China’s Xiaomi embarks on Apple’s road not taken

Apples and pears. China's Xiaomi may have started out as an Apple wannabe but it has now pulled ahead of the American technology titan. The $48 billion handset-maker said it will deliver its first electric car just weeks after the iPhone-maker scrapped a decade-long effort. CEO Lei Jun's timing isn't great but an edge in software will help him.

Xiaomi only made its electric-vehicle ambitions public three years ago, when Lei unveiled a $10 billion investment roadmap spanning 10 years. Since then, the company has partnered with state-backed manufacturer, BAIC, which has also worked with BMW in China, and built a dedicated team of some 4,400 engineers and experts.

Those efforts have paid off. On Tuesday, the Hong Kong-listed group announced plans to deliver its first model, the SU7 sedan, this month, sending shares up 11%. Financial details including price are scarce, but earlier Lei touted technical specs including faster acceleration speeds than some Tesla and Porsche models.

The market outlook, however, is far gloomier than three years ago. Annual demand for battery-powered vehicles is growing more slowly, with sales up 30% in 2023 compared with a rise of 60% in 2022, per Rho Motion. In Xiaomi's home market, a cutthroat price war and fierce competition will eat into the company's already razor-thin 5% operating profit margin, analysts polled by LSEG forecast for 2023.

Xiaomi could still find a niche. In October, the company launched a new operating system that connects its smartphones, cars and other gadgets it sells, ranging from air purifiers to robotic dogs. The new SU7 model can link to over 1000 Xiaomi devices, though users can also choose to plug in other favourites such as iPhones. That'll be a huge advantage: drivers in China's premium segment, Lei's target, consider the vehicle’s internet-connected features as important a selling point as steering, or fuel and maintenance costs, according to a survey by McKinsey in July.

Xiaomi's financial health also gives it an edge over pure-play rivals. It is forecast to generate nearly 19 billion yuan ($2.6 billion) of operating cash this year, LSEG data shows, and as of June, it had more than $1 billion in net cash. It's a far cry from Nio <9866.HK>, which analysts expect to report a net loss of 15 billion yuan this year.

Lei has chosen a difficult time to drive into electric vehicles, but Xiaomi might still have a fun ride.