Because it’s not actually “cheap.”
A high-specced Xiaomi Mi 8 with a top-of-the-line Snapdragon 845 costs around $400. If you go to a country like, say Vietnam, $400 is enough for a person to live pretty comfortably, eating out at restaurants every day for a month. I could live lavishly for a month at $400 in my country.
It might not seem like much too, say, an American, but it’s not exactly cheap. Even an American who is down on his luck can easily live on $400 of groceries for a month. That’s beside the point, though.
How can Xiaomi afford to price this way? Easy. That’s because the cost to make the phone is actually way less than that. Does it cost $300? Nah. Probably way less. They aren’t thriving on a profit margin of just $100 per flagship. The phone itself probably cost less than $200 to make.
It’s not that Xiaomi is pricing their phones cheap. It’s just that other competitors are massively overpricing their phones to fill out their margins.
Galaxy S9 at $900? iPhone X at $1000? These phones probably cost around $300 to make. The S9 shares many parts with the Mi 8, so it probably is also cheaper than $300. One thing’s for sure, the S9 definitely doesn’t cost more than $400 to make, that’s the retail price of the Mi 8. Samsung is making at least $500 per phone here.
Xiaomi isn’t cheap. It’s just that Apple, Samsung and other competitors are just unreasonably expensive.
It’s not just that, though. Xiaomi does price aggressively. They can afford to do this because phones aren’t their only revenue source. Xiaomi — like Apple and Samsung — have other businesses where they make a lot of money. Their phones are just one way to funnel people to those businesses.
Apple for instance actually makes a lot of their money from the iTunes ecosystem. They just choose to also make hefty margins off their hardware because they want to keep that premium exclusive status in their branding, unlike say Google who chooses to sell many products and services at a loss to funnel people into their search engine business.
Xiaomi uses their phones as a strategy to get people into their internet services business, which also contributes a decent chunk to Xiaomi’s revenues ($585 million last quarter). That said, Xiaomi’s biggest business is still phones sales ($4.5 billion last quarter — their next biggest business was selling TVs at $1.5 billion) — meaning they actually have huge margins on their “cheap” phones.
Xiaomi’s labour costs are definitely lower than Samsung’s and Apple’s overall, but the other big place they are saving on is advertising. Samsung and Apple spend billions on advertising and marketing. Xiaomi spends significantly less and only has very small online marketing campaigns.
Hugo Barra, Vice President of Xiaomi, also shared that their long phone product cycles lets them keep costs lower as they have more leeway in negotiating component prices, as they can keep using the same parts over and over instead of needing new and different parts for a new phone model.
In addition, they keep a small portfolio of phones, so there’s not much need for variation in parts. Compare this with Samsung, that has tons of phones models available at any given time.
Combine all these with the better labour costs and closer sourcing components from Shenzhen, and they are able to save a lot and pinch much more pennies, savings which they pass on to the consumer.
EDIT: I wanted to add a little something to my answer. I dug up Xiaomi’s financials to make sure I wasn’t talking out of my butt. These are Xiaomi’s numbers from their first-ever earnings call as a publicly-traded company.
- Net Profit: $2.1 billion
- Total Revenue: $6.6 billion
- Phone Sales: $4.5 billion (67% of all revenue)
- TV and Fitness Bands: $1.5 billion
- Internet Services: $585 million
Lei Jun, Xiaomi’s CEO, has famously said that they keep hardware margins at 5%. However, if you look at the financials this is clearly not the case.
They aren’t making $2.1 billion net profit if their phone margins are just at 5%. That would mean they only made $225 million off phone sales and $75 million on TV sales ($300 million total), that’s $1.8 billion shy of their posted profits. $585 revenue (not even profit) from Internet Services isn’t even close to making it. These are Xiaomi’s numbers, straight from the horse’s mouth, so don’t look at me.
It’s clear that they are making way more than 5% on phones. That $400 Mi 8 isn’t even close to cost. They are making way more on each phone. Assuming that $585 Internet Services revenue is close to full profit, that’s still about $1.5 billion missing profit ($2.1B net profit – $585M) that should be coming from the smartphone and TV sales divisions. According to the math, their profit margins on their phones are closer to 40% ($6B total revenue from Phone and TV divided by $1.5B profit).
So that Mi 8 that retails for $400 probably cost around $240 to make, including all costs and overhead — unless they are being “creative” with their accounting.
Erwin Anciano, Former Manager at General Electric
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