Lei Jun: Xiaomi's Profit Margin In Hardware Business Would Never Exceed 5%

vincent_khoo · 16:40, Apr-25-2018

Hello Mi Fans,

Today is a historic day for Xiaomi. At the Mi 6X launch event in Wuhan earlier today, we promised our users that our hardware business, including smartphones, IoT and lifestyle products, will have an overall net profit margin that will never exceed 5%.

Why would we do this? Because we are Xiaomi.

1. A 5% limit on hardware net profit margin is necessary for our business model
Two days ago, Xiaomi’s Board of Directors approved my suggestion. Starting today, we officially promise our users that our hardware business, including smartphones, IoT and lifestyle products will have an overall after-tax net profit margin that will not exceed 5% per year. If the margin crosses 5%, then we will find a way to return the excess above 5% to our users.

If we sell our products at close to cost and return value to our users, then we can earn the long-term support of our users. Aiming for large volumes with small profit margins will still result in suitable hardware profits for us in the long term.

In addition, we are different from traditional hardware companies. Xiaomi is an internet company with smartphones and smart hardware connected by an IoT platform at its core.

We have created a unique “triathlon” business model, encompassing hardware, internet service and new retail. We maintain excellent design and outstanding performance in our products, while keeping our products as close as possible to their cost price. In addition, we deliver products directly to users through highly efficient online and offline retail channels, including our self-operated channels, while providing them with comprehensive internet services.

In the past eight years, our business model has been challenged again and again. During the most difficult times, we have faced major obstacles. Xiaomi is the only smartphone in the world that has rebounded after a decline in sales. This miracle, coupled with the results we have achieved as of today, shows how relevant and advanced our model is.

Eight years ago, we founded Xiaomi with a big dream: we wanted to revolutionize the efficiency of the manufacturing industry.

In China, a single piece of clothing that costs 100 RMB can be sold for 1000 RMB in a shop, which is a shocking markup of 10X. A pair of shoes can be marked up by 5-10X, and a tie can be marked up by 20X. The list is endless.

It has always been difficult for me to understand why consumers have to bear the costs of this inefficiency. This is why Xiaomi has the will and determination to revolutionize the industry’s cost-efficiency. We do this by putting in every bit of effort to create quality products and maximize value to users.

Our ambition started from this point, and our success is underpinned by this point.

Cost efficiency is at the heart of business competition, and a 5% limit on our overall hardware net profit margin is evidence of our high-cost efficiency. This applies not only to smartphones. Previously, 10,000 mAh power banks were priced above 200 RMB, whereas our price point was 69 RMB. Mainstream air purifiers were priced at several thousand RMB, while we have managed to price our air purifiers within 1000 RMB. Across various product categories, we have successfully launched the best products and kept them close to their cost price, thus revolutionizing the entire industry and allowing these products to be available to the masses in a short span of time.

Today’s launch of Mi 6X is an excellent case in point. As a strategic product for our new retail channels, Mi 6X is equipped with the high-end Qualcomm Snapdragon 660 processor and the latest AI technology. Although products of similar performance, technology or even inferior configuration are priced at around 3000 RMB, we continue to stay close to our cost price, pricing it at 1699 RMB, which is almost half the price of our competitors.

2. Quality products with honest pricing are two inseparable concepts and is the best way to repay users’ trust
In the past eight years, we have continually asked ourselves this question. Historically there have been many changes in the business, but what has remained constant?

Xiaomi’s answer is this: Users have always expected quality products at honest pricing.

“Quality products, honest pricing” is not just an empty saying, nor is it a statement to compliment ourselves. In order to truly execute this mission, we need sincerity and the determination to restrain greed.

Limiting our hardware net profit margin to 5% is our ever-lasting promise to our users and our goal for ourselves.

Quality products with honest pricing are two inseparable concepts. If the product quality is not high enough, users will not enjoy it no matter how low the price is. We need to ensure that we keep within the 5% limit on hardware net profit ratio while maintaining competitiveness at the same time. To do so, we need innovative technology and outstanding design, in order to launch products that exceed our users’ expectations. Simultaneously, we need to maintain honest pricing; only then will we able to touch the hearts of our users.

This belief is the foundation for our ceaseless motivation to explore and continually innovate. This belief is how we were able to launch one of the most innovative full-screen technologies in the industry with ceramic technology. This is also the reason we have won over 200 globally acclaimed design awards.
In the past 8 years, I have had so many unforgettable moments at Xiaomi, including the first time we heard a ringtone from the first Xiaomi phone, the first time we received a gift from a Mi fan, and the first time we heard that a Xiaomi smartphone was being added to a museum collection. Among all these moments, nothing can surpass the feeling of hearing a user say that they can walk into a Mi Home, and buy any product with full confidence, because they know that our products offer the best quality and price. When I hear this, I know that all our effort and energy has not gone to waste.

Why do our users trust us? It is because we relentlessly pursue innovation. In our users’ minds, we have established ourselves as a high-quality, well-designed and high-value brand. They trust that as long as it is a Xiaomi product, it will have the best quality and price.

Xiaomi employees, our users’ trust is the best form of validation and our most valuable asset. We will not allow users to be harmed in the slightest. Our company can progress only by continuously winning our users’ trust.

3. Maintaining reasonable profits has historically been important for a company’s progress and is the only way for us to fulfill our mission.
If we look at historical trends, whether in the automotive or PC industry, the great companies that have changed the world always make things lower in price and available to even more people.

Xiaomi is an engineering-led company. Engineers are constantly looking for the latest technologies to benefit the public and change the world. Our mission is to relentlessly pursue great products with honest prices so that everyone can enjoy the benefits of technology.

In the past eight years, our high-performing and well-priced smartphones have raised the standards on performance and quality in the entire industry, contributing significantly to the rise of the mobile internet in China. We are now looking to extend this positive influence to the entire world.

Beyond smartphones, we have replicated our business model and strategy to over 100 Mi Ecosystem IoT and lifestyle product companies, which has accelerated the adoption of a smarter lifestyle and helped to build the world’s largest IoT smart home platform. We have created high-quality everyday products that are priced honestly, allowing more people to experience a better through technology.

We will live out Xiaomi’s mission by strictly following the 5% limit on our overall hardware net profit margin.

We have always firmly believed that the pursuit of product experience is more important than that of one-time hardware sales profits. Instead of adding on costs from various channels, we believe in providing quality products at honest prices.

Going forward, maintaining reasonable profits is an inevitable industrial trend. Any move pushing for high gross margins will eventually reap no rewards.

Bearing in mind our values and legacy, we have set a hard limit of 5% hardware net profit margin. At present, the company has exceeded 100 billion RMB in revenue every year and has nearly 20,000 employees. In the future, Xiaomi may have higher revenue and become a larger organization. However, this hard limit will always remind everyone of us of our ideals and our initial ambitions. As I mention, today’s Mi 6X launch has a special meaning to me. This is because the launch event is at my alma mater, Wuhan University, which is where my dream started.

20 years ago, in my first year of university, I was in the library and read Fire in the Valley, a book that changed my life forever. After reading that book, my heart was not at peace for a long time, and I walked around the track at the sports field at Wuhan University multiple times. The fire within me was ignited, and from then on I was determined to create a great company and influence as many people as possible.

Going back to my alma mater today, I realized the fire within me is still burning as brightly as ever.

My fellow Xiaomi employees, eight years ago, we also ignited that fire within us, and that was just the beginning of Xiaomi. Today we have changed the lives of hundreds of millions, and in the future, we will become a part of the lives of billions.

Lei Jun