Regarding the "cannon fire" against Xiaomi's car dumping, the competitive strategy of Xiaomi's cars has attracted attention.
On August 21, Xiaomi Group (1810.HK) disclosed its automotive business data for the first time in the financial report for the second quarter of 2024: the revenue of innovative businesses such as smart electric vehicles reached 6.4 billion yuan, of which, the revenue from smart electric vehicles was 6.2 billion yuan, with a gross margin of 15.4%, and the net loss narrowed to 1.8 billion yuan, with a quarterly delivery volume of approximately 27,000 vehicles. Subsequently, some media calculated based on "delivering 27,000 vehicles and losing 1.8 billion yuan": Xiaomi loses more than 60,000 yuan for each car sold. This conclusion drew dissatisfaction from Xu Jieye, the PR head of Jie Yue Automobile, who posted on social media: "As an entrepreneur like Lei Jun, have some sense of public morality and shame, will you? Losing 60,000 yuan per car, why sell so many if you lose so much? Some companies lose because they can't sell without discounting, what does Xiaomi and Lei Jun call this? In the past, this was called dumping, which is the most despicable essence of a businessman." Jie Yue is a joint venture brand of Geely Automobile and Baidu, with a total brand sales volume of 1,824 vehicles in the second quarter of 2024, which is a huge difference compared to Xiaomi. On the afternoon of August 22, Jie Yue responded by saying that this statement does not represent the company's view, and Xu Jieye has been severely criticized, and Xu Jieye himself also expressed reflection on social media. Xu Jieye's criticism did not receive an official response from Xiaomi. However, both Lei Jun and Xiaomi's CFO (Chief Financial Officer) Lin Shiwei responded to the statement that "Xiaomi's car loses 60,000 yuan for each car sold." Lei Jun responded by saying, "This calculation is both correct and incorrect. Because our Xiaomi car has just started, I think our financial performance is good. We have invested 1.8 billion yuan in innovative businesses such as smart cars, and when we reach a certain scale, I believe it will be easy to break even." Lin Shiwei said in an interview that Xiaomi currently values growth more than short-term profits, and he emphasized, "We firmly believe that scale expansion will eventually bring us profits, and we will continue to invest in the electric vehicle business." The statements of Lei Jun and Lin Shiwei prove that Xiaomi is indeed expanding the scale of its car business at the expense of profits, and it will continue to increase its investment. So, has Xiaomi's car been dumped? If not, what does Xiaomi's CFO mean by "considering scale first and being willing to sacrifice profits to develop electric vehicles"?
Dumping Doubts
The basis for Xu Jieye's dumping doubt is the statement "Xiaomi's car loses 60,000 yuan for each car sold." According to Xiaomi's financial report, the automotive business did indeed lose 1.8 billion yuan this quarter. Lu Weibing, the president of Xiaomi's car, said in the financial report conference call that Xiaomi's car is still in the initial stage, and the current loss is mainly due to the limited scale effect, as well as the larger strategic investment in the early stage of car manufacturing, and the high cost of pure electric sedans. First, let's look at the definition of "dumping." According to the definition in the "Regulations on Prohibiting Low Price Dumping Behavior" issued by the National Development and Reform Commission in 1999: "Dumping refers to selling goods at prices lower than cost to eliminate competitors or monopolize the market." According to the financial report figures, the average selling price (ASP) of Xiaomi's smart electric vehicles is 228,600 yuan per vehicle. Xiaomi's car has not disclosed cost data, and it is also difficult for third parties to accurately estimate the cost price of Xiaomi's car. Can we conclude that Xiaomi's car has excessively high intermediate expenses from the difference between gross profit and net profit, suspected of subsidizing dealers to sell cars at low prices, and expanding market scale? No. The difference between gross profit and net profit includes not only sales expenses but also research and development expenses, management expenses, and financial expenses, and Xiaomi Group's financial report does not disclose these expenses for Xiaomi's car separately. Nevertheless, the current practices of Xiaomi's car do not hinder market competition. Liu Xu, a special researcher at the National Strategy Research Institute of Tsinghua University, told Caijing that Article 14, Paragraph 2 of the "Price Law" prohibits the following behaviors: "Except for legally reducing the price of perishable goods, seasonal goods, and backlog goods, etc., in order to eliminate competitors or monopolize the market, selling at prices lower than cost to disrupt normal production and business order, and to harm the national interest or the legitimate rights and interests of other operators." However, for high-tech products such