Xiaomi is primed to scale Mount Microchip

A man uses his smartphone next to the Xiaomi brand's store in central Kiev
A man uses his smartphone next to the Xiaomi brand's store in central Kiev, Ukraine February 11, 2020. REUTERS/Valentyn Ogirenko - RC2DYE9G9UVU

HONG KONG, Aug 26 (Reuters Breakingviews) - Xiaomi’s (1810.HK) wiring is nearly ready to include microchips. The $82 billion Chinese company shipped 53 million smartphones in the second quarter, overtaking Apple (AAPL.O) to become the world’s second-largest producer. With greater heft and official support from Beijing, boss Lei Jun should be closer to fulfilling his microchip dreams.

Financial results released on Wednesday underscore how quickly the company has capitalised on the woes of rival Huawei, which has been crippled by U.S. sanctions. Xiaomi, by contrast, is booming. Revenue from the handset division surged 87% in the three months ending June 30 from a year earlier, to $9 billion. Momentum from overseas markets, particularly in Europe where it is now the top-selling brand, has helped Xiaomi gain ground on Samsung Electronics (005930.KS). Lei wants to be the world’s biggest smartphone maker within three years.

To overtake the South Korean giant, Xiaomi will need to increase annual shipments by roughly a fifth, according to Daiwa analysts. Bringing semiconductor production in-house would help. The company mostly relies on Qualcomm (QCOM.O) and others for mobile chipsets, but a global shortage is expected to dock production in the coming months. Moreover, self-developed processors would deliver significant cost and technological advantages. When Apple switched out Intel’s (INTC.O) chips for its own in the MacBook last year, savings were estimated to be more than $2 billion by 2022, per research outfit Trefis.

Lei has been quietly building up Xiaomi’s semiconductor and manufacturing capabilities. The company unveiled its first microprocessor to much fanfare nearly four years ago, an attempt broadly considered to be unsuccessful. Earlier this year, however, it released its own imaging chip. Xiaomi also has stepped up investments into local firms in recent years and increased its allocation to new inventions. As of June, it reported having more than 11,000 staff in R&D, more than 40% of the company’s total headcount.

Beijing also could give Xiaomi a leg up. Amid President Xi Jinping’s broader tech crackdown, he has prioritised semiconductors as a strategic industry and is keen to develop homegrown champions. Government funding, subsidies and tax breaks all would be a big help for the capital-intensive industry. All signs point to Xiaomi’s next significant upgrade being chips.

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- Chinese smartphone maker Xiaomi said on Aug. 25 that revenue for the three months ended June grew 64% year-over-year to 88 billion yuan ($14 billion).

- Adjusted net profit for the period was 6.3 billion yuan, an 87% year-on-year increase.

- Indebted Chinese property developer Evergrande is in discussions with Xiaomi and Shenzhen-backed investment firms as it considers selling part of a 65% stake in its electric vehicle unit, Reuters reported on Aug. 20, citing unnamed sources.

- Xiaomi became the world’s No. 2 smartphone maker in the second quarter surpassing Apple, with 17% share of worldwide smartphone shipments, according to research firm Canalys.

Editing Jeffrey Goldfarb and Katrina Hamlin

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Sharon Lam joined Breakingviews in late 2017, and writes about Asia's consumer goods sector, technology and travel. She previously covered technology and culture at Forbes, and has also worked at Mirae Asset Global Investments and HSBC private bank. Sharon holds bachelor's degrees in international relations and political science from Tufts University, and is currently based in Hong Kong.

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Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.