Author | Zhou Zhiyu

Editor | Zhang Xiaoling

Since Lei Jun announced the car manufacturing three years ago, the market has been constantly questioning. With the release of Xiaomi's second-quarter financial report, selling a car at a loss of 0.06 million surged to the hot search.

According to Xiaomi's interim report, Xiaomi's car incurred a net loss of 1.8 billion in the second quarter, with an average loss of over 0.06 million per car, but its sales volume is astonishing, with a gross profit margin of 15.4%, far higher than other new energy vehicle companies, which has reassured some investors.

On August 22, Xiaomi's car stock price soared by 9%, with the share price rising to 19.1 Hong Kong dollars per share, and the market value surged by over 39 billion Hong Kong dollars in a single day.

However, Lei Jun still cannot afford to be complacent. Whether Xiaomi will reach the critical threshold of 0.3 million cars next year is still an unknown.

Moreover, with Huawei's return, the competition in the smartphone market is becoming increasingly fierce. Additionally, the new energy vehicle market is already saturated. Whether Xiaomi can continue to operate on multiple fronts is also a huge challenge for Lei Jun in the future.

Developing new models, expanding scale, and exploring and implementing applications in the AI field, there are still many things Lei Jun needs to do in the future.

Lei Jun said that building cars is difficult, but success is definitely cool.

This "billionaire" entrepreneurial star also needs to work harder to lead Xiaomi to new heights in the AI era.

Breakthrough

This second-quarter report of Xiaomi has attracted a lot of attention from investors because it is the first time that Xiaomi has disclosed specific data from its automotive business, including smart electric vehicles and other innovative businesses.

Among them, Xiaomi SU7 sold over 0.027 million units in the second quarter, and the market estimated that Xiaomi's automotive business revenue reached a level of 6.2 billion, which is not far from the final financial report of 6.24 billion yuan.

What is particularly encouraging for investors is that Xiaomi's automotive and innovative businesses achieved a gross margin of 15.4% in the second quarter, far exceeding the market's expectation of 4.7%. With an average bicycle price of 0.229 million yuan, lower than the price of competitor Xiaopeng Motors' bicycles, Xiaomi's automotive business achieved a gross margin second only to Ideal. This is a remarkable achievement for a newcomer in the car manufacturing industry.

This also means that even leading car manufacturers such as Tesla are troubled by declining gross margin due to price wars. Xiaomi's entry into the automotive industry has performed well.

Of course, Xiaomi's automotive sector is still in a high investment period. After considering marketing expenses, depreciation of factory equipment, and research and development costs, Xiaomi's automotive sector had an adjusted net loss of 1.8 billion yuan in the second quarter, which simply means a loss of 0.066 million yuan per car sold. However, with the scale reaching a new level, the losses are expected to narrow.

Xiaomi's unexpectedly high gross margin comes from suppliers offering favorable terms to Xiaomi and the rapid initial production. Xiaomi Group's President, Lu Weibing, revealed that suppliers have provided great support to Xiaomi and offered favorable business conditions. In addition, the economies of scale brought by Xiaomi's SU7 product and the accumulative management capabilities in industries such as smartphones have allowed Xiaomi Automotive to benefit from management dividends.

At present, Xiaomi Automotive's monthly delivery volume has reached around 0.01 million vehicles, and this year, it is expected to achieve monthly deliveries of 0.015 million vehicles or even 0.02 million vehicles. This provides Xiaomi Automotive with further room for improvement in gross margin.

Lu Weibing emphasized during the earnings conference that Xiaomi Automotive's gross margin improvement is certain. Many rights were given away with second-quarter orders, but they are decreasing in subsequent quarters. Additionally, the peak period for bill of materials (BOM) has passed, and the decrease in the overall cost of the supply chain and the industry provides favorable conditions for Xiaomi Automotive's gross margin to increase in the third and fourth quarters of this year.

Although Xiaomi's automotive business is burning through money, Lei Jun has shown great restraint. In addition, traditional businesses such as smartphones and AIoT are gradually recovering from a slump and even experiencing growth.

The financial report shows that Xiaomi's revenue in the second quarter increased by 32% year-on-year, reaching 88.9 billion yuan, surpassing the market's expectation of 86.8 billion yuan. It is also the highest revenue quarter since its listing. The adjusted net income was 6.2 billion yuan, a year-on-year increase of 20.1%.

In terms of revenue indicators, steady growth in smartphone shipments and growth in IoT businesses, including home appliances and wearable products, are the main factors contributing to Xiaomi's significant revenue increase.

In the second quarter, Xiaomi's smartphone business revenue increased by 27.1% year-on-year to 46.5 billion yuan. Xiaomi's IoT business achieved revenue of 26.8 billion yuan, a year-on-year increase of 20.2%, including tablet business, smart home appliance business, and wearable product revenue, all of which saw significant growth year-on-year.

