On April 26, Xiaomi Group released its 2023 Environmental, Social and Governance Report (ESG Report), which is the sixth consecutive year that Xiaomi Group has announced its ESG practices to all sectors of society and stakeholders.
In the past year, the release of Xiaomi cars has set off a sensation in the technology circle, and at the SU7 press conference, Lei Jun specifically mentioned the situation of green environmental protection in automobile factories. Lei Jun's on-site PPT showed the photovoltaic panels on the roof of the automobile factory, and marked that the annual power generation reached 16.4 million kWh, which can reduce 9,905 tons of greenhouse gas emissions per year.
Image source: Xiaomi
In the 2023 Xiaomi ESG report, the position of the smart car business in Xiaomi's ESG map is also shown. In the "Product Innovation" section of the "Technology Exploration and Inclusive Application" section of Xiaomi's ESG report, the role of Xiaomi Auto in promoting sustainable development in the future transportation industry was shared around the five core technologies of electric drive, battery, large die-casting, intelligent driving, and intelligent cockpit, and the attributes of Xiaomi's car in promoting sustainable development in the future transportation industry were emphasized.
ESG description of Xiaomi's automotive business
In the past 6 years, market rating agencies have defined Xiaomi as a consumer electronics hardware company, for example, the well-known rating agency MSCI has classified Xiaomi Group into the [Technology Hardware, Storage &Peripherals] industry based on GICS (Global Industry Classification Standard). According to MSCI's own ESG Industry Materiality Map, ESG issues related to the industry are given corresponding weights.
However, in addition to matching key issues by industry (mainly E and S dimensions), rating agencies also set company-specific key issues based on specific company circumstances, and MSCI's rating methodology believes that in some cases, a company may have a unique environmental or social key issue that may not be suitable for other companies in the company's industry. As a result, when a company-specific key issue is taken into account, other key issues will be weighted less in the rating.
One of MSCI's rules is that the most relevant key issues related to the secondary sector are considered to be company-specific key issues for which companies are added to specific key issues, if the rated company derives significant revenue or significant influence from the secondary business.
For example, Disney is classified as a "film and entertainment industry", but it is itself one of the largest toy manufacturers in the world, so "supply chain labor standards" is a specific key issue for Disney.
At present, Wall Street analysts believe that Xiaomi SU7 can reach annual sales of up to 100,000 in the future, so the automotive business can bring at least 20 billion revenue to Xiaomi in the future. Comparing the revenue structure of Xiaomi's annual report, although the automobile business may not be able to become the group's second business in the short term, from the perspective of influence, the automobile business affects the capital market's imagination of Xiaomi's future development.
In the automobile manufacturing industry, sorting out the key issues of Volkswagen, BMW, NIO, Tesla and other automakers in the past, the most likely key issues to become Xiaomi's specific key issues are "product carbon footprint" and "product safety and quality". Therefore, Xiaomi's automotive business not only brings new changes and impacts to the Group's operating performance, but also brings new challenges and opportunities to Xiaomi in terms of ESG practices.
One obvious change is that Xiaomi will have the same specific key issues as car companies such as NIO, Tesla, BMW, etc. In the MSCI ratings, Xiaomi's ESG rating hovers between B-BB, and is in the bottom 20% of its own industry. According to MSCI rules, the addition of certain key topics will change the weight of the original industry topics. Therefore, the performance of [product carbon footprint] and [product safety and quality] issues will be an important factor affecting Xiaomi's ESG score in the future.
Another change in addition is that the automotive business will make Xiaomi face the reality of increasing the weight of issues in the dimension of [supply chain management], and Xiaomi has been exposed to risks before in the supply chain management level. In 2018, on the eve of the IPO, a domestic environmental group published an article exposing the environmental and pollution problems in Xiaomi's supply chain. At the critical juncture of the IPO, this incident once caused Lei Jun to explain to the public in person.
At the beginning of the business, supply chain management was Xiaomi's weakness, but with the rapid development of Xiaomi's overall business, Xiaomi has become a leader in supply chain management in the field of consumer electronics. At the same time, combined with the issue of carbon footprint, this also puts forward higher requirements for Xiaomi in terms of carbon footprint management in the whole supply chain.
Lei Jun once posted on his personal WeChat public account, "By 2040, the existing business will achieve carbon neutrality at the operational level and will use 100% renewable energy." The same statement appeared in last year's interim report, but for the carbon neutrality goal of the entire industry chain, the interim report only stated that "we are actively exploring carbon reduction practices at the enterprise value chain level, and promoting core suppliers to set emission reduction targets that are equivalent to or higher than Xiaomi's emission reduction targets".
Although Xiaomi is listed on the Hong Kong Stock Exchange, according to the latest ESG Code of the Stock Exchange, there is a mitigation and transition period for disclosure entities in terms of climate disclosure. However, for a star company, compared with other leading companies, Xiaomi's ESG practice results in the carbon reduction dimension are not consistent with its own industry status.
In addition, as an emerging industry and hot field, new energy vehicles often have greater impact and impact when controversial events break out. Referring to the controversial incident of Tesla's self-driving, Xiaomi also needs to be prepared in advance to deal with the impact of negative and controversial events.
In addition to the challenges, the automotive business has also brought new opportunities and benefits to Xiaomi's ESG rating improvement. In the dimension of [product safety and quality], Xiaomi's relevant indicators have been performing well. In its 2023 ESG report, Xiaomi also ranked product quality and safety as the first material issue, and attached great importance to its ESG strategy.
In the 2023 ESG report, Xiaomi disclosed in the "Product and Service Quality" chapter that it has completed 249 product quality improvement projects, the failure feedback ratio (FFR) of smartphone products has continued to decrease to 36% compared with the previous year, and won 32 external quality honor awards, including 1 China Quality Technology Award issued by the China Association for Quality and 3 Enterprise Improvement Case Awards issued by the China Quality Club.
Xiaomi product quality improvement practices
It also cites the construction of the quality system of Xiaomi smartphones, which has carried out in-depth integration and closed-loop around the four dimensions of design, simulation, testing and after-sales, and established a scientific and sound quality index system. The praise rate of the e-commerce platform has reached more than 99%, and the net promoter score has increased by more than 20% for three consecutive generations. As of 2023, Xiaomi's smartphone simulation system has completed more than 2,000 simulation iterations, with a total of more than 450 pre-interception reliability risks.
Xiaomi's 2023 ESG report contains a total of 11 parts and 104 pages, which are detailed and wide-ranging. The addition of the automotive business will bring new challenges and opportunities to ESG practices, and the new energy vehicle business will provide an important starting point for Xiaomi to embrace a low-carbon economy.
In the context of sustainable development, ESG is a compulsory course for leading companies and a must for becoming a global leader. There is still more room for improvement and optimization of Xiaomi's ESG practices, and for the vast majority of domestic enterprises, there is still a long way to go to catch up with the ESG practices of leading international companies.