(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By John Foley
BEIJING, Aug 30 (Reuters Breakingviews) - Xiaomi has poached one of Google’s (GOOG.O) top executives – but can it steal Silicon Valley’s tech crown? The Chinese smartphone maker already outsold Apple’s (AAPL.O) iPhone in the Chinese market in the second quarter of 2013. Its valuation has ballooned from $4 billion to $10 billion in a year, based on a recent capital increase. Hiring former Googler Hugo Barra will fuel the hype; Xiaomi shouldn’t waste it.
Xiaomi’s business model is part hardware, part software and part social networking. Xiaomi’s Android-based operating system is updated every week, making it a hit with tech nerds. Service and clubbiness are its other strengths. Users can ask for help via microblog Weibo and get a reply in minutes. A dose of scarcity marketing adds secret sauce: the low-cost Hongmi model sold out within 90 seconds of its recent launch.
The company, whose name means “small rice”, hasn’t released details of its latest funding round, but the $10 billion valuation isn’t too demanding. Xiaomi aims to sell 20 million handsets in 2013, almost three times as many as last year. Assuming an average price of $250, that’s $5 billion of revenue. After applying the company’s net margin of roughly ten percent, the new valuation is a pretty un-racy 20 times earnings.
What’s missing is a “moat” to protect Xiaomi’s share of the viciously competitive smartphone market. Its operating system has won over around 20 million near-fanatical users, but companies with bigger budgets, from Baidu (BIDU.O) and Alibaba to Huawei, are also targeting users’ small screens. Xiaomi has so far relied more on charming customers than locking them in, as Apple did with its closed ecosystem, or as Blackberry did by targeting large-scale corporate email users.
Hot tech upstarts have waxed and waned in other markets. For Xiaomi, the biggest challenge may be expanding its user base while retaining the core fans. So far the focus on service and schmoozing consumers, rather than relying on hardware, suggests the hype is deserved. Raiding Google is a coup. But it will take something stickier to turn Xiaomi into China’s Apple rather than its Palm Inc.
- Xiaomi, a privately owned Chinese smartphone and software maker, hired former Google executive Hugo Barra as vice president of its international division. Barra had worked for three years on Google’s Android operating system, and joined the U.S. search engine operator in 2008. He is Xiaomi’s first non-Chinese executive, according to a person familiar with the situation.
- Xiaomi recently completed a capital raising that valued the three-year-old company at $10 billion, its chief executive Lei Jun confirmed via his Sina Weibo microblog account on Aug. 22. In June 2012, the company’s estimated valuation was $4 billion, Lei had previously said. Investors include venture capital funds Qiming and Digital Sky Technologies, and Singaporean state wealth fund Temasek.
- Xiaomi recently raised its sales target to 20 million handsets for 2013, an increase on its previous target of 15 million. In the second quarter of the year it sold 4.4 million handsets, beating Apple in China, according to data provider Canalys. An initial launch of a new low-cost model called Hongmi, retailing at 799 yuan ($130) per unit, sold out in 90 seconds.
- Reuters: China’s Xiaomi poaches Google’s Barra to power global drive [ID:nL2N0GU11E]
- For previous columns by the author, Reuters customers can click on [FOLEY/]
(Editing by Peter Thal Larsen and Katrina Hamlin)
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