Xiaomi is primed to scale Mount Microchip

Xiaomi’s wiring is nearly ready to include microchips. The $82 billion Chinese company shipped 53 million smartphones in the second quarter, overtaking Apple to become the world’s second-largest producer. With greater heft and official support from Beijing, boss Lei Jun should be closer to fulfilling his microchip dreams.

Financial results released on Wednesday underscore how quickly the company has capitalised on the woes of rival Huawei, which has been crippled by U.S. sanctions. Xiaomi, by contrast, is booming. Revenue from the handset division surged 87% in the three months ending June 30 from a year earlier, to $9 billion. Momentum from overseas markets, particularly in Europe where it is now the top-selling brand, has helped Xiaomi gain ground on Samsung Electronics. Lei wants to be the world’s biggest smartphone maker within three years.

To overtake the South Korean giant, Xiaomi will need to increase annual shipments by roughly a fifth, according to Daiwa analysts. Bringing semiconductor production in-house would help. The company mostly relies on Qualcomm and others for mobile chipsets, but a global shortage is expected to dock production in the coming months. Moreover, self-developed processors would deliver significant cost and technological advantages. When Apple switched out Intel’s chips for its own in the Macbook last year, savings were estimated to be more than $2 billion by 2022, per research outfit Trefis.

Lei has been quietly building up Xiaomi’s semiconductor and manufacturing capabilities. The company unveiled its first microprocessor to much fanfare nearly four years ago, an attempt broadly considered to be unsuccessful. Earlier this year, however,

it released its own imaging chip. Xiaomi also has stepped up investments into local firms in recent years and increased its allocation to new inventions. As of June, it reported having more than 11,000 staff in R&D, more than 40% of the company’s total headcount.

Beijing also could give Xiaomi a leg up. Amid President Xi Jinping’s broader tech crackdown, he has prioritised semiconductors as a strategic industry and is keen to develop homegrown champions. Government funding, subsidies and tax breaks all would be a big help for the capital-intensive industry. All signs point to Xiaomi’s next significant upgrade being chips.