Xiaomi: China’s Threat to Apple and Samsung

Why Xiaomi should worry Apple, Samsung and others

  • Share
  • Read Later

Xiamoi's Mi3 device.

Have you heard of Xiaomi yet? If you haven’t, you probably will pretty soon. If you have, you know the Beijing-based company has come out of nowhere this year to become the biggest threat to Apple, Samsung and other smartphone makers.

That’s because Xiaomi designs its phones with high-end specs and sells them at midrange prices. Xiaomi phones can’t touch the iPhone or the Galaxy in terms of quality (yet), but the company beats them handily on price, the paramount factor for many consumers in China. Xiaomi’s popular Mi3 handset — including a Nvidia Tegra 4 chip, a 13-megapixel Sony camera and 2-gigabit RAM — sells for $327. In comparison, in China, Apple’s iPhone 5S retails for $866 without a service plan, while the Samsung’s 32GB Galaxy Note 3 retails for $884.

Founded in 2010, Xiaomi started shipping products a year later. The company’s name comes from the Chinese word for millet (and may or may not reference a communist slogan), and its founders have backgrounds at Google, Microsoft and Kingsoft, an early Chinese software company.

The company’s private valuation is already estimated to have surpassed $10 billion — double the valuation of BlackBerry and half that of Sony. Xiaomi sold 7 million handsets last year and just as many in the first half of this year, putting it on track to sell 20 million in all of 2013. (Apple, by contrast, sold 125 million phones last year.) Very few startups can claim to have reached such milestones so quickly.

Outside of China, Xiaomi began to gain notice in July, when research firm Canalys said that the company’s market share in China surpassed Apple for the first time in the second quarter. Apple’s share fell from 8% to 5% in a single quarter. Around that time, Xiaomi unveiled its Hongmi, or Red Rice, phone for around $130 and offered 100,000 handsets for sale online. It sold out in 90 seconds. This month, Xiaomi moved past Taiwan’s HTC to become the fifth largest smartphone company in China.

(MORE: Money Talking: Crisis Could Weaken the Almighty Dollar)

The company made even bigger waves in late August, when it hired Hugo Barra from Google. Barra, who was head of product development at Google’s Android unit, was impressed with how the company forked Android to its handsets. At Xiaomi, he will oversee the company’s overseas expansion.

Beyond selling high-end phones at low cost, other factors are driving Xiaomi’s success. It helps that the company has a contract with China Mobile, the country’s state-owned telecom giant. China has 745 million customers (465 million smartphones and growing), promoting its 3G network. Samsung also has deal with China Mobile, while Apple doesn’t — although there are signs that that may change soon.

Xiaomi’s executives like to stress how the company is focused on user experience, but in a way that is different from Apple. Apple famously anticipates what will work with users and limits their ability to customize the product. Xiaomi updates its Android software every Friday after urging engineers to talk with customers to solicit feedback, CEO Lei Jun said at a conference this year.

Another divergence from Apple’s strategy: while the Cupertino, Calif., giant ran iTunes for years at little or no profit — using its music, movies and apps as a way to sell higher-margin devices — Xiaomi’s approach is similar to Amazon. Amazon sells its Kindle devices at or below cost to expand market share, using apps and content revenue to shore up slim margins.

Xiaomi also kept costs low by selling its phones online. That may be changing as it sells more phones through stores, including its own retail shops. The company is evolving quickly in other ways. Barra’s hiring suggests the company will be moving into new markets soon, starting with Taiwan and Hong Kong and moving on to Europe. It’s also already produced its first smart TV— a 47-in., 3-D screen retailing for around $490. It is reportedly working on its own smart watch.

Such ambitious growth may present Xiaomi with new challenges. It’s not clear whether it can maintain its intensive focus on customer experience as it moves into new markets, each with its own peculiar needs. Or whether it can grow quickly in them without the kind of support it receives from China Mobile. Or, most importantly, whether it can grow into new countries and new product categories with its small margins.

(MORE: States: No Thanks, We’ll Keep National Parks Closed)

On the other hand, Xiaomi has a huge opportunity in other developing countries. According to ABI Research, low-cost smartphone shipments will rise to 758 million units in 2018, from 238 million this year. And Xiaomi’s phones have already proved popular by offering more bang for the buck.

The rise of Xiaomi has left some securities analysts wondering about how Apple will respond to a company thriving by using strategies very different from its own. In a research note, Sanford C. Bernstein analyst Mark Newman called Xiaomi a “new disruptive force” that “particularly stands out to us as a potential game-changer.”

Meanwhile, UBS analyst Steve Milunovich wrote that “it would be a bit surprising if Apple were easily disrupted.” But he also noted, “It’s possible that Apple is becoming the Digital Equipment of phones, delivering improved technology for its best customers but ignoring the growth below because the company does not want to ‘compromise the user experience.’”

For its part, Xiaomi sounds a little more confident — if not outright cocky — about its prospects against Apple. “They [Apple] don’t really care about what the users want,” Lei said in a recent interview. “They imagine what the users want.”