Xiaomi's poor IPO may have little bearing on its consumer brand equity

It's revealing when you notice media outlets still preface Xiaomi as a "Chinese smartphone maker" in their reporting when the brand has been sowing the seeds for its “triathlon business model", encompassing hardware, internet service and new retail, in the run-up to its debut. Xiaomi's initial public offering yesterday watched its shares plummet by nearly 6% at one point, assaulted by an untimely China-US trade war, and ultimately closing below its IPO list price of HK$17.

Sandy Burns
Brand Strategist & Managing Partner
Red Spider Asia

I’m not entirely surprised Xiaomi failed to live up to the IPO hype. Its profits, huge as they may be, have been largely built by outpricing the competition, which is a short-sighted play in China’s cutthroat mid/low range smartphone market.

Despite Xiaomi's innovation push, I’ve yet to see how Xiaomi provides a service or platform that captures loyal customers with the stickiness of the other tech unicorns like Tencent, and WeChat in particular. That’s what the market is looking for right now.

The IPO market is not just looking for profits, but solid future performance. Without building a loyal following of the Xiaomi ecosystem, the company could be accused of trying to cash in too early. 

I think the stock market will now question Xiaomi’s long-term future. Is it a true tech unicorn, or another huge-scale gadget maker? The market has seen too many of the latter come and go.

If Xiaomi is to maintain and grow its brand status, it needs to make a definitive shift from a smartphone maker to a unique tech-enabled lifestyle brand. What unique platform experience will it provide that the other tech unicorns can’t? Until Xiaomi answers that, I think the stock market will continue to respond the way it did today.

Bryan Ma
VP, Devices Research
IDC

I suspect that there is a lot of confusion and even scepticism about Xiaomi’s positioning as an 'internet company' given that the bulk of its business today comes from smartphones. So investors may be looking at it as more of a low-margin hardware company rather than a platform selling higher-margin services. Even if the company’s long-term goal is the latter, I am concerned that it won’t be that easy to translate many of its services into markets outside of China.

One day alone of bad trading probably won’t drag down the brand, but it could be a concern if the downbeat sentiment persists over time. That said, Xiaomi fans are much more influenced by the company’s technology and product announcements rather than investor sentiment. One of the things that make Xiaomi rather unique is its intimate user-engagement model through events, online forums, etc. that ultimately help drive interest in the brand, and I’d expect Xiaomi to continue with this formula. 

Angie Wang
Principal Research Analyst
Gartner

The poor Xiaomi debut is not surprising news. Firstly, despite the Hong Kong stock market reaching a peak in terms of the number of IPOs in the first half of 2018, most of the newly-listed companies have been trading lower than their IPO prices. Secondly, unfavourable news over the past few weeks questioning Xiaomi's valuation, profitability, and positioning as an internet company reflect investor expectations.

Xiaomi's company value is still expected to be derived from hardware in the short term, given the recent complex macro environment (e.g. stock market downturn, the trade war between China & US, weakened passion from investors, challenging market growth for smartphones).

I don’t think the current underwhelming IPO will impact the Xiaomi brand significantly. Xiaomi is well positioned compared to most of the other Chinese smartphone/IOT device brands in the long term with its presence across product categories.

Benefitting from good pricing, innovative marketing and holistic investments, its long-term value depends on the following:

1. Successful transition from a hardware-oriented company to a true internet-based company that can leverage hardware devices to attract users as a volume play, then monetise with internet services to generate higher profit.
2. Sucesssful overseas penetration into emerging markets and settlement of patent issues.
3. Successful ecosystem development with progress in expanding into smart devices and internet-service offerings while maintaining consistent quality and brand identity.

Hanish Bhatia
Senior Analyst, IoT and Mobility
Counterpoint Research

The weak pricing can be attributed to existing market conditions, amid the ongoing US-China trade tensions. Although Xiaomi’s exposure to the US is minimal, the market has developed an overall negative sentiment toward global equities as of now. Apart from that, the delay in its Chinese CDR (Chinese Depositary Receipt) listing also impacted Xiaomi’s performance. Furthermore, concerns among some investors on Xiaomi’s weak operating margins from its core businesses contributed to its frail debut.

As a brand, Xiaomi is known to deliver good quality products at affordable prices. It has earned a lot of respect within the industry and it has diversified its product portfolio targeting other connected device categories, but the bulk of the top line comes from its hardware business rather than an ecosystem of both hardware and services.

From the way it has positioned itself as an 'internet' or 'ecommerce' company, investors will be looking for more proof, whether it is ecosystem stickiness, MAUs, and revenue or profit generated per user.

Looking at the business model, however, Xiaomi will have to scale its content, services and advertising business beyond the China market to India and Europe to reap ecosystem benefits. At the same time, Xiaomi needs to also scale its hardware portfolio across different markets and keep users interested enough to increase their spending and usage across multiple Mi products. The company must also build up its cutting-edge premium devices to maintain a halo effect for other devices in its portfolio. 

Gorden Guo
Chairman
Max Communications