Greed is not good at Xiaomi, as founder caps profit margin on its hardware business at 5 per cent
Xiaomi promises users that it will not earn more than five per cent margin on its hardware products, which range from smartphones to air purifiers
Xiaomi, one of China’s most valuable private companies, pledged to cap its net profit margin on its hardware business at five per cent starting this year, as part of a move by founder Lei Jun to ensure that its products remain affordable to the masses.
The Beijing-based company’s board passed a resolution to limit the margin and to distribute any excess amount “by reasonable means” to its users, according to a statement. The company offers more than 300 different products from smartphones to power banks to smart weighing machines, often co-branded with the more than 100 partners that Xiaomi invested in.
“From the beginning, we embarked on a relentless pursuit of innovation, quality, design, user experience and efficiency advances, to provide the best technology products and services at accessible prices,” Lei said in the statement. “We hope that our products and services will help our users to achieve a better life. We have always viewed our hardware as the gateway to providing our users with internet services, and providing value to them over time.”
Up to 70 per cent of Xiaomi’s sales came from seven models of smartphones, 20 per cent from scores of household and appliance products made with partners, and an estimated 10 per cent from internet services.
Xiaomi’s move to publicly announce a cap on profit margin is rare among smartphone makers. By comparison, Apple’s iPhone X smartphone earns a gross margin of 64 percent, according to TechInsights, a firm that takes apart devices to analyze their components. A 5 per cent net margin puts Xiaomi’s hardware business in line with the automobile manufacturing industry.
“It is quite unusual for a hardware company to make a commitment like that, and it is probably to appeal to its customers,” said Kiranjeet Kaur, a senior research manager at IDC. “It has always been Xiaomi’s message to its customers that they try to keep the overhead low so the products are affordable for the category that it plays in.”
Kaur said not many smartphone makers are currently making a lot of profit, “so if Xiaomi caps it at five per cent, I would think it is not lowering its margins to get to that point”.
