Huami must be self-developed

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On July 13, Huami Technology held the Next Beat 2021 conference in Hefei. Huang Wang, founder, chairman and CEO of Huami Technology, released a new generation of self-developed wearable chip — Huangshan 2S, self-developed smartwatch operating system Zepp OS, PumpBeat blood pressure engine. It has even unveiled a small MRI device that will cost in the millions of dollars.

Since the release of its own brand Amazfit in 2015, Huami has been pursuing the goal of high-end and autonomy. Later, Huangshan No. 1 and Huangshan No. 2 chips were successively released. To the present third generation, Huami hopes to exchange high gross profit for brand with high R&D investment, and then use the profit for research and development, so as to form a “snowballing” growth.

I do not know whether the bracelet is too successful, when it comes to Huami, most people still think that they cannot be separated from Xiaomi. Because of its single revenue structure and high operational risks, Xiaomi is not only the driving force behind Huami’s rapid rise, but also the object that needs to be weakened when Huami breaks through the ceiling and stands on a higher level.

It’s not that the relationship between the two companies is bad — on the contrary, the relationship between the two companies has always been smooth. It’s just that each company wants to diversify its business to increase its risk resistance, and the capital market expects the same. It’s the same logic behind Xiaomi’s need to expand beyond its phone business into an ecological chain, e-commerce, and even car manufacturing.

As a partner company of Huami, Xiaomi also has its own label that can not be cast off – cost performance. “After 10 years in the industry, Xiaomi is still considered a mid-to-low end product. I feel depressed,” Lei said at the end of last year.

Corresponding to the high cost performance at the same time, low gross profit is naturally millet and ecological chain enterprises facing the problem.

In the hundreds of ecological chain enterprises on millet, there are some enterprises content with the status quo, rely on millet blood transfusion as their own “local boss”; Another part of the enterprise in peacetime, try to self-hematopoiesis, do the difficult but right thing.

Clearly, Huang Wang belongs to the latter group.

Since the study hard

Xiaomi’s sales of wearable products accounted for 97.1 percent, 92.1 percent and 82.4 percent of Huami’s revenue in 2015, 2016 and the first nine months of 2017, respectively, according to the company’s 2018 prospectus

In other words, Huami’s business structure has become healthier year by year, but it is still at an early stage of development, with its own business contributing less than 20% in the third quarter of 2017. Of the 27 industrial and commercial risk alerts, nine were related to Xiaomi, accounting for a third.

It is not difficult to see that Xiaomi plays a decisive role in the overall operation of Huami, while the independent brand which has been developed for two years at this time only makes a drop in the water for its contribution to the revenue due to the small quantity of shipments.

“Having the platform and resources of a public company is not the end of success, but the beginning of creating new things.” Huang wrote the words on his personal account on the night of his 2020 birthday.

Obviously, going public is just the beginning, and the first thing for Huami to get more funds is to expand its research and development investment.

In the fourth quarter of 2018, after being listed, Huami’s R&D investment increased significantly, with a 141% year-on-year increase. In the third quarter of 2019, Huami’s R&D investment exceeded 100 million yuan for the first time, and since then, the R&D investment has remained above 100 million yuan every quarter.

These two key time nodes, it is the emergence of Huangshan No. 1 and Huangshan No. 2 self-research chip.

Is it difficult to develop your own chip? Hard to do. The chip industry is usually divided into four links: design, manufacturing, packaging and testing, among which design and manufacturing are the main links of the birth of chips. Most people know that domestic manufacturing is weak, and it is difficult to make smaller chips without lithography, but it is impossible to do so without design, and chip design is not easy.

Founded in 2004, Huawei’s first real mobile phone processor, K3V2, was born eight years later. This processor uses ARM quad-core architecture, 40nm process and supports Android system. However, due to the long development time, it is one generation behind the processors of Qualcomm and Samsung at the same time. Due to high power consumption and low performance, Huawei D1 and D2, which adopted K3V2, could not meet user needs. It wasn’t until 2014 that Huawei reached a turning point with the launch of the Kirin 920 and its upgraded version, the Kirin 925.

That means Huawei’s chip development has taken at least a decade to slowly start to get on track.

In addition to time, the investment of money can not be underestimated. Huawei is said to be investing billions a year in Hays, and it took seven years for the company to turn a profit.

However, Huawei’s strength comes from its diversified revenue structure. According to the financial report of 2020, the revenue of Huawei’s consumer business accounts for about 54.2%. Even if the consumer business is completely shut down, the revenue of enterprise business and operator business will exceed 400 billion yuan, enough to beat the performance of most listed companies in a second.

