Xiaomi Revs Up Electric Vehicle Gambit

Key Takeaways:

• Xiaomi received regulatory clearance to mass produce electric vehicles independently, a crucial move as it seeks to ramp up its high-stakes EV drive
• The smartphone maker’s big EV ambitions could be undermined by production bottlenecks, quality issues and a weakening consumer demand

By Xia Fei

Despite its late arrival to the race, Xiaomi Corp.’s (OTC:XIACF)(OTC:XIACY) drive into China’s crowded electric vehicle (EV) market is showing no signs of slowing and may even be gaining momentum.

That journey logged another milestone earlier this month when the company better known for its smartphones won a regulatory greenlight to manufacture cars independently instead of relying on third-party production lines. That moved Xiaomi into a fast lane by making it only one of about a dozen Chinese EV makers with that self-production privilege, paving the way for it to ramp up production and speed up its deliveries.

Many of China’s EV makers rely on third-party manufacturers, partly to save costs associated with building facilities that typically cost billions of dollars, and partly to avoid regulatory hurdles for obtaining manufacturing licenses. While use of third-party manufacturing avoids heavy capital spending and the need for hard-to-get licenses, it can also lead to delays and quality issues due to lack of control over production facilities.

“The first battle was a victory because SU7 finally brought Xiaomi to the party table,” Xiaomi’s charismatic founder Lei Jun told a cheering crowd at the company’s annual conference last week, referring to the launch of its first EV model this year in March. “But we still have a long way to go before we realize a bigger victory,” he added.

While Lei’s passionate speech may strike a positive note in China at a time when the U.S. has dialed up efforts to contain the rise of Chinese tech giants, Xiaomi still needs to overcome multiple hurdles to establish itself as a global EV leader. Those include contending with anti-dumping tariffs against Chinese EVs in Europe if Xiaomi decides to enter the market, and rapidly slowing demand for new energy vehicles (NEVs) in a China market that has become rife with price wars due to oversupply. 

Lately, Beijing-based Xiaomi, famous for its “hunger marketing” campaigns dating back to its roots a decade ago as a smartphone maker, is grappling with yet another problem due to production bottlenecks forcing buyers to wait as long as five months to receive their cars, according to a media report. Reports of various glitches in Xiaomi’s sleek EVs also surfaced only weeks after the SU7’s launch.

Smashing Hit With Controversies

Xiaomi’s late arrival to the EV industry has been a big success, at least judging by some early numbers. Since its March debut, the SU7 – a turquoise all-electric model resembling a Porsche but priced as low as 215,900 yuan ($29,867) – became an instant sensation. Sales of the car climbed steadily from around 7,000 units in April to more than 11,000 in June, putting the company on track to hit its annual target early.

The strong reception for the model, which comes with an autonomous driving system and plugs into Xiaomi’s ecosystem of digitally connected devices, propelled the company past major Chinese competitors such as XPeng (NYSE:XPEV) to rank 14th among Chinese NEV manufacturers in June, data from the China Passenger Car Association shows. Lei has said that Xiaomi needs to be among the world’s top five EV brands to survive in the industry.

But quality concerns over Xiaomi’s cars also quickly made headlines in China. One owner claimed in May that his SU7 broke down after only 39 kilometers. Others reported that paint peeled off their cars within days of delivery. In the same month, Xiaomi admitted to failure in the braking system for some cars, but claimed to have fixed the problem.

The strong demand has also led to prolonged waiting times. SU7 units now take an estimated 29 weeks or longer for delivery after order placement, while the wait period is even longer for higher-end models, such as up to 36 weeks for SU7 Max, according to Chinese media reports. By comparison, wait times are a much shorter six to nine weeks for Tesla’s (NASDAQ:TSLA) revamped Model 3 in China, a model that Lei has billed as a direct rival to the SU7. 

The new production license could help to address that production bottleneck by giving Xiaomi more control over its manufacturing facilities, though it remains unclear when Xiaomi might launch its own production. More symbolically, the license also demonstrates Lei’s intent to stay in the EV race for the long run. In addition to the SU7, Xiaomi plans to launch two more models in the next two years. It has also raised its target to deliver 120,000 EVs this year, up from an initial goal of 72,000 units, President Lu Weibing said on the company’s first-quarter earnings call.

Single-Market Play

Unlike rivals like Xpeng and Li Auto (NASDAQ:LI), who are eyeing expansion in Europe and the Middle East to move behind their overheated home market, Xiaomi has yet to announce any plans to sell its EVs outside of China. Such a strategy avoids growing protectionism against Chinese EVs in many markets, but also puts Xiaomi at greater exposure to growing economic headwinds in its home market that is the world’s largest for NEVs.

China’s overall EV market recorded robust sales in the second quarter after a sluggish start to the year, in part thanks to fresh price cuts among carmakers and government subsidies. But economic uncertainties suggest that sales growth will slow to around 20% this year, or half the nearly 40% growth in 2023, Fitch Ratings warned.

Counting on smartphone sales for over 60% of its revenue, Xiaomi was selling SU7 at a loss initially, Lei acknowledged during the launch ceremony. CFO Alain Lam told investors in May that gross margins for the company’s EV business were currently around just 5% to 10%, a fraction of the 22% for industry leader BYD (1211.HK; 002594.SZ).

Shares of Xiaomi are largely unchanged this year, as investors wait to see how the EV drive develops, as well as whether the company’s core smartphone business can rebound from a weak performance last year. Still, analysts are enthusiastic about Xiaomi EV’s outlook. Morgan Stanley raised its target price on Xiaomi’s stock from HK$20 to HK$25 in May and expects its EV shipments and profit margins to rise further. Among 29 analysts polled by Marketscreener, 17 rate the company a “buy” and another 7 give it a “moderate buy”.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.