Advances in Economics, Business and Management Research, volume 203

Proceedings of the 2021 3rd International Conference on Economic Management and

Cultural Industry (ICEMCI 2021)

Financial Performance Analysis on the Innovation of

Xiaomi’s Profit Model
Xingyi Wang1,*
1
International Education College, Tianjin University of Commerce, Tianjin 300134, China
*Corresponding author. Email: xingyiw9399@gmail.com

ABSTRACT
At present, in the era of globalization and the rapid development of Internet services, enterprises are facing the
transformation and development of the overall strategic model. For the industry that is closely related to the mobile
phone which is closely related to the Internet, it is difficult to find a profit model suitable for its own development,
because the definition and method of the profit model itself have a certain degree of ambiguity. Among them, when
Xiaomi was established in 2010 to become one of the top 500 companies in China today, it shows that its profit model
must be outstanding. Therefore, based on the innovative profit model of Xiaomi, this paper mainly studies the
financial performance of the profit model, so as to conclude whether the current profit model adopted by Xiaomi is
reasonable and put forward suggestions.The methods used in this article are mainly case analysis and literature
research methods to evaluate the financial performance of the ecological chain in Xiaomi’s innovative profit model.
The results of the study found that the current innovative profit model of Xiaomi has excellent financial performance,
but there will still be some problems such as low gross profit margin and lack of innovation in the ecological chain.
Besides, the author also put forward suggestions that can solve Xiaomi's current problems.

Keywords: Profit model, Financial performance, Xiaomi company, Ecological chain, Cost-effective

1. INTRODUCTION put forward shortcomings and suggestions. Among

them, the research of financial performance is mainly
In the era of rapid development of the Internet, completed through structural analysis and growth
China has also become one of the main forces in the analysis. The methods used are mainly literature
development of the Internet. The mobile phone industry research method and case analysis method, that is,
is undoubtedly the cornerstone of supporting the through a large number of literature reading and special
development of the Internet, so in order to win the case studies, similar to reading Xiaomi's annual
initiative in the mobile phone industry, it is necessary to financial report and prospectus, so as to integrate the
continuously improve the innovation and development research to get the advantages and disadvantages of the
capabilities of enterprises. Specifically, it is to find a profit model. The significance of this article's research is
profit model suitable for the company's development so that in addition to providing a method for researching
that it can innovate and seize the market [1]. In the innovative profit models, it mainly analyzes Xiaomi's
current research on corporate profit models, some current financial situation to evaluate whether Xiaomi's
scholars will confuse the concept of profit models, and profit model is reasonable.
use him and business models as a kind of research.
However, there are also more referential studies. For 2. THE INNOVATION OF XIAOMI'S
example, Gary Hamel divides the study of profit models PROFIT MODEL
into four major parts: renewable strategy, customer
interface, strategic resources and value network [2]. 2.1. Price advantage
This article will mainly start from the innovation
Xiaomi has always been favored by fee-payers with
points of Xiaomi's current profit model, study the
its "low price and high distribution" price advantage.
financial performance brought by these innovation
There are three main reasons that support Xiaomi's price
points, and evaluate the benefits of the profit model and
advantage: Xiaomi will not invest too much in

Copyright © 2021 The Authors. Published by Atlantis Press International B.V.

This is an open access article distributed under the CC BY-NC 4.0 license -http://creativecommons.org/licenses/by-nc/4.0/. 190
 Advances in Economics, Business and Management Research, volume 203

marketing, because Xiaomi focuses more on product problems, and humane marketing methods. Therefore,
development. Second, Xiao mi will rely on other Xiaomi has won market share because of its price and
products under the Xiaomi ecological chain to make good service [5]. And these markets can retain
profits. In addition, the hunger marketing carried out by customers because of Xiaomi's continuous innovative
Xiaomi has resulted in mass production and sales, so it products and high-quality services, and these customers
will not cause a large amount of inventory to will attract other potential customers to join. It can be
accumulate. This kind of mass production can ultimately seen that Xiaomi's rapid development from its
increase the capital turnover rate, thereby reducing costs establishment in 2010 to today is inseparable. The basis
to a certain extent. for such loyal customers.

