Internet & Tech

Lei’s wager

Is Xiaomi boss set to win bet?

Leijun w

Lei: set for a massive windfall?

Business school students from the 1980s should still remember the “H-Y war”, a popular case study of the bitter rivalry between Honda and Yamaha in the motorcycle market. Such intense domestic competition, however, helped propel Japanese exporters towards manufacturing excellence and global dominance, especially in the electronics industry.

Today Chinese manufacturers are keen to show the world that they are able to produce consumer goods that are just as good as those from Japan. At the forefront of this “Made in China 2025” dream has been Xiaomi, a smartphone maker that has expanded into making all kinds of electronic products from rice cookers to toilet seats (two emblems of Japanese excellence, see WiC378).

A tough foe at home appears to have helped Xiaomi’s expansion too. During a televised show in late 2013, Xiaomi’s founder Lei Jun traded barbs with Dong Mingzhu, the chairwoman of air conditioning giant Gree. However, as their debates got heated, Dong challenged Lei that Xiaomi’s revenue would not be able to overtake that of Gree in five years time. If Xiaomi proved her wrong, Dong vowed to pay Lei Rmb1 billion ($150 million).

At the time it looked like an easy win for Dong, known as ‘China’s toughest business woman’, given Xiaomi’s revenue stood at about Rmb30 billion, or a quarter of Gree’s. But with barely 12 months to run before the end of 2018, Lei’s firm has significantly narrowed the gap.

Recent reports from English-language media have pointed to a very close call for the “century bet” between Lei and Dong. According to Reuters, Xiaomi has been hearing bank pitches for a potential IPO this year. At a conferenc held before Christmas, Xiaomi told bankers that its 2017 revenue would be between Rmb110.2 billion to Rmb116.6 billion, or 18% higher than its target for the year.

In comparison, Gree’s 2016 revenue stood at around rmb110 billion although the company is expected to report healthy income growth in 2017 thanks to contributions from new businesses such as robotics.

“It won’t be a surprise to see Xiaomi’s surpassing Gree in 2018,” Securities Times reckons, adding that Xiaomi and Gree have come to represent Chinese manufacturers from different eras, and the competition between them would come a long way in deciding the future of China’s manufacturing sector.

Xiaomi’s investors would be happy to see the seven year-old firm scoring a symbolic victory over Gree, which was founded in Zhuhai in 1991. Xiaomi was valued at $46 billion in a 2014 funding round. Sales, however, stagnated over the following two years as Xiaomi overstretched itself in new markets (see WiC311) while its smartphone business was hammered by domestic rivals such as Huawei.

Apple Daily notes that Xiaomi was “the world’s most valuable unicorn” (a start-up that is worth $1 billion or more) in 2014 but it is also “one of the world’s oldest unicorns”. “Some investors may lose patience, pressuring Xiaomi to go public as early as possible in order to lock in their profit,” the Hong Kong newspaper says.

The Wall Street Journal reports Xiaomi’s listing could turn out to be the world’s biggest tech IPO this year, with some bankers even suggesting a $100 billion valuation for Lei’s rejuventated firm.

As of this week, Gree’s Shenzhen-listed unit is carrying a market value of $43 billion. But Dong is not ready to admit defeat just yet.

“I believe I will win [the Rmb1 billion bet with Lei],” she told reporters recently, while also trying to play down the mouth-watering wager as merely a verbal battle. “Of course it is not really about money at the end of the day. What really matters is that it provides incentives for all of us [Chinese manufacturers] to strive for excellency.”

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