Source: Geek Park

At 7 p.m. on March 28, Xiaomi's first car, the Xiaomi SU7, will be officially launched. This will also put an end to the three-month price debate.

One important reason for the SU7 price dispute is Xiaomi's essence “price-performance ratio.”

In 2010, the company Xiaomi, which had just been founded back then, launched an advertising slogan: the first mobile phone for young people. In August 2011, the Xiaomi Phone Generation was officially released. The price was 1999 yuan, winning the market with its high cost performance ratio. Subsequently, Xiaomi became a “windbreaker” in popularizing smartphones, driving the prosperity of China's mobile internet.

Seemingly, the public generally expects Xiaomi to continue its strategy in the mobile phone sector, provide the younger generation with affordable and technologically advanced cars, and become the “first car for young people” in their minds. Many people painstakingly advised Lei Jun to set the starting price below 200,000, or even 99,000 yuan.

However, Xiaomi really shouldn't set the price of the car below 200,000 yuan. Whether considering costs or analyzing industry trends and the mission of the times, we can see the inevitability behind this judgment.

At 18:30 on March 28 (Thursday), I will watch the Xiaomi SU7 press conference with you on the Geek Park video channel live broadcast room!

Simple price war, no future

The reason why many people suggest that Xiaomi set the price of cars below 200,000 yuan is mainly because the car market is currently undergoing a fierce price war.

Since 2023, “price war” has been the key word in the Chinese automobile market. Compared to last year, this year's price war showed the characteristics of wide coverage and high discount margins. From miniature pure electric cars that cost tens of thousands of yuan to luxury models that cost 2.3 million yuan, they all participated. The price war has caused a lot of headache for Chinese car companies; most of them can only keep fighting hard.

There are many reasons for this phenomenon, including the relative reduction in vehicle construction costs, imbalances in market supply, and a slowdown in demand growth.

According to information, the price of lithium carbonate dropped from nearly 600,000 yuan/ton at the end of 2022 to the current 100,000 yuan/ton, which greatly reduced the cost of power batteries and became an opportunity for the current price war. Power batteries account for about 40% of the cost of pure electric models. For smaller A-class cars, power batteries may even account for about half of the cost.

At the same time, due to the high degree of homogenization of products and the current relatively weak domestic demand, competition in the automotive industry will be very intense. According to the forecast of the China Association of Automobile Manufacturers, automobile sales in China will increase by 3% year on year in 2024, which is far lower than the 12% increase in the previous year.

Overcapacity is also a major problem in the current automobile market. The overall production capacity layout of passenger cars in China is close to 55 million units, while the annual production volume is about 23 million units, and the utilization rate is only 50%. Generally speaking, the standard for normal production capacity is 79% to 83%, which is less than 79%, which is overcapacity.

Furthermore, the layout of Youshang in the price range of the Xiaomi SU7 gives people the feeling of “mobbing” Xiaomi cars. In particular, Geely recently deployed five models in the 150,000-300,000 class. The market positioning is roughly the same as the Xiaomi SU7. This has undoubtedly put some pressure and challenge on the pricing of Xiaomi cars.

However, the simple price reduction seems to have begun to “fail”, and the price reduction may not necessarily lead to an increase in sales. According to the latest report by Auto Home Research Institute, price cuts from different brands have different effects on sales:

The price reduction strategy for leading luxury brands was effective, but the sales volume and price of second-tier luxury brands such as Cadillac and Lexus fell short of expectations;

The discount rate for joint venture brands has increased to around 20%, but sales growth is still insufficient. Among them, the three major Japanese brands are serious.

Most Chinese brands have effective price reduction strategies. Although discounts are lower than luxury and joint venture brands, sales are growing. Brands such as Geely and Changan increase sales through discounts.

The price war is like a “group losing game”, which is bad for either party in the long run. Gaining market share by lowering prices may hurt long-term gains unless price reductions are offset by increased cost efficiency. As a result, companies caught in a price war are like falling into mud and unable to help themselves. As consumers become more picky, the end result is that the industry falls into a “cesspool butterfly” predicament.

