Because itâs not actually âcheap.â
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 itâs not exactly cheap. Even an American who is down on his luck can easily live on $400 of groceries for a month. Thatâs beside the point, though.
How can Xiaomi afford to price this way? Easy. Thatâs because the cost to make the phone is actually way less than that. Does it cost $300? Nah. Probably way less. They arenât thriving on a profit margin of just $100 per flagship. The phone itself probably cost less than $200 to make.
Itâs not that Xiaomi is pricing their phones cheap. Itâs 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 thingâs for sure, the S9 definitely doesnât cost more than $400 to make, thatâs the retail price of the Mi 8. Samsung is making at least $500 per phone here.
Xiaomi isnât cheap. Itâs just that Apple, Samsung and other competitors are just unreasonably expensive.
Itâs not just that, though. Xiaomi does price aggressively. They can afford to do this because phones arenât their only revenue source. Xiaomi â like Apple and Samsung â 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 Xiaomiâs revenues ($585 million last quarter). That said, Xiaomiâs biggest business is still phones sales ($4.5 billion last quarter â their next biggest business was selling TVs at $1.5 billion) â meaning they actually have huge margins on their âcheapâ phones.
Xiaomiâs labour costs are definitely lower than Samsungâs and Appleâs 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 thereâs 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 Xiaomiâs financials to make sure I wasnât talking out of my butt. These are Xiaomiâs 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, Xiaomiâs CEO, has famously said that theyÂ keep hardware margins at 5%. However, if you look at the financials this is clearly not the case.
They arenât 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), thatâs $1.8 billion shy of their posted profits. $585 revenue (not even profit) from Internet Services isnât even close to making it. These are Xiaomiâs numbers, straight from the horseâs mouth, so donât look at me.
Itâs clear that they are making way more than 5% on phones. That $400 Mi 8 isnât even close to cost. They are making way more on each phone. Assuming that $585 Internet Services revenue is close to full profit, thatâs 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 â unless they are being âcreativeâ with their accounting.
Erwin Anciano, FormerÂ ManagerÂ atÂ General Electric
This article appeared first on Quora