Lei Jun: I don’t want to be left behind, I hate brand premium the most

Why does Xiaomi want to build cars? How can it stand out from the crowd in the industry? Let’s take a look at the author’s analysis.

Why is Xiaomi making cars?

From the perspective of traditional car manufacturing, Xiaomi's car manufacturing is just throwing money at it without any chance of success.

But, if we change our perspective, we may understand the logic behind why Lei Jun wants to build a car.

The future is dominated by new energy and digital ecology. New energy and digital ecology intersect in one product: new energy vehicles.

Why not a fuel car?

Because traditional fuel vehicles have no inherent advantages in the digital ecosystem. The engine control accuracy of fuel vehicles cannot be compared with that of new energy vehicles, and its reaction time cannot be compared with that of new energy vehicles. The popularity of automated driving in new energy vehicles is much higher than that of traditional fuel vehicles.

Once we understand this logic, we can see clearly the direction of Xiaomi's car manufacturing.

Three years ago, Lei Jun announced that Xiaomi would enter the electric vehicle market, saying he was willing to bet his "entire record and reputation". This statement attracted great attention from the capital market and a number of media to Xiaomi's car manufacturing.

Tonight, the three-year deadline has expired, and Xiaomi Auto has plunged into the eye of the storm of new energy vehicles.

At the press conference held tonight, Lei Jun announced the detailed parameters, product highlights and sales price of Xiaomi Auto SU7.

In terms of price, the three versions of SU7 are priced between 215,900 yuan and 299,900 yuan. In this price range, there are hot-selling models of new energy vehicle companies such as Tesla, Wei, Xiaoli, and BYD, Great Wall, BAIC, and GAC, and there are also pure electric models of established car companies, so the competition is very fierce.

In fact, after entering 2024, the entire automotive industry has become more involuted, and price reduction has become an eternal topic. In March, BYD, Xiaopeng, and Aion announced price cuts for their models, and even the industry's newcomer AITO Wenjie joined in, with the highest discount for Wenjie M5 reaching 57,000 yuan. Some netizens joked that "Xiaomi Auto has not even been on the table yet, but its peers have already started to overturn the table."

With slogans being shouted out and product prices being reduced one after another, can Xiaomi SU7, which is catching up with the "hand-to-hand combat" of new energy vehicles, stand out from countless competitors?

The second time, can you stand out from the countless competitors?

1. Why does Xiaomi want to build a car?

Industry insiders said that Xiaomi's car manufacturing is not only to seize the opportunity of industry development, but also an important strategic decision for Xiaomi to further improve its AIoT intelligent scene layout. Therefore, a deep understanding and analysis of the strategy, products and business layout of Xiaomi, a global IoT giant, in the field of smart cars will help us better understand the reasons for its car manufacturing.

Note: Pictures from the press conference

First, smartphone shipments have been declining year by year, and the ceiling for Xiaomi phones is visible.

Since the launch of smartphones, global mobile phone shipments have grown rapidly from 2008 to 2016, increasing from 150 million units to 1.47 billion units, with a CAGR of 33%.

However, shipments have basically been in negative growth since 2017. Despite the 5G replacement wave in the past two years, IDC predicts that global mobile phone shipments will only be 1.5 billion units in 2025, with a CAGR of only 3.7%. The overall growth momentum of the smartphone market is insufficient and the incremental space is limited.

According to domestic data, Xiaomi's mobile phone market share peaked at 16% in 2015 and then began to decline, and has basically remained below 15% since 2021.

The latest report released by Canalys shows that in 2023, Apple won the first place in the annual shipment in the Chinese mainland market for the first time, and its annual market share increased to 19%. Xiaomi maintained its fifth place in the market with a market share of 13%.

Xiaomi's 2023 financial report released a week ago showed that among the three core business segments, the smartphone division's revenue decreased by 5.8% from 167.2 billion yuan in the same period last year to 157.5 billion yuan, a decrease of nearly 10 billion yuan. The average price of mobile phone shipments in the fourth quarter was 1,092 yuan, a year-on-year decrease of 2.6%.

The traditional car market is about five times the size of the smartphone market.

According to the latest data from Canalys, global smartphone shipments will reach 1.14 billion units in 2023, with a total market value of approximately US$410 billion. QYResearch research shows that global passenger car sales will reach 88.9 million units in 2023. Based on an average price of 200,000 yuan (approximately US$27,800) per car, the global passenger car market alone will reach approximately US$2.47 trillion.

Compared with the $400 billion smartphone market, the automotive market has greater strategic prospects for Xiaomi.

Secondly, now is the best time for Xiaomi to enter the car manufacturing industry.

With the continuous promotion of the domestic "double points" policy and industrial development, the penetration rate of new energy vehicles in my country has increased rapidly. Data shows that the penetration rate of new energy vehicle production reached 20.62% in August 2021, breaking 20% ​​for the first time.

The industry generally believes that 20% is a very important indicator. On the one hand, the education and popularization of the market has been basically completed, and on the other hand, the supply chain has begun to stabilize. Referring to the history of smartphone development, in 2010, the penetration rate of smartphones exceeded 20% to 22%, and the terminal market began to enter a reshuffle stage.

