Xiaomi will give you money back if its profits run too high

• Xiaomi sets limit on net profit margin after tax.
  
• Says it will share excess amounts by “reasonable means”.
  
• Business model only allows for 1-2% profit margins on smartphones.

Xiaomi, the Chinese smartphone manufacturer, just pledged that if they make profits beyond a certain point, they will give a part of it back to the users. In fact, they’ve set the limit at 5 percent of the net profit margin on hardware after adjusting for tax.

If Xiaomi’s profits from smart home devices, smartphones, and other hardware cross that threshold then its official statement is that it has plans to “distribute the excess amount by reasonable means to its users.”

Today our CEO Lei Jun announced a promise to all our fans...#Xiaomi will forever limit the net profit margin after tax for our entire hardware sales (including smartphones, IoT and lifestyle products) to a maximum of 5%.

Do you like the sound of that? pic.twitter.com/ZbEjaVeBLf

— Mi (@xiaomi) April 25, 2018

Let’s talk about profit

That said, making profits in the smartphone market is easier said than done. Xiaomi has gained a healthy market share, but it took time to do so. And the company, by its own admission, sells products at low margins.

In essence, Xiaomi’s strategy is to sell products from its “ecosystem” to consumers and make profits from that. It's something Apple has mastered over the years, but Xiaomi sells products at less than half the price and margins as compared to Apple.

A brand like Apple can afford to claim 87% profits, while controlling 18% of the market share.

Even if the industry wasn’t so cutthroat, Xiaomi’s business model in itself only caters to marginal profits in the realm of 1-2%. Nonetheless, this venture by Xiaomi converges with its core focus on providing high-end specs at a budget price.

Their flagships models are consistently compared to the likes of Samsung and Apple, while being considerably cheaper. As per reports by Counterpoint Research, Xiaomi overtook Samsung as the leading smartphone brand in India last quarter and during Q1 2018, Xiaomi has continued to increase its lead while Samsung has fallen behind.

What’s in store

Bloomberg has suggested that the Xiaomi IPO will go public this year and, according to sources in China the company plans on launching a dual IPO, which will list the Xiaomi in Hong Kong as well as Mainland China.

There’s a possibility that the IPO could be valued at up to $100 billion. Globally, Xiaomi now ranks fifth in the smartphone space. Reports even indicate that the IPO could possibly be the biggest since Alibaba’s $25 billion debut in 2014.