Article / 24 December 2014 at 6:58 GMT

Xiaomi's smart-home concept a smart move for growth

China Watcher / Shanghai
China
  • Smartphone manufacturer Xiaomi is attracting keen interest from investors
  • It is expanding its ecosystem to build a smart home concept  
  • There is huge potential in this market as no other firm in China is able to compete

By Neil Flynn

As Christmas and New Year are upon us, and the markets look to end the year in a comatose state of low liquidity and volatility, investors begin to reflect on the year about to pass, and the year about to commence. Since April, investors were eagerly anticipating the IPO of Jack Ma’s behemoth Alibaba, but as interest in Chinese firms grew throughout the year, investors began to notice another technology firm that is only set to grow in 2015.

More than just smartphones

Outside of China, Xiaomi is mostly known as a smartphone manufacturer, and offers the Xiaomi 3 and 4 phones, as well as the budget Redmi 1S and Note. The Xiaomi range has a very similar interface to the iPhone, despite using an Android operating system, but in terms of price, the most expensive Xiaomi 4 costs RMB 2299 ($369), while the budget Redmi starts at RMB 599 ($96). 

With the cheapest iPhone 6 costing RMB 5288 ($849), Xiaomi offers a much more cost-effective option to customers wanting to buy a smartphone. In addition to a range of smartphones, Xiaomi has a 7.9-inch screen tablet device called the MiPad, costing RMB 1299 ($209) for the 16GB version and the 64GB version costing RMB 1699 ($273), which is half the price of the equivalent iPad Mini in China.

Xiaomi TV
Xiaomi has used the visual technology from its smartphones and tablets to build its ecosystem as it targets the smart home market. Photo: Xiaomi 

However, Xiaomi is more than a smartphone manufacturer; it is designing products for the home, and this makes it a fascinating company. The firm has used the visual technology from its smartphones and tablets to build a very sleek 49-inch TV with surround sound system for RMB 3999 ($642). 

The TV system has a large library of HD movies and TV series, as well as games and 3D content. For consumers that don’t have the Xiaomi TV, they can still have access to this content by purchasing the Xiaomi Box for RMB 299 ($48). 

I have spoken before about how tech firms are expanding their ecosystem through TV services. By offering libraries of TV and film content, firms can boost advertising revenues, which is why tech firms have been eager to acquire the rights to media content, and they can also direct users to their other services. 

Alibaba is one of the leaders in this market, and released its new Tmall Box 2 during Single’s Day. The TV box’s operating system has many access points to Alibaba’s shopping channels, so that users can shop through their TV. Xiaomi has invested in the video platform Youku-Tudou, which also counts Alibaba as an investor, and this will likely become the default video provider for Xiaomi’s mobile video app.

Building the ecosystem

In its latest funding round, Xiaomi raised $1 billion, taking the firm’s valuation to $45 billion. I don’t expect that Xiaomi will target the North American market in the near term due to potential intellectual property disputes with Apple, and the firm has also been essentially shut out in India, which means that it will likely challenge the dominance of Apple, Samsung and HTC in China and South East Asia. 

I believe that the key to Xiaomi building a dominant ecosystem is to expand its home appliances business. It has recently purchased a stake in Midea, the Chinese home appliances firm, and Xiaomi is set to launch a range of air filtration and heater products for the home. 

The ultimate goal of this product launch will be for a user to be able to control all aspects of the home through a smartphone. This concept of the "smart home" has been mooted for years, and there is huge potential for Xiaomi in this market because no other firm in China is able to compete. Both Alibaba and Qihoo are working with domestic smartphone manufacturers to build their user base through default software, but with Xiaomi, they would be able to control and monetise every vertical of the smart home concept.

Evolution or revolution?

Before investors get too excited about the firm, there is a major issue that I touched on above. Xiaomi has built its business on copying the designs of high-end western brands, which it can sell for much cheaper in China. Within the coming year, Xiaomi wouldn’t be able to market its phones or tablets in the west because of the intellectual property lawsuits that Apple would file. Likewise, its air filter and heater products would face similar claims from a variety of firms, including Dyson.

With the impressive growth of market value and reputation that the company has enjoyed in 2014, Xiaomi needs to develop products that it can market across the world. The partnership with Midea will help to correct this issue with home appliances, but the key to the firm’s overseas expansion is the smartphone, simply because it is half the price of the Apple and Samsung equivalent. 

Once the firm can build a substantial smartphone user base overseas, it can build its ecosystem with the TVs and home appliances. However, the intellectual property issues must be corrected for the firm to realise its full potential and rival the tech giants outside of China.

– Edited by Gayle Bryant

Neil Flynn is head equity analyst at Chinese Investors. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform
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