Cash for China’s Homegrown Smartphone

Xiaomi Mobile Internet Co. has raised US$216 million, its CEO says, raising the total value of the upstart, homegrown Chinese smartphone maker to US$4 billion.

If Lei Jun’s claim is accurate, his two-year-old company’s value is close to the market capitalization of Research In Motion Ltd., which makes Blackberry smartphones, and tops most Chinese Internet companies.

Lei also said June 26 his Beijing-based firm had no plans to launch an initial public offering within the next five years.

Lei did not name the sources of the latest capital injection, but Caixin has learned the funds came from a Singapore sovereign wealth fund called the Government of Singapore Investment Corp.; Russian investor Yuri Milner, founder of Digital Sky Technologies; and Lei’s friends.

“Our investors have confidence in Xiaomi, and they care about how much money it can make in the future,” said Lei, a forty-three-year-old known as a Steve Jobs wannabe in the Chinese IT sector.

Xiaomi produces a low-price smartphone called Mi available only in China. It has a 1,999 yuan price tag, making it the first dual-core smartphone to sell for less than 2,000 yuan in China.

Earlier, it had two rounds of financing: US$41 million in 2010, and US$90 million a year later, bringing its reported value to US$1 billion.

Xiaomi launched its phones last September, and sold 3 million units between January 1 and June 12, the company said. The company broke even in February and started to turn a profit in the second quarter, Lei said.

Xiaomi has yet to say how much it costs to make its phones, which are sold through online shops and not in stores.

Zhou Hongyi, chairman of the anti-virus company Qihoo360 Technology Co. Ltd., has estimated each device costs about 600 yuan to produce.

But can Xiaomi compete in an electronics market already crowded with handset manufacturers?

Lei has bragged in the past that many Mi parts suppliers “are also Apple suppliers,” implying a link between his handset and the iPhone. But an industry source who asked not to be named told Caixin Lei’s boast exposed two of Xiaomi’s weaknesses: As a smaller handset maker, its procurement costs without doubt exceed those of Apple’s iPhone. And in the future if component supplies tighten, parts-makers are likely to satisfy Apple long before helping Xiaomi.

On the technical side, Lei likes to call the Mi “one of China’s fastest phones.” But an engineer at a phone manufacturer told Caixin the Qualcomm processor in Mi phones may become outdated soon because it generates more heat and has higher energy needs than newer chips. Qualcomm might have stopped making the chips if not for the Mi, the engineer said.

Several other manufacturing sources told Caixin the Mi is no more than a basic smartphone, and its custom operating system called MIUI is based on the Android system’s architecture.

Another challenge for Xiaomi lies in building an after-sales service network for the handset. The company had no owner-support system for the first month of Mi sales, but later said service centers would open in seven cities. Another twenty-three cities were expected to get service centers this year.

Zhu Yishi is a Caixin staff reporter.