What is the gross profit margin of the automotive sector? How is overseas revenue achieving significant growth? What progress has been made in AI? Learn about Xiaomi's conference call in one article

On May 23, Xiaomi announced its first-quarter financial report, with a revenue of 75.51 billion yuan, a year-on-year increase of 27%. The smartphone business continued to recover, with adjusted net profit doubling year-on-year.

At the press conference following the financial report release, regarding the highly anticipated automotive business, Xiaomi stated that the gross profit margin of electric vehicles is approximately between 5% to 10%, and it is expected to separately disclose the revenue and gross profit of the automotive business starting from the second quarter.

In terms of AI, Xiaomi mentioned that in the field of AI large models, they focus on edge AI models and collaborate with general large model companies to introduce AI-based features and applications. However, they believe that AI smartphones are more of a packaging of AI functions, rather than a new category, and may not have a significant promoting effect on the overall smartphone market.

The following is a transcript of the analyst Q&A session during the conference call:

Question 1: How do the automotive and smartphone businesses empower each other in terms of integrated ecosystem synergy between humans and vehicles?

On one hand, there is synergy at the product, technology, and supply chain levels. Xiaomi combines its experience, technology, and supply chain advantages in the consumer electronics field with the automotive business to achieve synergy.

On the other hand, there is user expansion. Xiaomi's electric vehicles have attracted iPhone users (51.9%), BBA users (29%), and a large number of female users (40%-50%), demonstrating Xiaomi's attractiveness to new user groups that may not have been reached in breaking the circle with smartphones before, which the SU7 has achieved.

Thirdly, there is ecosystem user stickiness: Xiaomi's ecosystem closed-loop strategy will enhance user stickiness, increase the cost for users to leave the Xiaomi ecosystem, compared to the stickiness of iOS and Android users.

Question 2: How does the increase in component prices affect smartphone gross profit margin? What cost reduction and efficiency enhancement measures will the company take to maintain the gross profit margin?

The increase in core components actually started from the third quarter and saw a significant increase in the fourth quarter. Faced with rising raw material costs, Xiaomi first increases strategic reserves, strategically reserves core components such as memory by accurately predicting price fluctuations to cope with cost increases.

Secondly, there is economies of scale: Xiaomi is narrowing the scale gap with competitors like Apple and Samsung, using economies of scale to reduce costs and increase gross profit margins.

The third point is to optimize product structure through high-endization to cope with cost increases and improve gross profit margins. The fourth point is that the increase in IoT product gross profit margin helps offset the potential decline in smartphone gross profit margin.

Question 3: Future new retail expansion plans?

In terms of new retail, Xiaomi plans to further expand over the next three years. They plan to add 10,000 new stores in China between 2024 and 2026, bringing the total number of stores to 20,000. Secondly, they will upgrade stores to improve quality, including better locations and larger areas to meet the demands of high-end and large appliances development.

Regarding automotive retail construction, they plan to add car showrooms in over 50 cities to reduce the inconvenience for users to experience Xiaomi cars. Lastly, there is overseas market expansion: Xiaomi Home will transform to meet the requirements of new retail and plans to open 10,000 Xiaomi Home stores in overseas markets within five years In addition, Xiaomi believes that the logic and practices of new retail can be replicated overseas, and its replicated market has universality even if the per capita GDP reaches $50,000 and the per capita allocation reaches two to three thousand dollars.

Question 4: What is the reason for the 40% year-on-year growth in overseas revenue?

The growth in the number of users is the main driver of revenue growth, with overseas users increasing by 50 million to nearly 500 million, and monetization capabilities have also correspondingly improved.

There are three driving forces behind the improvement in monetization capabilities. One is the growth in pre-installed revenue as new customers join the platform; the second is revenue from performance and search advertising; and the third is structural impact, with an increase in the proportion of high-end users and the upgrading of partners, promoting revenue growth.

Question 5: Sustainability of IoT gross margin and overseas expansion plans

The increase in IoT gross margin is due to Xiaomi's leading industrial capabilities strategy. Xiaomi has proposed an industry-leading strategy to optimize the IoT business through self-research and enhanced industrial capabilities, and the operational effects released by this strategy are just the beginning.

In terms of gross margin sustainability, Xiaomi does not have a unified gross margin target but formulates it based on the market situation of each category and evaluates it by benchmarking against other companies in the same category.

