Why the Xiaomi IPO Failed?

Xiaomi is considered to be one of the most valuable startup firms in the world now. This firm, which has Chinese origins, has become truly global in nature. It sells world-class products at rock bottom prices all over the world. This firm completely dominates the Indian smartphone market. Given the fact, that India is poised to become one of the largest markets in the world, Xiaomi has become the blue-eyed boy for investors.

This is the reason why when Xiaomi wanted to conduct an IPO it received proposals from more than 50 global investment banks. Everybody wanted a part of the action. These investment banks valued Xiaomi at $100 billion dollars. Xiaomi suddenly became one of the poster boys of the Chinese industry.

The BAT acronym which refers to Baidu, Alibaba and Tencent were modified. Some investment bankers thought Xiaomi would replace Baidu and hence TAX came into being. TAX refers to Tencent, Alibaba, and Xiaomi.

In January 2018, everybody was going gung-ho over the Xiaomi IPO. However, when it did take place, the IPO was somewhat of a failure. The market valued Xiaomi at only $54 billion which is about half the valuation that the company was expecting only six months ago!

In this article, we will have a closer look at the main reasons for the failure of the Xiaomi IPO.

The Trade War: The Xiaomi IPO was being valued at $100 billion before Donald Trump announced the tariffs on Chinese products. Once the tariffs were announced, a trade war began.

Both China and the United States started aggressively levying taxes on each other’s products. This became a point of contention for Xiaomi. Some of Xiaomi’s products are shipped to the United States. Hence, Xiaomi was forced to include the trade war as a risk to business in its prospectus.

Increasing tensions over the trade war led investors to undervalue Xiaomi’s shares. Even though Xiaomi currently ships a very small portion of its goods to the United States, it still faced a huge impact. This is because the “per unit” cost of products sold in the United States is much higher than in countries like India.

Hence, even if fewer units are sold, the profits generated are substantial. Also, Xiaomi has completely penetrated markets like India. The United States is where the company hoped to achieve future growth from. However, with increasing tariffs that seems unlikely.

Hence, Xiaomi may have lost market value due to bad timing. They should have gone ahead with the IPO during a time period where the macroeconomic environment was not so negative.

Listing on the Hong Kong Stock Exchange: Earlier Xiaomi was scheduled to list its shares on a global stock exchange like the FTSE in London or the NYSE in New York. However, after the trade wars gained momentum, Xiaomi changed its decision. It is a company based in China.

Given the hostile environment in western countries, Xiaomi wanted to list within China itself. This is why they chose the Hong Kong Stock Exchange. The Hong Kong Stock Exchange also changed some rules to allow the listing of Xiaomi.

However, the Hong Market simply does not have the depth that other more global markets have. Given the trade war, global investors stayed away from the Chinese stock markets. This is the reason why NASDAQ and NYSE have seen an upward trend even though the Hong Kong Stock Exchange has been range bound. As a result, Xiaomi had to lower its price in order to be able to sell its shares. The end result was that the company lost close to 50% of its valuation.

Ambiguous Business Model: During the IPO, Xiaomi started describing its business model as the “triathlon model.” This means that Xiaomi hoped to sell smartphones, hardware and also internet services. At the present moment, Xiaomi is a well-known smartphone maker. Most of its revenue comes from smartphone sales. However, Xiaomi planned to achieve close to 50% of its revenue from internet service sales in the future.

To many investors, this seemed like unnecessary diversification and lack of focus. The smartphone industry is very challenging. Global giants like Nokia, HTC, and Sony, have been obliterated by newer firms.

In such an environment, Xiaomi needs to ensure that it is focused on its smartphone business in order to maintain its lead. There is no precedent of any company being able to manage both internet services as well smartphone business successfully. Xiaomi is venturing into unchartered territory, and hence investors were shying away from the risks involved.

Differentiated Voting Rights: Xiaomi became one of the first companies in the world to offer differentiated voting rights to its shareholders. This meant that the promoters continued to have a huge influence on the business.

The founder of the company holds only 29% of the shares but controls 55% of the voting rights. This does not seem to have gone well with the investing community. Global investors already fear too much interference from the Chinese government. On top of that, the founders do not seem to be willing to cede control of the firm.

To sum it up, there have been many factors which have caused Xiaomi’s performance to be muted. The company had hoped to raise around $10 billion by selling 10% of its stake. In the end, it was able to raise only $4.7 billion.