Xiaomi: The Chinese phone giant taking a bite out of Apple

Samsung and Apple go largely unchallenged in the West. But in China, there's a new 'hero company' making rapid headway

Lei Jun is keen to distance himself from comparisons to the late Apple boss Steve Jobs (Getty Images)

Can you name the world’s third biggest smartphone maker? The company that sold 61 million handsets last year? Most in the UK would struggle to pronounce Xiaomi, if they know the name at all.

The Chinese company is a sensation in its home market, going from a standing start four years ago to overtaking Samsung as the market-leader today. Earlier this week, Xiaomi (it’s pronounced sh-ow-me) announced that its sales grew by 227 per cent last year, while revenue jumped by 135 per cent to £7.8bn. The news came a week after the business surpassed Uber as the world’s most valuable privately held company. Xiaomi raised $1.1bn at a valuation of $45bn, compared to Uber’s $40bn price tag.

“The astonishing bit about Xiaomi is its growth,” says Marina Koytcheva, director of forecasting at CCS Insight, a market research company specialising in the mobile industry. “In an industry where the leaders Apple and Samsung are seeing their growth slow, the market is looking for new hero companies. Xiaomi looks like one of those.”

The business’s trick is to offer high-spec phones at low prices. Xiaomi’s smartphones rival those of Apple and Samsung’s in terms of performance, as well as mimicking their designs. Even Xiaomi’s website echoes Apple’s. But whereas an iPhone 6 costs $649, Xiaomi’s highest performance device, the Mi3, costs just $320.

“[Xiaomi] combines features of Apple’s strategy and Amazon’s strategy,” says Ms Koytcheva. “It looks to create beautiful devices that people want and people eagerly wait to buy. But at the same time it sells them just at cost.”

The company isn’t alone in offering Apple or Samsung-like devices at cheaper prices in China, but Xiaomi has combined this with a clever use of the web to create demand and build a brand. The phones are only sold online and new devices are initially offered during a limited window, with buyers having to pre-register. This creates more demand through scarcity.

“Xiaomi is primarily a hardware company but it’s on its way to becoming a lifestyle brand,” says James Roy, an associate at Shanghai-based China Market Research. The company uses social media to encourage this image.

Mr Roy says Xiaomi’s products are most popular among China’s middle classes, but adds: “It’s not just people who are budget conscious – a lot of people will use them because they like them and have switched from an Apple or a Samsung or a HTC or something else. I see [Xiaomi phones] all the time.”

In the three months to November, 30.2 per cent of all phones sold in China were Xiaomi devices, according to data released this week by Kantar Worldpanel, compared to 12.2 per cent a year earlier.

Xiaomi is the brainchild of Lei Jun, an entrepreneur often dubbed “China’s Steve Jobs” and who, along with Alibaba’s founder Jack Ma, is the face of the new, tech savvy China.

“He’s headed software companies, he founded the online bookstore that became the equivalent of Amazon in China, he chaired a company that did mobile software and he has also done a lot of venture capital investments in all areas of tech,” says Mr Roy.

Mr Jun’s clout can be compared to that of Silicon Valley executives such as Mark Zuckerberg, whose influence extends beyond the world of tech. Mr Jun was one of a number of Chinese tech executives to do the Ice Bucket Challenge last summer, nominating Andy Lau, arguably Hong Kong’s most famous actor and singer, to take the challenge, as well as the boss of Apple supplier Foxconn.

In another parallel with Silicon Valley, Mr Jun has a fondness for mimicking the style of Steve Jobs. Forty-five-year-old Mr Jun wears Job’s iconic uniform of faded jeans and a black top while presenting new devices and does so while walking around an empty stage in front of a black screen, just as Jobs did.

But Mr Jun is not a copycat, insists Roy: “Jun is very vocal about saying ‘I’m not China’s Steve Jobs’. He’s trying to forge his own identity. He’s known as being a very savvy and dynamic individual.”

Similarly, Mr Roy thinks the characterisation of Xiaomi as a clever Apple mimic is “selling it short”, adding: “It isn’t necessarily a hardware or software innovator in the same way that Apple can be. But the innovation is really in its business model, in terms of competing on price and quality at the same time and focusing exclusively on online sales.”

Having conquered China, the company is now expanding overseas, targeting emerging markets such as India and Brazil. Xiaomi poached top Google executive Hugo Barra to head its international expansion in September 2013 and one of Barra’s first moves was to rebrand the company internationally as simply Mi.

Most agree that Xiaomi is unlikely to launch in the UK or other developed nations anytime soon, with the market for growing more slowly here and stiff competition from deeply entrenched incumbents.

Xiaomi’s backers include Singapore’s sovereign wealth fund and renowned Russian venture capitalist Yuri Milner, who has invested in Facebook, Twitter, Spotify and Alibaba. The company’s investors are betting that Xiaomi can enjoy similar success outside China and there are early signs of success – a flash sale of its Mi3 phone in India sold out in just four seconds in October.

“It understands markets where it’s more than another smartphone provider,” says James Wise, a partner at London-based venture capital firm Balderton Capital. Explaining the company’s stellar valuation, Mr Wise says: “It’s the first and main device people in these geographies use to connect to the web and these are the markets that will define the next wave of growth for technology businesses.”

But expansion could bring problems. Ms Koytcheva highlights the potential problem of intellectual property rights overseas, citing Ericsson’s recent legal challenge of Xiaomi in India over alleged patent infringements.

Another issue is profitability. Xiaomi doesn’t disclose its profits but most analysts believe its razor-thin margins on phones and tablets means it is unlikely to be generating much excess cash.

“Xiaomi doesn’t look to make money on hardware, it looks to make money on accessories and digital content,” explains Ms Koytcheva. “Whether that will be enough to make Xiaomi a significantly profitable company – that’s really the biggest gamble.”

Mr Roy argues that, like Amazon, Xiaomi may be more concerned with becoming a destination than profit. “They’re moving to become a lifestyle brand. They’ve branched into smart TVs and other smart home appliances.”

He adds that Mr Jun and Xiaomi may be no less ambitious than Amazon and its founder Jeff Bezos, saying: “In terms of their goal, I think they’re hoping to hit a $100 billion valuation eventually.”

Ms Koytcheva concedes that profitability may prove to be a small issue. “In this industry it’s a big thing to underestimate a growing competitor – I wouldn’t go there,” she said.