The news: Xiaomi will spend $77.4 million to acquire autonomous vehicle (AV) startup ​​Deepmotion using funds from surging smartphone shipments in an effort to expand its product offerings, according to Bloomberg.

• Xiaomi reported a record 64% year-over-year (YoY) revenue increase in its Q2 ending in June. Its net income also surged 80% YoY.
• In addition to AVs, Xiaomi also said earlier this year that it would invest $10 billion into electric vehicles over the next decade.

The rapid rise of Xiaomi: The Chinese smartphone giant has rapidly filled the shoes of a diminished Huawei and recently became the world’s largest smartphone vendor by shipments for the first time.

• That mantle was held by Huawei as recently as 2020, but an onslaught of US sanctions rapidly tanked its international business.
• Xiaomi, meanwhile, took off in international markets. In Q2, Xiaomi smartphone shipments grew 83% YoY in Western Europe, Africa, and Latin America.

The bigger picture: Xiaomi is the latest Chinese tech firm to enter an increasingly competitive and crowded EV and AV space.

• Chinese tech giant Baidu has been working on autonomous vehicles for years and recently launched the world’s first paid (though limited) autonomous taxi service in May.
• Not to be outdone, Alibaba announced earlier this year that it would develop a self-driving truck in partnership with logistics company Cainiao.

The opportunity: Autonomous vehicles could turn into the next digital frontier for Xiaomi if the company hits a ceiling on new smartphone users.

• AVs, which feature touch-screen interfaces and mobile broadband connectivity bundled into infotainment centers that serve as an extension of the mobile experience, could offer a potentially large growth area.
• If it can deal with (nontrivial) manufacturing hurdles, Xiaomi could be well suited to use its experience creating consumer electronics to create a tech-integrated connected car.
• According to our estimates, autonomous ride-sharing vehicles in the US alone are expected to see a 333% increase from 2021 to 2023.

What’s the catch? Xiaomi may need to tread carefully given China’s reinvigorated regulatory regime that has demonstrated an eagerness to limit the size of the country’s largest tech companies.