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Text｜Gu Lingyu

Editor: Yin Lu

A piece aboutXiaomi MotorsThe "bombardment" of dumping has brought attention to Xiaomi Auto's competitive strategy.

On August 21, Xiaomi Group (1810.HK) disclosed its automotive business data for the first time in its second quarter 2024 financial report: innovative businesses such as smart electric vehicles achieved revenue of 6.4 billion yuan in the quarter, of which smart electric vehicles had revenue of 6.2 billion yuan, with a gross profit margin of 15.4%, net losses narrowed to 1.8 billion yuan, and quarterly deliveries of approximately 27,000 vehicles.

Later, some media calculated that Xiaomi lost more than 60,000 yuan per car sold based on the "delivery of 27,000 cars and loss of 1.8 billion yuan".ExtremeXu Jiye, the head of automotive public relations, was dissatisfied. He posted on WeChat Moments: "Can entrepreneurs like Lei Jun have a little sense of public morality and shame? You are losing 60,000 yuan on each car. Why do you sell so many cars at such a loss? Some companies lose money because they can't sell without discounts. What do you call Xiaomi and Lei Jun's behavior? In the past, this was called dumping. This is the worst nature of businessmen."

(Xu Jiye posted on WeChat Moments to accuse Xiaomi. Image source: Internet)

ExtremelyGeely AutomobileThe joint venture brand with Baidu has a total sales volume of 1,824 units in the second quarter of 2024, which is far behind Xiaomi. On the afternoon of August 22, Jiyue responded that this statement did not represent the company's views and had severely criticized Xu Jiye. Xu Jiye himself also expressed his reflection in his circle of friends.

Xiaomi did not respond to Xu Jiye's criticism. However, Lei Jun and Xiaomi CFO (Chief Financial Officer) Lin Shiwei responded to the statement that "Xiaomi Auto loses 60,000 yuan for each car sold." Lei Jun responded, "This calculation is both right and wrong. Because we are just starting out with Xiaomi Auto, I think our financial performance is good. We have invested 1.8 billion in innovative businesses such as smart cars. When we reach a certain scale, I believe it will be easy to break even." Lin Shiwei said in an interview that Xiaomi currently attaches more importance to growth rather than short-term profits. He emphasized, "We firmly believe that scale expansion will eventually bring us profits, and we will continue to invest in the electric vehicle business."

Lei Jun and Lin Shiwei's statements prove that Xiaomi is indeed expanding its automotive business at the expense of profitability, and will continue to increase its investment. So are Xiaomi cars dumped? If not, what does Xiaomi's CFO mean by "considering scale first and willing to sacrifice profits to develop electric vehicles"?

Xu Jiye's basis for raising the dumping doubt is that "Xiaomi Auto loses 60,000 yuan for each car sold". According to Xiaomi's financial report, the automotive business did lose 1.8 billion yuan this quarter. Xiaomi Auto President Lu Weibing said in a financial report conference call that Xiaomi Auto is still in its infancy and the current losses are mainly limited by the scale effect, the large strategic investment in the early stage of car manufacturing, and the high cost of pure electric cars.

First, let's look at the definition of "dumping". According to the definition in the "Regulations on Preventing Low-Price Dumping" issued by the National Development and Reform Commission in 1999: "Dumping refers to the dumping of goods at prices below cost in order to exclude competitors or monopolize the market." According to the financial report, the ASP (average selling price) of Xiaomi's smart electric vehicles is 228,600 yuan per vehicle. Xiaomi Motors has not released cost data, and it is difficult for third parties to accurately estimate the cost price of Xiaomi Motors.

Can we conclude from the gap between Xiaomi Auto's gross profit and net profit that Xiaomi Auto's intermediary costs are too high and that it is suspected of subsidizing dealers to sell cars at low prices and expand the market scale? No. The difference between gross profit and net profit includes both sales expenses, research and development expenses, management expenses, and financial expenses, and Xiaomi Group's financial report does not disclose these expenses of Xiaomi Auto separately.

Despite this, Xiaomi Auto's current practice does not hinder market competition. Liu Xu, a special researcher at the National Strategy Institute of Tsinghua University, told Caijing that Article 14, Paragraph 2 of the Price Law prohibits the following behavior: "In addition to reducing prices in accordance with the law to deal with fresh goods, seasonal goods, and overstocked goods, in order to squeeze out competitors or monopolize the market, dumping at prices below cost, disrupting normal production and operation order, and damaging national interests or the legitimate rights and interests of other operators."

but,For high-tech products such as new energy vehicles, the large amount of R&D and marketing costs in the early stage need to be amortized after achieving a certain sales scale before a reasonable profit can be achieved. However, Xiaomi Motors has just been listed and its scale is limited, so it is impossible to determine that its price is dumping.

