Red Hot Chinese Smartphone Maker Xiaomi Operating On 1.8% Profit Margin

Chinese smartphone OEM Xiaomi has been kicking ass and taking names during the past year. In the Chinese market, Xiaomi displaced Samsung to become the country’s top-selling smartphone vendor during Q2. And thanks to some combo blows from both Xiaomi and Huawei, Samsung has been sent running for cover as it attempts to reinvent its smartphone lineup and cut costs across the board.

“I believe that no one thought the Xiaomi from three years ago, which just made its first phone, would later rank as the third largest player,” said Xiaomi CEO Lei Jun at China’s World Internet Conference last month. “Within five or 10 years, we have the opportunity to become the number one smartphone company in the world.”

But Xiaomi’s philosophy of cramming high-end specs in its smartphones at rock bottom prices has taken a toll on its profitability. Whereas companies like Samsung have seen their sky-high margins erode over time as budget-minded competitors — like Xiaomi and Huawei — enter the marketplace, Xiaomi already in the low single-digits with respects to its operating margin.

According to a regulatory filing obtained by Reuters, Xiaomi recorded revenue of $4.3 billion and $56 million in net profit during 2013. The company skated by on an operating margin of just 1.8 percent according to the filing.

For comparison, Apple was sitting pretty with an operating margin of 28.7 percent in 2013, while Samsung was a bit lower at 18.7 percent. In its most recent earnings release (Q3 2014), Samsung’s operating margin was lower still at 8.7 percent.

"They're growing so fast and so lean, I wouldn't be surprised even if they were losing money," said analyst Bryan Wang, an annuls for Forrester Research. "The current market is so competitive that I don't think it's sustainable without consolidation."

When it comes to global market share, Samsung holds 23.8 percent of the smartphone market according to IDC, while Apple has half that share with 12 percent. Xiaomi is running in third place with 5.3 percent of the worldwide smartphone market with Lenovo and LG closing out the top five with 5.2 percent and 5.1 percent respectively.