At 7 pm on March 28, Xiaomi’s first car, Xiaomi SU7, will be officially launched, which will also bring an end to the three-month price debate.
SU7 price controversy,An important reason is Xiaomi’s essence of “cost-effectiveness”.
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In 2010, Xiaomi, a newly established company, launched an advertising slogan: Young people’s first mobile phone. In August 2011, the first generation of Xiaomi mobile phone was officially released, priced at 1,999 yuan, winning the market with its high cost performance. Subsequently, Xiaomi became the “breakthrough” in popularizing smartphones, driving the prosperity of China's mobile Internet.
It seems that the public generally expects Xiaomi Motors to continue its strategy in the mobile phone field and provide affordable, technologically advanced cars to the younger generation, becoming the “first car for young people” in their minds. Many people tried their best to persuade Lei Jun to set the starting price below 200,000 yuan, or even 99,000 yuan.
However, Xiaomi really shouldn't set the price of its car below 200,000 yuan. Whether we consider it from the perspective of cost, or analyze it from the perspective of industry trends and the mission of the times, we can see the inevitability behind this judgment.
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01. A pure price war has no future
The reason why many people suggest that Xiaomi sets the price of its cars below 200,000 yuan is mainly because there is currently a fierce price war taking place in the automobile market.
Since 2023, “price war” has been a keyword in the Chinese automobile market. Compared with last year, this year's price war shows the characteristics of wide radiation range and high discount rate. From mini pure electric cars worth tens of thousands of yuan to luxury models worth 20 to 300,000 yuan, they are all involved. The price war has caused headaches for Chinese car companies, and most of them can only bite the bullet and persist.
There are many reasons for this phenomenon, including relatively lower vehicle manufacturing costs, imbalances in market supply, and slowing demand growth.
On December 28, 2023, Xiaomi Motors held its first technology conference, followed by three months of price speculation | Image source: Lei Jun Weibo
It is understood that the price of lithium carbonate has dropped from nearly 600,000 yuan/ton at the end of 2022 to the current 100,000 yuan/ton, which has greatly reduced the cost of power batteries and has also become an opportunity for the current price war. The price of power batteries accounts for about 40% of the cost of pure electric models. For smaller A-class cars, the cost of power batteries may even account for about half.
At the same time, due to the high degree of homogeneity of products and the current relatively weak domestic demand, competition in the automotive industry will be very fierce. According to the forecast of the China Association of Automobile Manufacturers, China's automobile sales will increase by 3% year-on-year in 2024, which is much lower than the 12% growth rate of the previous year.
Overcapacity is also a major problem in the current automobile market. my country's overall passenger car production capacity is close to 55 million units, while the annual production volume is about 23 million units, with a utilization rate of only 50%. Generally speaking, the standard for normal production capacity is 79% to 83%. If it is lower than 79%, it means overcapacity.
In addition, the layout of the price range of Xiaomi SU7 by other companies gives people the feeling of “besieging” Xiaomi cars.In particular, Geely has recently launched five models in the 150,000-300,000 class, and the market positioning is roughly the same as that of Xiaomi SU7. This undoubtedly brings certain pressure and challenges to the pricing of Xiaomi cars.
However, simple price cuts seem to have begun to “fail”, and price cuts may not lead to an increase in sales. The latest report from the Autohome Research Institute shows that price cuts of different brands have different impacts on sales:
The price reduction strategy of leading luxury brands is effective, but the sales and prices of second-tier luxury brands such as Cadillac and Lexus have not met expectations;
The preferential ratio of joint venture brands has increased to about 20%, but sales growth is still insufficient, especially for the three major Japanese brands.
The price reduction strategy of most Chinese brands is effective. Although the discounts are lower than those of luxury and joint venture brands, sales are growing. Brands such as Geely and Changan increase sales through discounts.
On March 25, Xiaomi SU7 launched static tastings in 29 cities across the country | Image source: Lei Jun Weibo
A price war is like a “group-losing game” that is not beneficial to either party in the long run. Lowering prices to gain market share may harm long-term earnings unless price reductions are offset by improved cost-effectiveness. Therefore, companies trapped in price wars are like being stuck in the mud and cannot extricate themselves. As consumers become more and more picky, the final result is that the industry falls into a “cesspit butterfly” dilemma.