In addition, according to Article 6, Paragraph 2 of the "Anti-Monopoly Guidelines for the Automobile Industry of the Anti-Monopoly Commission of the State Council" issued in 2019, although Article 14 of the Anti-Monopoly Law explicitly prohibits fixing resale prices and limiting minimum resale prices, it is necessary to use specific prices to incentivize dealers to promote new energy vehicles, increase sales efforts, and expand market demand for new products within nine months after the new vehicles are launched. The prohibition clauses in the Anti-Monopoly Law can be exempted during this period.

Xiaomi Motors will complete its first batch of deliveries on April 3, 2024, less than nine months after its launch, so even if Xiaomi fixes dealers’ selling prices, it will not be illegal. On the contrary, for new energy vehicles that have been on the market for more than nine months, if car manufacturers still fix or restrict dealers’ minimum selling prices, they may be suspected of violating the Anti-Monopoly Law.

Huge initial R&D and fixed asset investments are a characteristic of the automotive industry. As the scale increases, these investments are expected to be diluted. Xiaomi did not directly disclose the R&D expenses of its automotive business this time, but only disclosed operating expenses of 2.9 billion yuan, including R&D, sales promotion and administrative expenses. However, when explaining the increase in the group's total R&D, sales promotion and administrative expenses, Xiaomi mentioned that the increase in the three parts of expenses was due to the increase in expenses for innovative businesses such as smart electric vehicles.

Xiaomi Motors suffered a loss of 1.8 billion yuan in a single quarter, but this is within the normal range in the automotive industry.XiaopengandZeekrIn the second quarter of 2024, the vehicle deliveries were 30,207 and 54,811 respectively, with net losses of 1.28 billion yuan and 1.81 billion yuan respectively.NIOThe net loss in the first quarter of 2024 reached 5.19 billion yuan.

When Lin Shiwei said that he would consider scale first and be willing to sacrifice profits to develop electric vehicles, does he mean that Xiaomi Auto will exchange market for low prices like Xiaomi mobile phones did in the past?
Among all new energy vehicle companies, Xiaomi is the first to achieve a total delivery volume of over 10,000 and a monthly delivery volume of over 10,000 in just three months.Xiaomi SU7The annual delivery target of 100,000 vehicles is expected to be achieved in November ahead of schedule, and the annual sales target of 120,000 vehicles is expected to be achieved. Lin Shiwei said that Xiaomi's goal is to become the world's largest automobile manufacturer within ten to twenty years.Tesla、BYDAnd other companies are keeping pace.

"Right now, we are more focused on development rather than profitability. We are convinced that scale will bring profits in the future. Right now we only have one car, which is still a long way from what we call profitability, and we need to continue investing in this business." Lin Shiwei said that Xiaomi once ranked among the top in the global mobile phone industry with its cost-effective concept, and this concept will also apply to the new energy vehicle business.

So, where does Xiaomi get the confidence from if it is not in a hurry to make profits?

Although Xiaomi Auto has just been launched, Xiaomi cannot be regarded as a new car company. Xiaomi has mobile phones and IoT businesses as its foundation, which provide stable resources, technology, channels, and experience for the development of its automotive business.

The automotive industry has huge initial R&D and fixed asset investments. Most new car companies are in a life-or-death situation when they cross the mass production barrier. Extreme cases such as Byton, which claims to have invested 8.4 billion yuan after its establishment, still cannot produce mass-produced cars. Even if they have crossed the mass production barrier, only Ideal andAsk the worldAlthough the net profit has turned positive, none of the new energy vehicle companies focusing on pure electric vehicles have yet to make real money.

As the initial investment payback cycle is too long, the new forces still active in China are either born out of a mature car company, such as Zeekr obtaining resources from Geely, or have first-class fundraising capabilities, such as Weilai, which has received investment from the Middle East sovereign fund and Hefei state-owned assets, and Xiaopeng, which has been favored by Volkswagen of Germany. In short, there are powerful investors behind them.

The high demand for funds is also an important reason why car companies' cash reserves have attracted attention. According to financial reports, as of the end of the second quarter of 2024, Xiaomi Group's cash reserves reached 141 billion yuan, a record high. Ideal Auto, which currently ranks first in cash reserves among China's new energy car companies, had a cash reserve of 98.9 billion yuan at the end of the first quarter of 2024, and BYD, China's top new energy car company, had a cash reserve of 86.179 billion yuan at the end of the first quarter of 2024.

Therefore, Xiaomi's attitude in entering the automotive industry is closer to that of a large automaker focusing on electric vehicles, rather than a complete newcomer in the automotive industry. In the past year, Xiaomi's automotive losses have been narrowing, while the group's overall net profit has remained stable. According to Xiaomi Group's financial report, the company's revenue in the second quarter of 2024 was 88.9 billion yuan, and its adjusted net profit was 6.2 billion yuan, a year-on-year increase of 20.1%; its revenue in the first quarter of 2024 was 75.51 billion yuan, and its adjusted net profit was 6.49 billion yuan, a year-on-year increase of 100.8%. During the same period, BYD's net profit was 4.569 billion yuan, Ideal Auto was 593 million yuan, and Xiaopeng Motors lost 1.37 billion yuan.