On the contrary, Huami Technology, which has only been established for 7 years, faces greater challenges both in terms of time and capital volume, even if it is faced with smart wearable chips with lower research and development threshold than mobile phone chips.

According to the data of Tianyangcheck, there were only two rounds of financing before Huami went public, which were tens of millions of RMB in Round A and 35 million US dollars in Round B. In addition, due to the low gross profit, Huami’s main business profit from 2015 to 2017 is not ideal, with net income of -37.85 million yuan, 23.95 million yuan and 168 million yuan respectively.

Huangshan No. 1 chip was established in 2015, and it took three years to successfully stream the chips, among which the financial pressure can be imagined. Different from the market based on ARM architecture, Huangshan I is developed based on RISC-V instruction set.

As we all know, the two mainstream chip architectures are X86 and ARM, which are the main architectures of PC and mobile terminal chips, occupying 90% market share of CISC (Complex Instruction Set) and RISC (Reduced Instruction Set) respectively.

Huawei Kirin, Qualcomm Snapdragon and Apple A series chips are all designed on the basis of ARM architecture. ARM company stopped the cooperation with Huawei and Haysys, which directly led to the failure of Kirin chip design.

RISC-V instruction set is an open instruction set architecture based on the principle of reduced instruction set computing. RISC-V instruction set has the characteristics of open source and light weight, which is more suitable for light terminals of the Internet of Things such as wearable.

According to Zhao Yajun, co-founder of Huami Technology, vice president of hardware technology and member of CMT, the new generation of Huangshan chip is developed based on dual-core RISC-V architecture. Compared with Huangshan 2, the operating power consumption is reduced by 56% and the computing capacity is increased by 18%.

At the same time, the RISC-V Foundation moved from the US to Switzerland in 2020 to ensure that universities, governments and companies outside the US would use the open source RISC-V without political influence, according to CEO Calista Redmond. This further reduces the risk of getting stuck.

And Huangshan chip continued iteration at the same time, the private brand began to gradually enter the market, in the last three years, the sales ratio of millet gradually dropped to less than 70%.

In the fourth quarter of last year and the first quarter of this year, Xiaomi’s product shipments declined by 14.5% and 34.3% respectively, while Huami’s own product shipments rose by 31.3% and 111.1% respectively. Among them, the global sales of Huami’s own brand products in the first quarter of this year exceeded 1.65 million, with a year-on-year growth of 68.8%, ranking among the top four. Of course, the decline in Xiaomi’s shipments in the first quarter of this year is also related to product upgrading, but the rise of Huami’s own brand is obvious to all.

But sustained research and development will still be necessary to sustain this growth.

Huang revealed at the Next Beat 2021 conference that Huami has spent an average of 410 million yuan a year on research and development in the past three years, and will spend 538 million yuan in 2020. For a public company with low gross margins and quarterly financial statements to file, that’s a lot of pressure.

Opportunities and risks coexist

“Smart wearable devices are the next growth point in the hardware field, and watches are more likely to become the next important entry. Otherwise, why do Huawei, Xiaomi, Oppo and Vivo join this track one after another?” said a senior executive of a Xiaomi ecological chain company to Photon Planet.

According to data from IDC, the global shipments of wearable devices in 2020 reached 444.7 million units, with a year-on-year growth of 28.4%. Among them, headphones accounted for 64.2%, followed by watches and bracelets with 24.1% and 11.5%, respectively.

While Bluetooth headsets have gained popularity in recent years thanks to the launch of Apple’s AirPods, smartwatches offer much more potential in terms of interaction and versatile. Concerns about health and fitness continue to rise, especially as a result of the outbreak.

Last year, Huami upgraded Zepp, a motion-sensor technology company, to a specialised digital health management brand, two years after acquiring it. Earlier this year, Huami Technology (HMI.US) announced that it was changing its name to Zepp Health Corp under the New York Stock Exchange ticker “Zepp”.

Different from the home furnishing linkage of mobile phone manufacturers, Huami’s move means to focus on the health sector.

Meters according to introducing, China now with top hospitals and research institutes at home and abroad has carried out a number of cooperation, such as cooperation with Peking University first hospital of “using smart wearable devices after radiofrequency ablation of atrial fibrillation follow-up management”, and GuangYi YiFuYuan academician zhong nanshan group “wearable devices in the management of chronic obstructive pulmonary application”, etc. The reliability of the PUMPBEATS blood pressure detection engine was verified in a clinical trial jointly carried out by the First Hospital of Peking University.

