Xiaomi’s $725 million investment will strengthen its IoT play

Details of the company's plans are sparse, but Xiaomi is reportedly planning to spend the money on expanding distribution channels as well as rewards programs for sales staff and partners.

As of Q1 2019, Xiaomi was the fourth-largest smartphone vendor in the domestic Chinese market. But according to an insider source cited by Bloomberg, Xiaomi aims to be the top smartphone brand in China, with the intermediate goal of moving into the top three. However, we don't think the retail investment will be used to achieve these purported goals.

There are two reasons why we don't think the sole focus of Xiaomi's Chinese retail investment is to capture the lion's share of the country's smartphone market:

Huawei holds a significant lead in the Chinese smartphone market, and recent setbacks are unlikely to change that.Huawei'sdominance appears somewhat vulnerableat the moment, as it's caught in the crosshairs of the escalating US-China trade war: It lost its US component suppliers as well as some international partners. But the majority of Huawei's losses seem to be limited to the international market the company predicts that its number of international shipments will fall by up to 60 million not the domestic Chinese market. Huawei boasts a 34% market share of smartphones by shipments in China, while Xiaomi sits in fourth with 12% of the market. It's also unlikely that Xiaomi's expansion is in response to Huawei's weakness, given the large size and scope of the investment.
Additionally, the Chinese smartphone market is experiencing a slowdown, so it's not an advantageous time to make larger investments to expand smartphone sales channels.In 2018, smartphone shipments in China were down by around 14% year-over-year (YoY). And with many expecting China's economy to slow, consumer interest in buying a new device that could set them back hundreds of dollars could be further suppressed. The Xiaomi Mi9, which is the company's flagship phone, costs 449 ($504).

The bigger picture: We believe Xiaomi likely plans to use its expanded retail network to grow its IoT network, which includes a line of smart devices, an area the company sees promise in.

Expanding and enhancing its retail presence in China would give Xiaomi the ability to showcase its IoT devices in order to drive up consumer awareness and, in turn, revenue.IoT has become a core part of Xiaomi's growth strategy, which is supported by major investment plans.

InJanuary, Xiaomi unveiled a 10 billion yuan ($1.5 billion), five-year investment in artificial intelligence (AI) and IoT devices. It also partnered with Swedish home goods retailer Ikea in late 2018 to produce a line of smart lights that can be connected to Xiaomi's IoT platform.

Xiaomi likely hopes these investments can continue to drive revenue: Xiaomi'sIoT and lifestyle product segment revenue jumped by more than 56% YoYto 12 billion yuan ($1.7 billion) in Q1 2019, compared to 16% for its smartphone segment over the same time period.