Even so, Xiaomi's cash reserves at the end of June this year reached a level of 141 billion yuan, further increasing from the 127.3 billion yuan at the end of March, ranking second only to SAIC Motor Corporation among domestic automakers. The abundant financial resources allow Lei Jun, who once worried that building cars would be costly, to continue to invest in the automotive business.

At the earnings conference, Lu Weibing also admitted that the mobile phone market is a mature market, a stock market, and Xiaomi does not have any special tricks, only the solid implementation of its strategy.

Technological breakthroughs and continuous high-end development are crucial for Xiaomi. It not only needs to have no shortcomings in its products, but also needs to have its own competitive characteristics. In the stock market, the only way to achieve growth is to take away others' market share.

Lu Weibing pointed out that the development momentum of the mobile phone and IoT businesses is good, and they will continue to maintain good growth in the third and fourth quarters. He also revealed that Xiaomi will continue to focus on the high-end market and aim at the market segment above 0.01 million yuan by 2025.

Lei Jun, who sees building cars as his final battle in life, has achieved initial success.

This serial entrepreneur, who has taken Kingsoft and Xiaomi to the stock market, has had his setbacks. He founded Joyo.com early on but had to sell it to Amazon due to the capital winter, and in less than half a year, the new wave of the Internet arrived during the BAT era.

When promoting the listing of Xiaomi, Lei Jun has always been telling a story of "Internet + Hardware", but the revenue from Internet services still accounts for less than 9.3% of the overall revenue.

In the past few years, Xiaomi's stock price has been hovering at a low level. Even after the rise on August 22, it only reached HKD 19.1 per share, with a total market cap of approximately HKD 475.999 billion. It still ranks behind internet giants such as Tencent, PDD, Alibaba, Meituan, and Netease.

Building cars has become a crucial battle for Lei Jun to turn the tide. After missing the PC internet era and then entering the mobile internet era, Lei Jun hopes to use car manufacturing to achieve a "people-car-home" ecosystem and help him make a beautiful comeback in the AI era.

It can be seen that after the disclosure of the listing date of Xiaomi SU7 on March 12 this year, Xiaomi's stock price has experienced a significant increase, and investors in the market are calculating how to price Xiaomi.

According to analysis by foreign institutional analysts to Wall Street News, the current market valuation of Xiaomi's new energy car business is mainly based on the P/S ratio and has not yet entered the period of considering profitability. This means that while the mobile phone and other businesses are steadily growing, the growth of the car business is the key to determining Xiaomi's valuation in the future.

Lu Weibing also admitted at the earnings conference that Xiaomi's focus in the automotive sector is on scale growth.

Only with sustained growth, using larger scale to drive continuous cost reduction, and becoming one of the "global top five," can Lei Jun truly prove the success of his car manufacturing venture to the market.

This is not an easy battle. In the short term, over the next three years, Xiaomi will still be in a phase of increasing production capacity, whether it is the construction of the Phase 2 factory or the development of new car models, which will put Xiaomi in a high-intensity R&D phase in the car manufacturing business.

Lu Weibing also revealed that the overall competitiveness of the new car models being developed by Xiaomi is good. According to Wall Street News, Xiaomi will launch a new SUV model next year, targeting the Model Y.

If Xiaomi's new SUV model can continue to maintain the popularity of the SU7 after it is launched, Xiaomi's annual sales volume can also reach the level of 0.3 million vehicles. In terms of revenue, it can exceed 70 billion yuan for the whole year, becoming the second largest business sector after smartphones in terms of revenue structure.

However, it is still too early for the automotive business sector to achieve profitability. The early high-pressure investment will continue to put Xiaomi's automotive business in a situation of 'buy one car, lose one car' in the future. This also means that Xiaomi still needs traditional businesses such as smartphones and IoT to make money and support the family until the automotive business can become more independent.

In addition, Xiaomi will continue to make efforts in overseas markets. Recently, Lei Jun and Lu Weibing, as well as other Xiaomi executives, have been investigating markets in Southeast Asia, Europe and other regions.

Lu Weibing stated that Xiaomi's new retail will enter the overseas market comprehensively, and in the future, when everyone travels globally, they will see a lot of Xiaomi stores in other countries. This will also be a very important carrier for Xiaomi's 'smartphone, car, and home' ecosystem strategy. Xiaomi's automotive business will also enter the overseas market at the appropriate time.

At that time, after Xiaomi expands its smartphone and IoT business overseas, it will become an important participant in the wave of automotive globalization along with BYD, Great Wall Motors, and other car manufacturers. Even if Xiaomi's automotive business becomes one of the top five global car companies as Lei Jun expected, this long journey has just begun.

Lei Jun also stated that Xiaomi will work even harder. 'Next, we will work hard to ensure that everyone can earn some money.'