China’s Apple clone

Xiaomi is criticized for copying the iPhone maker, but it’s now beating Apple where it matters most
China Foto Press / Getty Images

Glow Sticks and black lights illuminated a cheering crowd of young people packed into a vast, darkened room in Beijing earlier this month. They were there to see one man: Lei Jun, the co-founder and CEO of the Chinese start-up smartphone company Xiaomi, as he took the stage dressed in jeans and a T-shirt, Steve Jobs-style, to show off his company’s latest creations.

Xiaomi is often criticized for imitating Apple’s flashy product launches, but there is no doubt the strategy is paying off. Xiaomi, meaning “little rice” and pronounced shao-MEE, has eclipsed Apple’s smartphone sales inside the Chinese market. Two years after launching its first phone, it accounts for five per cent of smartphone sales. Apple now has just 4.8 per cent, down from 9.1 per cent in 2012, according to market research firm Canalys.

In North America, Apple’s latest iPhones are a hit: Opening weekend sales are expected to reach six million. But the real battle for the global smartphone market today is being played out in China, where there are as many as 330 million smartphone users. The iPhone 5C’s high price tag, $757, is part of the reason investors were disappointed after the new phone launched earlier this month. Given that the average monthly income in Beijing is just $870, “Apple is very expensive for normal people,” notes Wilson Miao, a Taipei-based analyst with research firm TrendForce. Over a third of global smartphone shipments, some 88 million, went to China in the second quarter of 2013—and while the global market grew by 50 per cent over the past year, global market-research firm Canalys estimates that, in China, it shot up 108 per cent. Most of that growth is in less pricey phones—Xiaomi’s bread and butter.

Peter Biao, a university student in Shanghai, is a Xiaomi fan and uses the Mi-One, the first phone the company sold. “Most important, Xiaomi is cheap,” he says. Its lowest-priced smartphone, dubbed Red Rice, sells for just $133. Xiaomi’s higher-end Mi-2S ($285) beat Samsung’s S4 ($617) for the highest-selling smartphone in the first half of 2012.

In 2012, Xiaomi sold 7.2 million phones in China, Taiwan and Hong Kong, and Lei has estimated its revenues—currently around $3.2 million a month—will reach $21 million to $24 million a month by the end of next year. While still far short of Apple’s $35 billion in quarterly revenue, it’s not bad for a three-year-old firm that sells its phones exclusively online. Xiaomi launched the Mi-One using a specially tailored version of Google’s Android operating system. The latest version, the Mi-3, is the fastest phone in the world, the company claims—at about half the price of Apple’s iPhone 5C.

Beyond price differences, analysts say Apple and Xiaomi are, at their core, vastly different firms. Xiaomi started life as a social networking site and parlayed its network of users into potential phone buyers, says Miao. There are no Xiaomi stores, which cuts back on costs, and the company’s made-to-order supply chain lets it collect money first and ship product out second. Lei has compared Xiaomi to a hybrid of Amazon and Google, where the phones are like Amazon’s Kindle—sold at near cost, with the money recouped from sales of books or, in Xiaomi’s case, apps and games bought through its own online market, a take-off on Google Play, which isn’t widely available inside China.

In a bid to broaden its products and its appeal—it sells mostly to 20- to 35-year-olds, says Canalys analyst James Wang—Xiaomi launched MiTV this month, a 47-inch “smart” TV that uses Android to stream online content or to sync to a Xiaomi phone. (Apple is rumoured to be preparing its own smart TV.) It also made headlines in August for poaching Google executive Hugo Barra, hired to help the company push further into international markets.

Developers around the world, from the U.K. to Russia and India, already convert Xiaomi’s tweaked version of Android’s operating system to different languages. But analysts see potential glitches ahead. Miao questions whether Xiaomi’s supply chain will satisfy a global market, where people might want their phones faster than Xiaomi’s one- to two-week delivery time. Xiaomi will also have to adapt its social networking site to appeal outside the Chinese market, and the company will have to fight for app and games sales with Google Play.

As its name suggests, Xiaomi is still little. It has raised projected sales for 2013 to 20 million phones—compared to Apple’s 37 million in the first quarter of 2013 alone. Lei may not like the comparisons to Apple, or Steve Jobs, but he has Apple-sized ambitions: In 2012, he told China Daily that Apple’s success set a good example, “but if you are just imitating it, you cannot overtake it.”