Xiaomi limits profit margin at 5 per cent; will return the excess to users

The Chinese smartphone manufacturer and Internet company, Xiaomi will forever limit its net profit margin after tax for the entire hardware business, which includes smartphones, IoT and lifestyle products, to a maximum of 5 per cent.

Xiaomi's Chairman and CEO, Lei Jun, announced this during the Mi 6X launch event and also through a letter to all Xiaomi employees. The letter stated that if the margin crosses 5 per cent, then the company will find a way to return the excess above 5 per cent to our users. Xiaomi claims to have an honest pricing for all its products and this new move might help in further building the consumer confidence.

"If we sell our products at close to cost and return value to our users, then we can earn the long-term support of our users. Aiming for large volumes with small profit margins will still result in suitable hardware profits for us in the long term," says Jun in the email.

Jun's decision to cap the margin has already been approved by Xiaomi's Board of Directors. Jun further emphasis that Xiaomi is different from traditional hardware companies as it is an internet company with smartphones and smart hardware connected by an IoT platform at its core.

The email further highlights the company's "triathlon" business model - encompassing hardware, internet service and new retail, while keeping the products as close as possible to their cost price. Xiaomi has also been delivering products directly to the user.

"It has always been difficult for me to understand why consumers have to bear the costs of this inefficiency. This is why Xiaomi has the will and determination to revolutionize the industry's cost-efficiency. We do this by putting in every bit of effort to create quality products and maximize value to users," the email says.

Xiaomi has been really aggressive in India with its product offerings. After announcing the global launch of the Redmi Note 5 Pro from India, the company is expanding its product portfolio beyond smartphones and has introduced Mi Smart TVs in the county. Xiaomi recently launched the Mi Crowdfunding platform, using which; the company will be able to gauge consumer interest in the Xiaomi products they wish to bring into the country.

Jun further adds, "Going forward, maintaining reasonable profits is an inevitable industrial trend. Any move pushing for high gross margins will eventually reap no rewards. At present, the company has exceeded 100 billion renminbi in annual revenue and has nearly 20,000 employees. In the future, Xiaomi may have higher revenue and become a larger organization."

According to the recent report released by Canalys focusing on the India smartphone shipment for Q1 2018, the report explains that Xiaomi has shown no signs of slowing down in India. The Chinese smartphone vendor registered an 155 per cent annual shipment growth, shipped over 9 million units, giving it a market share of just over 31 per cent, the highest ever for a vendor since Q1 2014, when Samsung had a share of 33 per cent.