A McKinsey research report pointed out that the lively scene in the smart electric vehicle market is based on a serious overdraft of the profitability of car companies:The scale and profits of China's auto market account for about 30% of the global auto industry, but the total profits of local auto companies are less than 5% of the total profits of the global auto industry, creating a contrast.
Long-term low profit status will not only dampen the enthusiasm of investors, but also hinder car companies from improving their technological level and building long-term and sustainable competitiveness. For a mature technology company like Xiaomi, it is difficult to justify entering the market with this logic.
02. Changes in cost-effective formula bring new advantages
Chinese companies do have rich experience in cost-effective products, and Xiaomi was once a “grandmaster.” However, with the development of the times and changes in corporate strength, the cost-effective formula also needs to be constantly adjusted.
At first, Xiaomi used mid-to-low prices and the highest performance as its selling point to attract a large number of users, and then made profits through value-added services. Xiaomi has quickly made a name for itself in the market by offering products with superior performance and affordable prices. Within five years, Xiaomi surpassed established manufacturers such as Lenovo and became the top five Internet companies in China.
However, with the rise of the “people-made smartphones” craze, more than 100 brands have flooded into the smartphone market, followed by crazy expansion, brutal reshuffle and low profit margins. In comparison, in the fourth quarter of 2016, Apple accounted for 92% of the industry's profits despite accounting for only 18% of sales.
As the market begins to become saturated, the focus of competition in the mobile phone industry has shifted from traditional hardware configuration and price war to the user experience of the product itself. The most obvious manifestation is that there are fewer and fewer “thousand-yuan phones” with the largest market share, while there are more and more flagship models.
During this period, Xiaomi began to enter the high-end market and explore new cost-effective formulas. In 2019, the Xiaomi and Redmi brands split. Redmi, which was upgraded from Redmi, became an independent brand and took over the label of ultimate cost-effectiveness, while Xiaomi mobile phones are positioned to pursue the ultimate technology and experience.
This year is already the fifth year of Xiaomi’s high-end strategy. Thanks to the hot sales of the Mi 14 series, Xiaomi's share of the global high-end mobile phone market successfully doubled last year.
The financial report shows that in 2023, the average unit price of Xiaomi mobile phones in the mobile phone market in mainland China will increase by more than 19% year-on-year, hitting a record high. In the smartphone market in the price range of 4,000 yuan to 6,000 yuan, Xiaomi's market share reached 16.9%, a year-on-year increase of 9.2 percentage points.
In the process of Xiaomi's impact on the high-end, there are also some rice fans who suggested that they raise the price a little higher, but Xiaomi still insists on cost-effectiveness, but the formula has changed.
Lei Jun has mentioned many times,Cost-effectiveness is not about discussing absolute prices, let alone low prices. Adhering to cost-effectiveness can also lead to high prices and high-end products.Cost-effectiveness is about comparative advantage, that is, the best performance for the same price, and the lowest price for the same performance.
Xiaomi Auto aims to create a mobile smart space | Image source: Xiaomi
At the same time, for Xiaomi Motors in 2024, its contemporary responsibility is no longer to become the “breakthrough” in popularizing new energy vehicles, but to pursue the ultimate experience, open up new fields, and define new products.
With the development of China's automobile market, we are not only experiencing the transformation of traditional cars into new energy vehicles, but also witnessing the market's transformation from incremental to stock. Compared with the incremental market, the stock market plays a different role: most car buyers are not buying cars for the first time, and they have higher expectations for products and experiences. In addition to price, they pursue quality, craftsmanship, cutting-edge technology, and even A higher-end brand image to show your taste.
Even in the field of new energy vehicles, it is no longer a blue ocean, and its market penetration rate is close to 40%. In February 2024, the retail penetration rate of domestic new energy vehicles reached 35.8%. BYD Chairman and President Wang Chuanfu predicts that the monthly penetration rate of new energy vehicles will exceed 50% this year.
For Xiaomi Motors, which is about to launch, the key to success lies inAchieving differentiation from competitors through brand building, product upgrades and high-quality services is Xiaomi’s true mission and the way to survive.. Giving up differentiation and going back to the old path of price war is an absolutely undesirable choice for Xiaomi.
Therefore, Xiaomi Motors should avoid falling into a price war. The starting price of SU7 must exceed 200,000 yuan. If you want to bet on a price range, 230,000-250,000 yuan may be more in line with Xiaomi’s positioning and market demand.