2.2. Xiaomi's diversified internal and external 3. THE FINANCIAL STATUS OF THE
ecological chain PROFIT MODEL
For Xiaomi's internal company, Xiaomi has formed The new profitability of an enterprise is a means to
a product design centered on mobile phones. For evaluate the success of the innovative profit model
example, the new products launched by Xiaomi are adopted, if the market economy is stable. Therefore, the
similar to those of Xiaomi's electric cars, which are author will evaluate the financial performance of
compatible with mobile phones. Therefore, Lei Jun, the Xiaomi's profit model in recent years after the
founder of Xiaomi, followed the principle of "not innovation, and will start from the horizontal
putting all eggs in one basket" in terms of profitability. comparison of similar and highly relevant companies,
and the vertical comparison of the companies
For the external ecological chain of Xiaomi, Xiaomi
themselves in recent years. Specifically, the analysis
will actively cooperate with its own enterprises and
will be conducted from two perspectives of structure
industries that lack resources for a long time. In this
and growth.
way, an industrial chain will be formed when the
number of cooperative enterprises increases, thereby
eliminating many intermediate costs while increasing 3.1. Structural analysis
market share and marketing capabilities. Therefore, such After Xiaomi started to lay out the ecological chain
an ecological chain will be copied by Xiaomi into many in 2014, it has determined the industrial layout of
similar industries, so that all the ecological chains will "smartphone + LoT and consumer products + Internet
be built together to form a huge and powerful collective. services", which means that it has abandoned the model
of relying solely on mobile phones and their auxiliary
2.3. Product mix and scale effect products. Therefore, in recent years, Xiaomi’s revenue
has increased significantly in this structure. This
Although Xiaomi's core profit is the mobile phone
paragraph will explore the benefits of the new profit
business, it has also derived a series of mobile phone
model through the revenue and cost institutions.
products based on the mobile phone business. Similar to
Apple, Xiaomi will launch matching headsets, TVs, and
set-top boxes. In addition, the company should now
launch products such as the ecological chain, high-end
household products and electric vehicles, which can be
said to satisfy all aspects of life and work of buyers [3].
The most important thing is that a series of products
developed by Xiaomi can be controlled with the mobile
phone that Xiaomi supports, thus forming a complete set
of Xiaomi ecosystem. Therefore, due to the diversity of
products and the high cost-effective characteristics of
the Xiaomi ecosystem, it will win continuous repeat
customers, so there will be considerable economies of
scale and economic benefits.

2.4. Fan effect

As Xiaomi has always promised that its net profit in
the hardware business will only be less than 5%, it has
always had loyal buyers and fans in the market because
of the price [4]. In addition, the main ways for Xiaomi
to gain the trust of fans are the creation of 15 minutes of
extremely fast customer service time to deal with

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3.1.1. Revenue structure

Figure 1 Xiaomi’s business proportion in 2018-2020 [6]

It can be seen from figure 1 that the overall income life to work. Therefore, although mobile phone sales and
ratio of Xiaomi's IoT to consumer goods and Internet revenue continue to increase, the increase in revenue
services has increased, which echoes Xiaomi's from other products has also confirmed the advantages
ecological chain strategy. After 2014, Xiaomi began to of this profit model.
develop various lifestyle products that can be used from
Table 1. 2018-2020 Xiaomi's gross profit margin of various revenues [6]

Business type Smart phone IoT and consumer products Internet service Other Total(100%)

