Xiaomi's sky-high value also comes with potential obstacles

Updated: 2014-12-30 07:32

By PAUL WELITZKIN in New York(China Daily USA)

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Chinese smartphone maker Xiaomi's valuation is now more than Sony Corp, LG and Motorola combined, and analysts are split on whether the company is worth such a high market price and warn of potential hurdles it may face.

Xiaomi founder Lei Jun announced on Monday that the company has raised $1.1 billion for expansion and or acquisitions. The funding left Xiaomi with the $45 billion valuation.

"Most of these Chinese TMT (telecommunication, media and technology) companies including Xiaomi are valued against a similar mature company in the US. In the case of Xiaomi, that company is clearly Apple," said Jack Liu, senior vice-president at Chardan Capital Markets in New York.

Liu noted that Apple was worth $45 billion about 10 years and today is worth around $670 billion. "If Xiaomi can achieve half of Apple's past success in the last decade for the next 10 years, the investors in this round could have made eight times their money in 10 years, which isn't too bad for an investment at this late stage for a high-profile startup company," he said in an e-mail.

Dan Panzica, senior analyst with global information and analytics provider IHS, said Apple has been able to keep the next-big-thing buzz going for over 30 years now by introduction new and innovative products and technologies and by controlling their own ecosystem. "Xiaomi is beginning to create a similar buzz. However, keeping it going will be the challenge," he said.

Panzica said Xiaomi has produced some positive trends that should continue to bolster the company. "Xiaomi has created an Apple-like aura around their products similar to the impact that the famous Apple 1984 Super Bowl commercial had in the US," he said in an e-mail.

Panzica said the Chinese prefer to buy national brands if the price and quality is good. "During the past seven years. I have been asked many times to carry US phones into China for my friends. This includes Apple and more recently Google Nexus products. Most of my young (30's) Chinese friends now own Xiaomi, Oppo, ZTE, or Huawei devices. The newer generation of college grads never owned anything other than a Chinese handset," he said.

While Xiaomi is riding high on its valuation, the analysts see potential problems ahead.

Liu said Xiaomi's past growth was largely driven by an increasing appetite for quality in affordable smart-device products in China. Xiaomi's current product portfolio largely resembles what other brands (including Apple) are offering. Competition is becoming fiercer and coming up with more innovations are becoming more difficult.

"Apple became today's Apple after redefining a number of new product categories through a few product generations. When people compare Xiaomi to Apple, they expect similar scale of innovation success, which is a very high expectation for any company to live up to," Liu said.

IHS's Panzica sees several potential hurdles for Xiaomi including a major quality or recall incident that could slow down expansion and kill the company's marketing buzz.

"Low cost module partners and poor build quality is an Achilles' heel," he said. "Winning on price alone is not defensible as Huawei and ZTE can compete directly on price and already have technically equivalent handsets. Xiaomi has few patents. Patent cross-licensing agreements need to be made."

Panzica also said that Xiaomi has no current relationships with the US and EMEA (Europe, Middle East and Africa) carriers. "US customers are less inclined to buy handsets outside of the Carriers. Even the Google Nexus 6 is now available at the carriers."

What does Xiaomi's $45 billion valuation mean for Apple and Samsung?

"Xiaomi's current valuation is clearly referenced on Apple and Samsung's valuation. However, it has benefited from Alibaba's IPO success (the China element) and high demand in other startup companies in general," said Liu.

"Short term, I am not sure if the $45 billion valuation of Xiaomi affects the valuation of Samsung, LG, and Apple. What it will do is to refocus their defenses on a formable competitor. Xiaomi will transition from the hunter to the hunted," he added.