Xiaomi Group started out with mobile phones. The ultimate cost-effectiveness of Xiaomi mobile phones was once well-known in the industry. Will Xiaomi Auto repeat the strategy of Xiaomi mobile phones?

Lei Jun defined "cost-effectiveness" in "Xiaomi Entrepreneurship Thinking". He believes that cost-effectiveness is a comparative advantage, with the best performance at the same price and the lowest price at the same performance. The outside world considers Xiaomi's "cost-effectiveness" as "low price" because in the early days of its mobile phone business, it launched products priced at less than 2,000 yuan, which were priced at 4,000 yuan to 6,000 yuan. However, as the market developed, Xiaomi began to transform into a high-end brand, increasing prices and profit margins. The development of Xiaomi mobile phones is a typical example of "seizing market size in the early stage and increasing profit margins in the later stage".

Xiaomi Motors did not trade low prices for market share. In the second quarter of 2024, the average price per customer (ASP) of Xiaomi SU7 was 228,000 yuan, which is directly comparable to Tesla. For car buyers in the 200,000-300,000 yuan range, low prices are certainly an advantage, but they also have high requirements for vehicle technology, configuration, and manufacturing level. Low prices alone cannot win the competition in this market segment.

The current situation of the Chinese auto market is that, on the one hand, the price war is becoming more and more brutal, and on the other hand, consumers and investors are paying more attention to the profitability of automakers. Consumers are worried that long-term low prices will eventually lead to automakers exiting the market, and long-term price wars have also reduced consumers' sensitivity to prices, and they are more concerned about product quality and service capabilities, all of which require sufficient profits to support.

The capital market is more directly concerned about the profitability of car companies. Due to the erosion of price wars, according to the China Passenger Car Association, the sales profit margin of China's automobile industry will be only 5.7% in 2023, which is at a low level in the downstream manufacturing industry. The capital market has gradually shifted from focusing on market size to profitability in addition to size. The growth story of "financing-loss" can no longer continue to attract investors' interest. In the face of brutal price wars, indicators such as gross profit margin that prove that companies can continue to operate are more concerned.

In an interview in March 2024, Lei Jun said that the final selling price of the top-end version of SU7 was 60,000 yuan lower than the original price. "In the pure electric vehicle industry, I don't know which company is still making money except Tesla. The pricing of Xiaomi SU7 must make consumers feel that we are sincere, and at the same time we must be able to bear the losses."

Xiaomi Group's second quarter 2024 financial report shows that Xiaomi Auto's gross profit margin reached 15.4%. This shows that the company's automotive business can make a gross profit of 15.4 yuan for every 100 yuan of goods sold in the quarter. The automotive industry is a typical economy of scale. As the delivery volume increases, costs can usually be reduced and gross profit margins can be increased. This year, Xiaomi Auto has just started delivery, which means that there is still room for gross profit margins to continue to increase. Compared with the gross profit margins of other pure electric vehicle companies in the first year of delivery, Xiaomi leads by a cliff.

Lu Weibing pointed out in the conference call that such a high gross profit margin is mainly related to three factors: first, the support of Xiaomi suppliers for Xiaomi Auto; second, Xiaomi Auto adheres to the strategy of explosive products to maximize the sales of a car; third, although Xiaomi is making a car for the first time, it is not a startup company and has many years of experience in the mobile phone and consumer electronics fields, all of which are helpful in making cars.Lu Weibing said that in the future, with the improvement of Xiaomi Auto's scale effect, the exploration of production capacity and the improvement of delivery capabilities, Xiaomi Auto's profitability will be further enhanced.

Xiaomi Auto has profitability in multiple sectors. In the second quarter of 2024, Xiaomi's smartphone, IoT and consumer products, and Internet business revenues reached RMB 46.5 billion, RMB 26.8 billion, and RMB 8.3 billion, respectively, up 27.1%, 20.3%, and 11% year-on-year. The technology, experience, and supply chain accumulated in these sectors can be reused by the automotive sector.

Unlike Xiaomi mobile phones, which had to seize the market by offering low prices in the early stages of development, Xiaomi Group has already established an ecological chain at this time, and Xiaomi Auto can relatively easily create differentiation based on the ecology and channels established by mobile phones. Therefore, Xiaomi Auto's cost-effectiveness strategy does not emphasize low prices, but comprehensively considers market positioning, cost control, technological innovation and brand.

But these positive factors do not mean that Xiaomi Auto is safe. The Chinese auto market is highly competitive, and a car company that leads this year may be on the brink of collapse next year. This situation has happened repeatedly.