Revenue 65.1 25.1 9.1 0.7 100

2018 Cost 61 22.5 3.2 0.6 87.1
Gross margin 4.1 2.6 5.9 0.1 12.9
Revenue 54.4 34.5 10.1 0.9 100
2019 Cost 50.3 31.3 3.7 0.8 86.1
Gross margin 4.1 3.2 6.4 0.1 13.9
Revenue 61.9 27.4 9.7 0.01 100
2020 Cost 56.5 23.9 3.7 0.01 85.2
Gross margin 5.4 3.5 6 0 14.8
As Xiaomi has always won the trust of consumers overall, but its larger scale and proportion can also show
with low prices and high quality, it would be a good that Xiaomi’s current main profit Revenue is still
choice to study gross profit margin in income. Gross smartphone-related business. In addition, it can be seen
profit margin equals revenue minus expenses. It can be that the gross profit margin of Internet-related services
seen from table 1 that although the gross profit margin is quite high (almost 6% every year), so Xiaomi can
of smartphones is low and the proportion of revenue has make Internet services a key development object in its
dropped from 65.1% to 61.9, there is a gradual decline future development.
3.1.2. Cost structure analysis
Table 2. Cost input in 2018-2020 (million yuan) [6]
Year 2018 2019 2020
Sales expense 7993.1 10,378.1 14,539.4

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R&D expenses 5776.8 7492.6 9,256.1

Administrative expense 12099.1 10378.1 3,746.4

Xiaomi has always used online as the main sales of high-end electronic products, this also reflects the
channel, which means that the investment in entities is good layout of Xiaomi's ecological chain.
not large, so if you want to study its cost structure,
people must focus on sales, R&D, and administrative 3.2. Growth analysis
expenses. Specifically, the sales expenses have nearly
tripled in the past three years. This is because after The growth analysis of profitability is a method of
Xiaomi determined the ecological chain and diversified measuring the ability of an enterprise, and it usually
product route, Xiaomi focused on online marketing to compares the indicators that need to be measured with
improve competitiveness. It can be seen from table 2 the main profit strategy adopted by the enterprise to
that, for R&D expenses, there is an annual growth rate derive the importance and advantages of the profit
of nearly 30% (from 5.8 billion in 2018 to 9.3 billion in model. This article's analysis of Xiaomi's growth will
2020). This is due to Xiaomi's decision to diversify its mainly start with the growth rate of its main business
products and invest heavily in similar to electric income.
vehicles, high-end smart furniture or In the development
Table 3. Xiaomi's main business income in 2018-2020
2018 2019 2020
Smartphone business revenue (million) 113,800.40 122,094.90 152,190.90
Growth (%) 7.29% 24.65%
Revenue from IoT and consumer goods business
43,816.90 62,088.00 67,410.50
(million)
Growth (%) 41.70% 8.57%
Internet service business revenue (million) 15,955.60 19,841.60 23,755.30
Growth (%) 24.36% 19.72%
Main business income (million) 174,915.40 205,838.70 245,865.60
Main business input growth rate 17.68% 19.45%
From table 3, it can be seen that Xiaomi's
smartphones have been growing from 2018 to 2020, 4. SHORTCOMINGS AND
except that in 2019, the growth rate of IoT and IMPROVEMENT METHODS
consumer goods business revenue reached 41.7%, which
led to a reduction in the growth capacity of mobile 4.1. Insufficiency
phones to 7%. . This reflects the increase in revenue of
At present, there are two main problems caused by
Xiaomi's mobile phone fans in the past three years, and
Xiaomi's high cost performance, namely, the lack of
the characteristics of Xiaomi's combined online and
innovative motivation for profitability and the low gross
offline marketing model. The revenue of IoT and
profit margin caused by low pricing.
consumer goods business has increased sharply by 41%
in 2019. This also reflects Xiaomi's increased emphasis
on the layout of the ecological chain. Finally, for 4.1.1. Insufficient innovation motivation for
Internet services, although the growth rate in the past profit points
two years is low and less than 20%, Xiaomi still has an
Based on the above research on the profitability of
overall increase in this aspect. In summary, the growth
Xiaomi's main business income and costs, it can be
rate of Xiaomi in the three main areas of its business is
concluded that Xiaomi's revenue generation from smart
relatively stable and gradually increasing, which
phones is gradually weakening. Above all, compared
indirectly shows that the profit model of Xiaomi
with its peers, the quality of Xiaomi's low-priced mobile
mentioned above is feasible.
phones is not high Moreover, the most important thing
is the lack of innovation in Xiaomi smartphones. The
current domestic mobile phones, including Huawei,
Xiaomi and OPPO, will have the problem of insufficient
innovation and lack of core R&D technology.
Therefore, Xiaomi will mainly use low prices to obtain
the market, and then use these markets to sell other
products of the ecological chain, and the final profit