If we look at the ranking of global wearable device shipments, we are not surprised by Huami’s move. In IDC’s 2020 ranking of global smart wearable devices, the top four are all mobile phone manufacturers.

Relying on the shipment of mobile terminals can drive the growth of wearable devices, and the product diversity and company size are also difficult for ordinary wearable device enterprises to reach. Therefore, it is a good choice to concentrate on the construction of their own moats in the subdivision of the track.

In addition to the health field layout, Huami also released the Zepp OS smartwatch operating system based on FreeRTOS microkernel development. Since traditional wearable device systems are mostly mobile phone systems or ready-made embedded real-time operating systems, Huami’s self-developed operating system makes it occupy less space, and with self-developed hardware and algorithms, the operation is more smooth.

It is worth noting that when we talk about operating systems, ecology is always a topic that cannot be ignored. Even Huawei Hongmeng OS needs to be compatible with Android software to enrich its application ecology.

Zepp OS has configured the watch JS small Program Framework — Zeus Mini-Program Framework, which reduces the development threshold. In the future, it will open the graphic development environment for the design of the dial, enabling individual users to design the personalized dial.

Since then, a vertical ecological network of Huami’s software, hardware and algorithms has emerged, focusing on the health sector. However, the ability of enterprises to continue to invest in research and development is also followed by the test.

We stretch out the time frame to see some of the pressures Huami is under.

In the case of Huami’s intention to promote its own brand, in addition to the high R&D expenses, marketing expenses are also rising, and even nearly equal to the R&D expenses in the fourth quarter of 2020, but the gross profit margin has not been improved. On the contrary, with the decline of Xiaomi’s product shipments, the net income of Huami turned negative for the first time in recent years in the first quarter this year.

The above situation is not a matter of ability, but a matter of choice. It is all related to Huami’s intention to increase its investment. In the shorter term, no one will do that.

In the short term, in the process of building its own brand, Huami’s revenue and profit have to be affected, which is where its pressure lies. On the contrary, although the gross profit margin of millet products is not high, but the mosquito is also meat.

Seemingly aware of the situation, Huami extended its strategic partnership agreement with Xiaomi for another three years in October, ensuring it remains a top priority partner for future development of Xiaomi’s wearable products globally.

Therefore, an enterprise should not only ensure that there is no survival pressure in the short term, but also ensure that it has stronger competitiveness in the long term. This is a matter that needs to be balanced.

If the normal growth of the main business cannot be guaranteed, the research and development will probably be dragged down, and the excessive research and development investment will affect the cash flow of the enterprise, and there is even a risk of undermining the main business. We can see one or two things from Xiaomi’s chip development history.

Xiaomi registered a wholly-owned subsidiary, Pinecone Electronics, in October 2014 to prepare for chip development. One year later, the first chip was completed, and the ThepaperS1 chip was officially released in 2017.

Because it is the first self-developed chip, the lack of experience leads to the process and performance can not compete with the high-end chips of the same period, so the actual sales volume of Xiaomi 5C equipped with this chip is average. Just past 2016, Xiaomi suffered its first “Waterloo” since its founding. Xiaomi began a three-year remedial course. The industry characteristic of big investment in chips and slow return makes Xiaomi’s pace of research and development have to slow down.

So far, the S2 has not had a chance to launch, and it was replaced at this spring’s event by the camera chip The Paper C1. Perhaps it is the slow progress in chip development that makes Xiaomi’s high-end road a bit bumpy.

Huami’s choice of self-developed chip and OS is also a difficult path, but in order to improve user experience, it is a choice that must be made. Because if successful, Huami will build a higher moat.

Since Huawei was affected by chips in the past two years, the word “jam neck” has been constantly mentioned on the Internet, and whether it is self-research has gradually become one of the standards for consumers to judge the strength of an enterprise.

In fact, it is often difficult for enterprises to achieve self-research projects beyond their own strength, such as revenue, growth rate, earnings and even supplier relations

The common problems of poor battery life, single function and lack of ecology of global wearable devices are mostly caused by system problems, because the system carried by most wearable devices is usually based on the magic change of mobile phone system or the existing embedded real-time operating system.

With self-developed chip and self-built system, Huami has embarked on a difficult and long road which needs time to verify.

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Reprint indicated source:Spark Global Limited information