According to the latest data, "China's New Energy Vehicle User Demand and Product Insights in 2024" points out that the penetration rate of new energy vehicles will reach 36% in 2023. The plug-in and extended-range hybrid market segments are constantly expanding, and the market share has risen to 33% in 2023.

In other words, the market has entered a reshuffle phase. In the company's 2024 letter to all employees, He Xiaopeng, chairman of Xpeng Motors, mentioned that "2024 is the first year for Chinese auto brands to enter a fierce competition, and the first year of the elimination round." In addition to Xpeng, Geely also pointed out in an open letter that automakers in 2024 will face more intense competition. In early March, Yin Tongyue, secretary of the Party Committee and chairman of Chery Holding Group, talked about the competition in the auto market this year. In his opinion, the current auto market is no longer just an "elimination round", but has entered a "speed race of life and death."

Earlier, Li Xiang, CEO of Ideal Auto, and Richard Yu, Chairman of Huawei Intelligent Automotive Solutions BU, also predicted that the competition in the intelligent electric vehicle market will be fierce, and only five companies may be left to occupy the main market share. In this regard, Richard Yu also set a time for the industry's "reshuffle", "By 2030, there will be no more than five major players in the Chinese auto market."

Xiaomi Auto chose to enter the market now, which seems to be a move to "stir up troubled times".

Note: Pictures from the press conference

Finally, Xiaomi has successful experience in industrial chain integration.

Previously, Lei Jun and Xiaomi-related capital had greatly expanded the SKUs of the Xiaomi system through investment and integration. Now when consumers walk into Xiaomi offline stores, they can clearly find that in addition to mobile phones and computers, the products sold in Xiaomi stores also include smart wearables, smart home devices, and even "big items" such as TVs, refrigerators, and washing machines.

A person close to Xiaomi revealed that the "Xiaomi Youpin" store has more than 2,700 SKUs, with a wide range of products, covering 15 categories including home furnishing, travel, electronics, entertainment, clothing, sports and personal care. Most of them are Xiaomi, Mijia and ecological chain related products.

The strong ability to integrate the industrial chain not only helped Xiaomi increase its store sales, but also allowed investors to see its ability to create market demand.

In the field of new energy vehicles, Xiaomi has joined hands with listed companies in the upstream of the industry chain, such as Aolian Electronics, Sanfeng Intelligent, Sanhua Intelligent Control, and Zhiyun Shares, in the process of promoting car manufacturing. Lei Jun's capital has also invested in many related companies. At the power level, Xiaomi is behind AVIC Lithium Battery, Honeycomb Energy, Ganfeng Lithium Battery, etc.; at the autonomous driving perception level, Xiaomi has invested in Hesai Technology, Zongmu Technology, etc.; and at the decision-making level, it has increased its investment in autonomous driving solutions and wholly owned Shenzhen Motion Technology.

By making cars, Xiaomi can further integrate industry chain resources and achieve coordinated development of upstream and downstream industries. This can not only reduce costs and improve production efficiency, but also lay a solid foundation for Xiaomi's long-term development.

2. The real purpose is not the car

According to the plan, after the first Xiaomi car is launched and delivered this year, the annual sales target is to reach 100,000 units and enter the first camp in the industry. In the next three years, the cumulative delivery volume of Xiaomi Auto will reach 900,000 units.

But based on the experience of previous peers, it is not easy to deliver 100,000 vehicles in the first year.

Take the listed NIO, Xiaoli, and Tesla as examples. These automakers failed to achieve their goal of delivering 100,000 vehicles in the first year or even in the first two years. NIO’s sales in the first two years were 32,946, 43,649, and 4,728 respectively. Tesla’s sales in the first two years after entering the Chinese market were only 10,500.

Figure: Press conference site

But there is also a view that the core purpose of Xiaomi’s car manufacturing is not to “sell cars” but for data.

At the 2022 World Intelligent Connected Vehicle Conference, a company shouted the slogan "The value of car data is comparable to lithium ore". Cheng Peng, CEO of NavInfo, also said, "Data has become a new type of fuel, and it has the same high value as lithium ore." He believes that if companies want to win the intelligent connected vehicle race, which the industry calls the "second half" of the competition, the core of the competition is the dynamic amount of data and the ability to process and apply data.

In fact, Xiaomi Motors' ambition for data has long been revealed. In December 2023, Xiaomi Motors applied for a patent titled "Data Collection Method, Device, Controller, Vehicle, Storage Medium and Chip", with the announcement number CN117194741A. In February this year, Xiaomi Motors obtained another patent titled "Data Fusion Method, Device, Vehicle and Storage Medium", with the announcement number CN116363615B.

At this year's two sessions, Lei Jun, as a deputy to the National People's Congress, submitted a proposal on building a sound automotive data security management system. He pointed out that data between car companies has not yet been effectively and securely circulated, data islands are common, and the value of data cannot be fully utilized. He suggested that, under the premise of ensuring data security, an automotive data sharing mechanism and platform should be established to enable data between car companies to circulate and transform data into social productivity.