In terms of overseas expansion, attention is paid to product compliance, product-consumer matching, and channel issues. Xiaomi's new retail, Mi Home, Mi.com, and e-commerce platforms are efficient sales channels that help drive overseas growth of IoT products.

Question 6: How to capture more orders on the demand side?

The biggest obstacle to Xiaomi's mobile phone order lock-in volume is the delivery cycle issue. The long delivery cycle of Xiaomi cars (over 30 weeks) is the biggest obstacle for users to place orders. Therefore, Xiaomi's most important task now is to increase output and shorten the delivery cycle.

Currently, Xiaomi's car factory is fully speeding up production capacity and is ready to start double shifts in June to ensure that the monthly deliveries exceed 10,000 vehicles, meeting the demand for early deliveries by users. The expected output will be close to twice the original, and the management's goal is to sprint for 120,000 deliveries for the full year of 2024.

Question 7: Price strategy for the mobile phone business during the 618 period and its impact on sales volume, price, and gross margin?

The 618 promotion activities in 2024 started early, and the market competition was very intense. Xiaomi ranked at the top of the list, and the overall performance met expectations.

At the end of last year, Xiaomi faced challenges from changes in the industry environment, especially the performance of the high-end market for Xiaomi 14. However, the sales of Xiaomi 14 showed a significant increase compared to Xiaomi 13, indicating that Xiaomi was not greatly affected by the competitive environment. Xiaomi's business performance is expected not to be affected by the 618 promotion activities.

Question 8: Reasons for the increase in inventory levels?

Xiaomi conducted strategic stocking to cope with rising raw material prices. The car business went on sale in early April, producing 5,000 Founder's edition vehicles, which increased inventory Next, with the arrival of the air conditioning peak season, Xiaomi has also stocked up in hopes of achieving high sales in the second quarter. In addition, to prepare for the 618 promotion activities, Xiaomi has also made corresponding stocking arrangements.

Question 9: The reasons for the rapid growth in the Middle East region and progress in AI large models?

In terms of overseas market growth, through personnel and strategic adjustments, Xiaomi has strengthened the management of overseas markets and improved execution. Secondly, there have been many strategic adjustments, combining personnel and strategic adjustments, which will accelerate the development of overseas markets.

Although the Middle East region has achieved significant growth, there are still high-potential markets, such as Saudi Arabia where Xiaomi's market share is only in single digits. Xiaomi is confident in increasing this to 20-30%, and achieving 20% in Africa should also be a goal. Overall, the overseas market has great growth potential.

Regarding AI large models, Xiaomi focuses on edge AI models, collaborates with general large model companies, and launches AI-based features and applications. AI in smartphones is more of a packaging of AI functions, rather than a new product category, and it is not expected to have a significant impact on the smartphone market.

The company will focus on the development of edge AI, integrating the best AI models into user experiences through cooperation and investment with different companies. AI applications are not limited to smartphones, but also include scenarios such as intelligent driving in cars, smart homes, and integrating AI technology into smart manufacturing to improve enterprise efficiency.

Question 10: Overseas IoT channel strategy, especially in the North American and Japanese markets?

In terms of channel strategy, Xiaomi adheres to self-operated channels, closely cooperates with e-commerce platforms, and collaborates with social channels. Xiaomi upholds its product principle of providing ultimate cost-effectiveness without sacrificing product competitiveness.

In the Japanese market, the focus is on online channels to avoid the high costs of offline channels and enhance cost-effectiveness.

Xiaomi collaborates with localized e-commerce platforms in each country to cover a wider market. Xiaomi has in-depth cooperation with some large partners, such as the European media market.

Question 11: Gross profit margin target for the electric vehicle business?

The gross profit margin for electric vehicles is approximately between 5% to 10%, and it takes some time for the gross profit margin to materialize, around 4, 5, or 6 months.

Furthermore, the gross profit margin is related to scale, where larger scale may lead to higher gross profit margins. The company has set a target delivery volume for 2024, increasing from 76,000 units to 100,000 units, and possibly up to 120,000 units.

The supply of components will also affect costs and gross profit margins. The company needs to consider the supply of components in the coming years and the compatibility between different models.

The company currently does not have a specific gross profit margin target, which may be related to changes in the future product portfolio rather than the impact of a single product. The plan is to improve the gross profit margin by increasing delivery volumes.

Xiaomi will start separately disclosing the revenue and gross profit of the automotive business in the second quarter to enhance information transparency