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Xiaomi says it’ll cap hardware margins at 5%... but does it even make that much now?

Tight competition in China’s smartphone market squeezes profits

This article originally appeared on ABACUS

Xiaomi made headlines for an unusual pledge to limit how much profit it’ll make from its products. A company actively saying it plans to make less money isn't something you see every day. But some say Xiaomi’s promise isn’t quite what it appears.

In an open letter, CEO Lei Jun said Xiaomi’s board agreed to limit the net profit margin from its hardware division to 5% -- and if it exceeded that, it would find a way to return some of that extra money to users.

The company says it’s doing it to provide more value for their customers. But others point out that Xiaomi’s margins are already “well below” 5% -- and achieving that figure is difficult anyway, especially in China’s cutthroat smartphone market.
“If Xiaomi caps it at five percent, I would think it is not lowering its margins to get to that point,” IDC’s Kiranjeet Kaur told the South China Morning Post.

One of Xiaomi’s rivals also spoke to the SCMP -- and they were far more blunt.


“Among all the [tech] hardware companies in China, are there any of them able to achieve a net profit margin of five percent?” said Zhao Ming, president of Huawei sub-brand Honor. “If Honor was able to achieve that, we would be very pleased.”

China’s smartphone market is increasingly dominated by just five brands -- Huawei, Oppo, Vivo, Xiaomi and Apple -- leaving the rest fighting in the face of slumping demand.
Counterpoint Research says Huawei makes US$15 profit per unit, while Xiaomi’s margin is “very thin” at just US$2. (Apple makes US$151.)

And one analyst from the firm pointed at the reason Xiaomi is boasting about their new plan.

“It’s aimed at pleasing its users,” said James Yan from Counterpoint Research. “Xiaomi wants to tell users that they don’t make money or make only very little money.”

For more insights into China tech, sign up for our tech newsletters, subscribe to our Inside China Tech podcast, and download the comprehensive 2019 China Internet Report. Also roam China Tech City, an award-winning interactive digital map at our sister site Abacus.