Booming Chinese smartphone marker Xiaomi will bring in over a billion dollars during its current round of funding, which values the company at around $45 billion, according to a WSJ report.
Xiaomi’s business model is essentially to sell the smartphones themselves at razor-thin margins in order to create a captive market for its mobile commerce offerings. Accordingly they’re priced in the mid-tier, a market Apple doesn’t participate in at all in which isn’t Samsung’s strength, but is where most of the global smartphone growth is these days.
This is the classic internet model; sacrificing profit in the short term in order to grow a user-base, then looking to extract revenue from that user-base further down the line. Right now Xiaomi is the only major smartphone company adopting this as its primary business model but it may well not be the last. Amazon is also trying this approach, but priced its smartphone too high and has consequently sold far fewer than it had hoped.
But this model tends to burn cash somewhat, hence the need for extensive VC funding and eventual IPOs. Xiaomi’s last round of funding valued the company at a mere $10 billion and the rapid growth in its value coincides with its move to third place, behind only Samsung and Apple, among global smartphone vendors.
The vast majority of those sales have come from China, where Xiaomi has a strong brand and localised services. Xiaomi also has international ambitions, going so far as to poach Google’s head of mobile products back in 2013, but a replication of its domestic success is far from guaranteed. An overtly Chinese brand may not translate internationally and Xiaomi will need to invest in localising its products for each new market.
For all these reasons Xiaomi raising a billion bucks is significant. At a time when it’s very difficult to differentiate smartphones on hardware spec or, in the case of Android vendors, software and UX, Xiaomi’s novel business model has real potential. You can bet Xiaomi has got everyone else’s attention and they will be especially keen to see how Xiaomi spends this latest chunk of investment capital.