Preamble
I have a 5-year-rule for IPOs i.e. I won’t buy a company that’s been listed for less. The discipline has been handy as most of the value destruction that’s taken place in the China space this year has occurred via the stocks of companies listed (at least in Hong Kong) with shorter track records.
Among the rubble of China’s hi-tech and speculative complex though are some companies whose businesses now present cases for review-with-favorable-prejudice, and Xiaomi (1810) is one of them.
If you’re tempted to begin a study the paper highlighted today provides useful context. Existing holders may also find it of interest if they intend to stay onboard.
Xiaomi – Farmer and Metaphor Wrangler
Business academics struggle for ways to analyze firms that manage ecosystems and to date it’s been easier to backward-induct the path from success to strategy* than predict the journey the other way around.
With the above acknowledged Assistant Professor Dr. Sylvia Xinhui Liu of the Hong Kong Polytechnic’s School of Design and Professor Dr. Alison Rieple of the Westminster Business School present for review the case of Xiaomi (mi = rice in Chinese, xiaomi = millet, the name is important as you’ll see later).
Xiaomi was set up in 2010 by CEO Lei Jun and 7-co founders. Through enterprise, a novel strategy, and crucially word of mouth it’s grown since into one of the world’s largest IoT consumer products companies.
Most impressively it’s done so by managing an ecosystem of manufacturing and design partners and in the process created a unique business model.
Two strategies stand out:
First, their ability to act as a ‘farmer’ within their ecosystem. Not only do they hand out cash to partners but they share with them expertise and encourage other companies in their orbit to collaborate with them.
Second, their use of metaphor has been especially effective and the researchers identify seven key ideas propagated via this process. They are:
- Brotherhood. Initially this referred to the company’s founders but later came to mean the broader Xiaomi family (the ‘fighting’ brotherhood).
- Mi. Rice, as a metaphor for the company and products. A wholesome, dependable, affordable Mobile-Internet-related-product company.
- Mi Fans. Mi Fen in Chinese is cooked rice but it’s also become a catchy way to define their especially loyal consumer-supporters.
- Granary College. A granary is a value store but here it refers to the ‘college’ of collaborators and start ups that feed into the broader ecosystem.
- Small Station Training. A military/historical metaphor used to define the process of upward talent mobility withing the ecosystem.
- Bamboo Forest. One system, interconnected roots and a place where new shoots are protected and nurtured. Another ecosystem metaphor.
- Catfish (Strategy). An ability to enter into new areas where products can muddy the waters i.e. disrupt and confuse the established players.
Self-Indulgent Twaddle? It Seems Not, Entirely
The company listed in Hong Kong (at H$17.00) in July 2018 and I reviewed the 700-page listing document thoroughly at that time.
What I found most curios were pages 1~5, the like of which I had never seen before (nor since) in a listing document. There Lei Jun lays out a lot of what’s referenced above but at that time I (ahem!) failed to register the significance of this vision (read for yourself via this link Xiaomi IPO Prospectus, note especially the net margin pledge).
Since then the company has grown impressively and although Lei Jun’s IPO-message may have been hard to grasp earnings that have followed are a matter of impressive record.
Just A Mo Though
In the company’s latest reporting they flag significant gains from disposals of bits of their infrastructure and note 330-companies they have direct stakes in. I wonder if the ability to monetize parts of this ecosystem, given regulatory upheavals ongoing in China, may now be problematic?
I need dust to continue to settle in this sector before I’ll be convinced past successes haven’t become a bamboo-forest of problems that now need working through.
More from me perhaps then in July 2023 when my 5-year forced-cogitation concludes.
You’ll find the paper in full via this link Xiaomi’s Secret Sauce.
Happy Sunday.
[*One of the best books I’ve read on how to look at stocks concentrates on the problems of backward inducted causality from the observation of successful companies. The original was written in 2007 but there’s an updated version you can check out here The Halo Effect.]