According to the McKinsey research report, the bustling scene of the smart electric vehicle market is based on serious overdrafts of the profitability of car companies: the size and profits of the Chinese car market account for about 30% of the global automobile industry, yet the total profit of local automobile companies is less than 5% of the total profit of the global automobile industry, creating a contrast.

Long-term marginal profit not only dampens investors' enthusiasm, but also prevents car companies from improving their technical level and building long-term, sustainable competitiveness. For an established tech company like Xiaomi, it's hard to make sense to enter the market with this kind of logic.

Changes in cost-effective formulations bring new advantages

Chinese companies do have rich experience with cost-effective products, and Xiaomi was once a “grandmaster”. However, with the development of the times and changes in corporate strength, cost-effective formulations also need to be continuously adjusted.

At first, Xiaomi used the highest performance at medium to low prices as a selling point to attract a large number of users, and then obtain profits through value-added services. By providing products with excellent performance and affordable prices, Xiaomi quickly rose to prominence in the market. Within five years, Xiaomi surpassed established manufacturers such as Lenovo to become the top five domestic internet companies.

However, with the rise of the “national machine building” boom, more than 100 brands poured into the smartphone market, which was followed by crazy expansion, brutal reshuffling, and low profit margins. In contrast, in the fourth quarter of 2016, although Apple only accounted for 18% of sales, its profits accounted for 92% of the entire industry.

As the market begins to saturate, the mobile phone industry's competitive focus has shifted from traditional hardware configurations and price wars to the user experience of the product itself. The most obvious sign is that there are fewer and fewer “1000 yuan machines” 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 formulations. In 2019, the Xiaomi and Redmi brands split, and Redmi, which was upgraded from Redmi, became an independent brand, taking over the label of ultimate cost performance, while Xiaomi phones were positioned to pursue the ultimate technology and experience.

This year marks the fifth year of Xiaomi's high-end strategy. Due to the popularity of the Xiaomi 14 series, Xiaomi successfully doubled its share in the global high-end phone market last year. Financial reports show that in 2023, the average unit price of Xiaomi phones in the mainland China mobile phone market increased by more than 19% year on year, reaching a record high. In the smartphone market between 4,000 yuan and 6,000 yuan, Xiaomi's market share reached 16.9%, an increase of 9.2 percentage points over the previous year.

As Xiaomi hits the high-end path, there is no shortage of rice noodles that suggest they raise the price a little bit, but Xiaomi still sticks to the cost performance ratio; only the recipe has changed. Lei Jun has mentioned many times that cost performance is not about discussing absolute prices, let alone low prices. If you insist on cost performance, you can also be expensive and high-end. The cost performance ratio focuses on comparative advantages, that is, the best performance at the same price, and the lowest price for the same performance.

At the same time, for Xiaomi in 2024, the responsibility of the era is no longer to become a “windbreaker” in popularizing new energy vehicles, but to pursue the ultimate experience, open up new fields, and define new products.

With the development of the Chinese automobile market, we are not only experiencing the transformation of traditional vehicles to new energy vehicles, but also witnessed the transformation of the market from growth to stock. Compared to the incremental market, the way the stock market is played is different: most car buyers have higher expectations for products and experiences. In addition to price, they pursue quality, craftsmanship, cutting-edge technology, and even a more high-end brand image to show off their 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 domestic NEV retail penetration rate reached 35.8%. Wang Chuanfu, chairman and president of BYD, predicts that the monthly penetration rate of new energy vehicles will exceed 50% this year.

For the upcoming Xiaomi car, the key to success is to differentiate itself from competitors through brand building, product upgrades, and quality service. This is Xiaomi's true mission and its way to survive. Abandoning differentiation and going back to the old path of price warfare is definitely an unfavorable choice for Xiaomi.

Therefore, Xiaomi cars should avoid falling into a price war; the starting price of the SU7 must exceed 200,000 yuan. If you want to bet on a price range, the 23-250,000 yuan may be more in line with Xiaomi's positioning and market needs.

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