as new energy vehicles, a large amount of research and development costs and marketing costs need to be allocated after achieving a certain sales scale, and then reasonable profits can be achieved. Xiaomi's car has just been launched and has a limited scale, so it cannot be determined whether its price is a dumping behavior. In addition, according to Article 6, Paragraph 2 of the "Anti-Monopoly Guidelines for the Automotive Industry" issued by the State Council's Anti-Monopoly Committee in 2019, although Article 14 of the "Anti-Monopoly Law" explicitly prohibits fixing the transfer price and setting the minimum transfer price, it is necessary for new energy vehicles to encourage dealers to promote new energy vehicles, increase sales efforts, and expand market demand for new products at a specific price within nine months after the new car is launched. The prohibition clause in the "Anti-Monopoly Law" can be exempted during this period. Xiaomi's car completed the first batch of deliveries on April 3, 2024, and has been on the market for less than nine months, so even if Xiaomi fixes the dealer's selling price, it is not illegal. On the contrary, for those new energy vehicles that have been on the market for more than nine months, car manufacturers still fix or limit the minimum selling price of dealers, which may be suspected of violating the "Anti-Monopoly Law." The large investment in research and development and fixed assets in the early stage is a characteristic of the automotive industry. With the increase in scale, these investments are expected to be diluted. Xiaomi did not directly disclose the research and development expenses of the automotive business this time, only disclosed the operating expenses including research and development, sales promotion, and administrative expenses of 2.9 billion yuan. However, when explaining the increase in the group's total research and development, 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's car lost 1.8 billion yuan in a single quarter, but it is within the normal range in the automotive industry. Similarly, Xiaopeng and Ji Ke, which also produce pure electric products, delivered 30,207 and 54,811 vehicles in the second quarter of 2024, with net losses of 1.28 billion yuan and 1.81 billion yuan, respectively. Weilai, which has not yet disclosed the second-quarter report, had a net loss of 5.19 billion yuan in the first quarter of 2024.
The cost-effectiveness of Xiaomi's car is different from that of mobile phones
What Lin Shiwei said about considering scale first and being willing to sacrifice profits to develop electric vehicles means that Xiaomi's car will exchange low prices for the market like Xiaomi's mobile phone in the past? Among all new energy vehicle companies, Xiaomi is the first to achieve a total delivery volume of over 10,000 in just three months and a single-month delivery of over 10,000. It is expected that the annual delivery target of 100,000 for Xiaomi SU7 is likely to be completed in November in advance, and the annual sales target is expected to reach 120,000. Lin Shiwei said that Xiaomi's goal is to become one of the world's largest car manufacturers within ten to twenty years, keeping pace with companies like Tesla and BYD. "At present, we focus more on development rather than profitability. We are confident that scale will bring profits in the future. At the moment, we only have one car, and it is still far from our so-called profitability. We need to continue to invest in this business." Lin Shiwei said that Xiaomi once became one of the top players in the global mobile phone industry with the concept of cost-effectiveness, and this concept will also apply to the new energy vehicle business. So, not in a hurry to make a profit, where does Xiaomi's confidence come from? Although Xiaomi's car has just been launched, it cannot be regarded as a new car company. Xiaomi has mobile phones and IoT businesses as the basic plate, providing stable resources, technology, channels, and experience for the development of the car business. The automotive industry has a huge investment in research and development and fixed assets in the early stage, and most new force car companies are almost a "life and death" when they cross the mass production pass, with extreme cases like Byton, which claimed to invest 8.4 billion yuan after its establishment but still failed to produce mass-produced cars. Even after crossing the mass production pass, only Li Xiang and Wen Jie have achieved a positive net profit, and no new force car company focusing on pure electric models has made a real profit.
Due to the long return cycle of early investment, the new forces that are still active in the domestic market are either derived from a mature car company, such as Ji Ke obtaining resources from Geely; or have first-class fundraising capabilities, such as Weilai, which has received investment from Middle Eastern sovereign funds and Hefei state-owned capital, and Xiaopeng, which is favored by the German Volkswagen. In short, there are strong investors behind them.
