in the smartphone sector and is clearly making some risky bets in adjacent markets. Like other electronics firms, it must also pray that components become more readily available in 2022. Otherwise, "Xiaomi the chips" could make it into a few news stories.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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