From a market perspective, high-level intelligent driving is inseparable from powerful AI algorithms, and in order to achieve high-quality AI-assisted driving, it is necessary to "feed" a large amount of data. This is the fundamental reason why "the value of data is comparable to lithium mines."

If car companies provide good technical experience, they can attract consumers to place orders to a large extent. Wenjie is a typical case. Data shows that Wenjie's delivery volume in the first quarter of 2023 is even less than its sales volume in one month of 2022.

However, with the launch of Huawei's high-end intelligent driving ADS2.0, the sales of the new M7 intelligent driving version have been rising. During the National Day holiday in 2023, the order data of M7 reached an astonishing 120,000 vehicles. After that, M7 began to deliver new cars crazily, with 12,000 vehicles delivered in October, 17,000 vehicles in November, and an astonishing 25,500 vehicles in December. According to the latest statistics, the wholesale sales of M7 in January and February this year were 51,100 vehicles, a year-on-year increase of 15 times.

In summary, what Xiaomi sells is not the car itself, but a brand-new mobile data platform. As the scale of this platform gradually expands, it will become a mobile "data miner" in the data economy era.

Finally, by integrating data to form a complete industrial chain of resource, asset and capitalization, Xiaomi's valuation will also increase significantly.

3. How to break out of the siege?

Since the beginning of 2024, on the one hand, BYD, Xiaopeng and others have taken the lead in launching a wave of price cuts, while on the other hand, HiPhi Auto has suspended production and Feifan Auto has been caught up in rumors of layoffs.

When the entire market has entered the elimination stage, Xiaomi has just launched its first car, which seems a bit late.

Fortunately, Xiaomi Auto has 20 million users of Xiaomi's high-end flagship phones. This large and loyal customer base is expected to become a strong support for Xiaomi's advancement into the high-end automobile market.

Yuehu data shows that the user profile of Xiaomi high-end mobile phones (taking Xiaomi 13 Ultra as an example) is mainly male, a middle- and high-income consumer group with a certain level of education, and has a high preference for smart AI. This group has certain similarities with the user group of 200,000-300,000 yuan cars. At the same time, the popularity of the Xiaomi brand may bring a certain endorsement to the car, which is conducive to Xiaomi Automobile's early market development.

Image source: Yuehu Data

But in the long run, it depends on Xiaomi Auto's continuous iteration and evolution of technical capabilities, the continuity and stability of R&D investment, and the cost control and comprehensive product competitiveness brought about by the industrial chain layout. These factors will jointly determine Xiaomi Auto's competitive position in the market and its future development potential.

Two weeks ago, Lei Jun wrote on Weibo, "The number of people who made reservations for Xiaomi SU7 to visit the store increased by more than 100,000 in one day."

As a big V with 23 million fans, this high-profile "Versailles" may be a double-edged sword for Xiaomi Auto. On the good side, it can help the company promote at low cost, but on the other hand, it may also become the starting point for reversing public opinion. A typical example is that when Lu Weibing said that Xiaomi Auto was "a bit expensive" and Lei Jun also said "not too cheap", the voices on the Internet began to polarize.

What's more serious is that the loss-making sales of various car companies are intensifying. The new round of eliminations tests not only the "ability to make money" but also the "ability to lose money." According to Weilai's financial report, the company will have a net loss of 20.7 billion yuan in 2023, which is equivalent to a loss of nearly 130,000 yuan for each car sold. Similarly, Xiaopeng Motors' losses in 2023 also expanded to nearly 10.4 billion yuan, and the gross profit margin of the whole vehicle fell to -1.6%. Earlier, BAIC Blue Valley said in its performance forecast that the company expects a net loss of 5.2 billion to 5.7 billion yuan in 2023. This is the fourth consecutive year that the company has lost more than 5 billion yuan.

Image source: Video account @Lei Jun

One detail is that at the press conference, Lei Jun quoted comments from many automotive media to support the handling experience and driving pleasure of SU7. He also quoted some parameters of Model 3 to highlight the superiority of SU7. However, judging from the comments section of the live broadcast platform, the issues that fans are worried about are still the same old three: "battery life, durability, and value retention."

However, Lei Jun did not seem to focus his speech on the above three points. Instead, he spent a lot of time explaining the Xiaomi Auto "family bucket", which includes audio, ambient lighting, dual dials, and even parasols, mobile phone holders and tablet holders, as if the previous "Xiaomi Store" had been moved to the car.

A fan left a message in the comment section of the live broadcast room, saying, "Now car companies are relying on price cuts to boost sales, but they can't make much money in the end by exchanging price for volume. Xiaomi's idea is quite clever, moving the grocery store into the car. I don't know if it can make money by selling cars, but it can definitely make money by selling groceries."

For Xiaomi Auto, faced with the increasingly fierce price war in the industry and the fact that many of its "predecessors" are making losses, how to stand out in the increasingly fierce competition, how to continue to innovate in response to user needs and technological changes, and how to find a balance between cost control and economic benefits will all be key issues affecting the company's future development direction.

Author: Mo Ma Tang Fei, Editor: Weber

Source: ValuePlanet (ID: ValuePlanet)