In China’s slumping smartphone market, debate swirls over how Xiaomi’s 5 per cent margin pledge is too high 

Honor, the sub-smartphone brand of Huawei, said it was difficult for Chinese tech hardware companies to record a 5 per cent net profit margin

PUBLISHED : Friday, 27 April, 2018, 6:03am
UPDATED : Saturday, 28 April, 2018, 10:06am

Debate is raging on whether smartphone start-up Xiaomi’s pledge to cap its profit margin on hardware at five per cent is too generous amid a record plunge in China shipments in the first quarter.

Zhao Ming, the president of Huawei Technologies sub-smartphone brand Honor, said that was barely a commitment from Xiaomi.

“Among all the [tech] hardware companies in China, are there any of them able to achieve a net profit margin of five per cent?” Zhao said on the sidelines of the Global Mobile Internet Conference in Beijing on Thursday. “It should be extremely rare, given that net profit is a result of eliminating all costs, inputs and contributions.”

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Xiaomi, which has pledged to cap the net profit margin on its hardware business at five per cent from this year, declined to comment on the Honor chieftain’s criticism.

“But we are extremely proud of our unique and highly efficient business model,” the Beijing-based company said.

The debate has erupted in China as cutthroat competition is expected to force smaller players to exit the world’s largest smartphone market.

Analysts said this shake-up will play out this year because consumers in China are waiting longer for more significant upgrades in features before replacing their smartphones, which has contributed to a slowdown in domestic sales.

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China has increasingly become a fight between Huawei, Oppo, Vivo, Xiaomi and Apple according to a report on Thursday by research firm Canalys.

Those four large and deep-pocketed Chinese smartphone suppliers have won a big chunk of the market through aggressive marketing, more attractive handset designs and features, and by offering a wider array of models available in a range of prices to entice both younger and affluent buyers.

That leaves an estimated 200 Chinese smartphone companies to fight for the scraps. Just two years ago, there were as many as 300 of these firms offering inexpensive, knock-off handsets.

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Smartphone shipments in China plunged in the first quarter, falling below 100 million units for the first time since 2013, amid stiff competition between major domestic brands.

The country recorded a 21 per cent drop in shipments to 91 million units in the quarter ended March 31 – its biggest ever annual decline – as sales decreased at eight of the country’s top 10 smartphone brands.

Smartphone shipments for Gionee, Meizu and Samsung Electronics shrank to less than half of their respective numbers in the first quarter last year, according to Canalys.

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It said the top four smartphone suppliers – Huawei, Oppo, Vivo, and Xiaomi – together accounted for more than 73 per cent of total shipments in the country last quarter. 

“While Huawei, Oppo, Vivo and Xiaomi must contend with a shrinking Chinese market, they can take comfort from the fact that it will continue to consolidate, and that their size will help them last longer than other smaller players,” said Canalys research analyst Mo Jia.

Huawei, which includes Honor, grew smartphone shipments by a modest 2 per cent to 21 million units to stay the market leader.

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Second-ranked Oppo and third-place Vivo bore the brunt of the market’s overall decline, with shipments falling by about 10 per cent to 18 million units and 15 million, respectively. 

Xiaomi was the only company to buck the trend, with a 37 per cent increase in shipments to 12 million units, and overtaking Apple to take fourth place.

Sino-Market, the only research firm covering Honor sales, suggested the Huawei sub-smartphone brand also bucked the market’s downward trend with shipments of 14 million units in the first quarter.

Among all the [tech] hardware companies in China, are there any of them able to achieve a net profit margin of five per cent?
Zhao Ming, president at Honor

In light of that strong performance, Zhao said Honor would be pleased if the company could achieve a five per cent net profit margin like Xiaomi.

On Wednesday, Xiaomi’s board passed a resolution to limit the company’s net profit margin on its hardware business at five per cent from this year, as founder Lei Jun sought to ensure that the company’s products remain affordable to the masses. 

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Xiaomi offers more than 300 different products, from smartphones and power banks to smart weighing machines, that are often co-branded with the more than 100 partners the company has invested in. 

Last month, Lei told the South China Morning Post that Xiaomi “must curb the tendency for greed and win absolute trust from consumers”. He said he wanted a margin cap written in the company charter to avoid people “messing with it after 50 years”.