The high demand for funds is also an important reason why car companies' cash reserves are closely watched. According to financial report information, as of the end of the second quarter of 2024, Xiaomi Group's cash reserves were 141 billion yuan, a historical high, while the current top cash reserves of new Chinese force car companies, Li Xiang Auto, were 98.9 billion yuan as of the end of the first quarter of 2024, and BYD, the top-selling new energy vehicle company in China, had cash reserves of 86.179 billion yuan as of the end of the first quarter of 2024. Therefore, Xiaomi's entry into the car circle is more like a large car company's effort in electric vehicles, rather than a complete newcomer to the car circle. In the past year, Xiaomi's car losses have been narrowing, and 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, with an adjusted net profit of 6.2 billion yuan, a year-on-year increase of 20.1%; the first quarter of 2024 revenue was 75.51 billion yuan, with an adjusted net profit of 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, Li Xiang Auto's net profit was 593 million yuan, and Xiaopeng Auto's loss was 1.37 billion yuan. Xiaomi Group started with mobile phones, and Xiaomi's mobile phone's ultimate cost-effectiveness strategy was once famous in the industry. Will Xiaomi's car repeat the strategy of Xiaomi's mobile phone? Lei Jun defined "cost-effectiveness" in "Xiaomi's Entrepreneurial Thinking." He believes that cost-effectiveness is a comparative advantage, the best performance at the same price, and the lowest price at the same performance. The outside world regards Xiaomi's "cost-effectiveness" as "low price" because in the early stage of its mobile phone business, it launched products that targeted the 4,000-6,000 yuan price range at a low price of less than 2,000 yuan. However, with the development of the market, Xiaomi began to transform to the high-end, increase the selling price and profit margin, and the development of Xiaomi's mobile phone is a typical "early stage to seize market scale, later stage to increase profit margin." Xiaomi's car did not exchange low prices for the market. In the second quarter of 2024, the average selling price (ASP) of Xiaomi SU7 was 228,000 yuan, which is directly competing with Tesla. For car buyers in the 200,000-300,000 yuan range, low price is certainly an advantage, but their requirements for vehicle technology, configuration, and manufacturing level are also very high, and they cannot win the competition in this segment market solely by low price.The current state of China's automotive market is characterized by increasingly fierce price wars on one hand, and on the other hand, a growing emphasis by consumers and investors on the profitability of car manufacturers. Consumers are concerned that long-term low prices may lead to car companies eventually exiting the market. Moreover, prolonged price wars have reduced consumers' sensitivity to prices, shifting their focus to product quality and service capabilities, which require sufficient profits to support.
The capital market's concern for the profitability of car manufacturers is more direct. Due to the erosion of price wars, according to statistics from the China Passenger Car Association, the sales profit margin of China's automotive industry in 2023 was only 5.7%, which is at a low level in the downstream manufacturing industry. The capital market is gradually shifting from focusing on market size to also considering profitability in addition to scale. The "financing-loss" growth story can no longer attract investor interest. In the face of brutal price wars, indicators such as gross profit margin that prove the company's ability to operate sustainably are more closely watched. In an interview in March 2024, Lei Jun stated that the final selling price of the top configuration of the SU7 was reduced by 60,000 yuan from the original price. "In the pure electric car industry, apart from Tesla, I don't know which company is still making money. The pricing of Xiaomi's SU7 must make consumers feel that we are sincere, and at the same time, the losses must be bearable for us." Xiaomi Group's financial report for the second quarter of 2024 showed that the gross profit margin of Xiaomi's cars reached 15.4%. This indicates that during the operation of that quarter, for every 100 yuan worth of goods sold, the company could achieve a gross profit of 15.4 yuan. The automotive industry is a typical scale economy, and as delivery volumes increase, costs can usually be reduced, and the gross profit margin can be improved. With Xiaomi's cars just starting delivery this year, it implies that there is still room for the gross profit margin to continue to increase. Compared to the gross profit margins of other pure electric car companies in their first year of delivery, Xiaomi is leading by a significant margin.
Lu Weibing pointed out in a conference call that such a high gross profit margin is mainly related to three factors: first, the support of Xiaomi's suppliers for Xiaomi's cars; second, Xiaomi's cars adhere to a blockbuster strategy, maximizing the sales volume of a single model; third, although Xiaomi is making cars 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 for car manufacturing. Lu Weibing stated that in the future, with the improvement of Xiaomi's car scale effect, the exploration of production capacity, and the enhancement of delivery capabilities, the profitability of Xiaomi's cars will also be further improved. Xiaomi's cars have profitability in multiple sectors. In the second quarter of 2024, Xiaomi's smartphone, IoT and lifestyle consumer products, and internet business revenues were 46.5 billion yuan, 26.8 billion yuan, and 8.3 billion yuan, respectively, with year-on-year growth of 27.1%, 20.3%, and 11%. The technology, experience, and supply chain accumulated in these sectors can all be reused for the automotive sector. Unlike the early development stage of Xiaomi's mobile phones, which needed to capture the market through low prices, Xiaomi Group has now established an ecosystem. Xiaomi's cars can relatively leisurely create differentiation based on the ecosystem and channels established by mobile phones. Therefore, the cost-effectiveness strategy of Xiaomi's cars does not emphasize low prices but comprehensively considers market positioning, cost control, technological innovation, and brand. However, these positive factors do not mean that Xiaomi's cars are already safe. The competition in China's car market is fierce, and a car company that leads this year may be on the brink of collapse next year, a situation that has occurred repeatedly.
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