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return will be delayed. Such a profit strategy will and increase mid-to-high-end consumption, so as to
undoubtedly affect the process of innovation and better meet the wave of the global economy.
research and development.
5. CONCLUSION
4.1.2. Too low pricing leads to low gross profit
margin In conclusion, this paper found that Xiaomi’s
innovative profit model has price advantages, Xiaomi's
It can be seen from the gross profit margin of diversified internal and external ecological chains,
smartphones that Xiaomi's mobile phone profit margin product mix and scale effect, and fan effect. First of all,
will not exceed 5%. However, although such a low price the innovation of Xiaomi's profit model has brought
can attract more users, the overall quantity multiplied by competitiveness to the enterprise. Due to Xiaomi's
the total quantity is not objective, which means that continuous innovation and development, Xiaomi has
Xiaomi's current market share is very low compared to made continuous financial progress in "smart phones +
its peers. Since the mobile phone industry has had a LoT and consumer products + Internet services", which
relatively mature market since 2010, and industry giants affirms the company's efforts in the ecological chain and
such as Apple, Huawei and Samsung have occupied the fan effect. Specifically, for the ecological chain,
vast majority of the mobile phone market, Xiaomi must Xiaomi's move to use smartphones as the core to
not only focus on the current low- and mid-range market develop products beyond life and work is correct. In this
of. If it continues to rely on the current market, Xiaomi way, Xiaomi will be able to continuously improve its
will face the risk of a huge drop in revenue from the own product production chain, thereby occupying more
core business of smartphones. to enhance competitiveness and seize more market share
However, it is not difficult to find that this profit
4.2. Solutions model still has certain risks. Specifically, for the
ecological chain of Xiaomi's internal products, due to
4.2.1. Increasing R&D investment and improve continuous innovation and research and development,
product quality the product quality may not meet the requirements of
the market or not meet the needs of the market, leading
At present, Xiaomi has made some achievements in to the situation of excess product and inventory
the ecological chain and achieved a certain degree of accumulation. Subsequently, the profit model will affect
innovation, but the quality of products and market the company's cash flow and liquidity to a certain
preference should be improved [7]. In the current extent, resulting in a decrease in revenue. For Xiaomi’s
mobile phone and electronic product market, consumers external ecological chain, however, if Xiaomi relies too
are not only looking at the price, but also the appearance much on and cooperates with other companies too
and the experience of using them after getting them. much, it is likely to be affected by other companies. For
Although Xiaomi’s current market share in China has example, if there is a problem with the company that
reached the fourth place, according to general feedback, Xiaomi cooperates with, then some of the products of
it can be concluded that its quality ratio cannot be equal Xiaomi will be affected.
to the top three. Therefore, if Xiaomi wants long-term
development, it must increase its investment in scientific
AUTHORS’ CONTRIBUTIONS
research and improve the quality of its products to win a
more loyal consumer market. The author finished the paper through collecting data,
analyzing and writing all by herself.
4.2.2. Expanding market share and increase
mid- to high-end customer base ACKNOWLEDGMENTS
At present, the company mainly has a place in First of all, I want to thank my teacher Chen Xinxu.
China, but in terms of China's current international The methods and ideas of financial performance
development speed, Xiaomi should take a long-term analysis used in this article are all taught to me by Mr.
view to go international and increase its Chen. In the process of writing this article, Mr. Chen
mid-to-high-end customer base. Based on the above has been patiently and meticulously teaching my ideas
analysis, it can be concluded that Xiaomi's current smart and writing techniques, which has given me a lot of help.
phones, IoT, consumer goods and Internet service Secondly, I want to thank my parents and friends. When
businesses are all developing steadily, and are mainly I encountered difficulties and troubles, they were the
oriented to middle and low-end users. Therefore, under ones who solved the puzzles and brought great concern
the stable domestic market environment and China's to me, so that I have sufficient motivation to go forward
current better globalized economy market conditions, without fear of difficulties!
Xiaomi should try its best to enlarge its own advantages

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