Xiaomi is criticized for copying Apple (NASDAQ: AAPL) when it comes to design, and this together with low prices has given them great success. Xiaomi recently surpassed Samsung (KSE: 005930.KS) to become the largest smartphone company in China (if you look at the number of units sold. It's important to keep in mind that Xiaomi has razor-thin margins because of their low-priced devices. This is not true when you look at Apple, they have extraordinary high margins. Apple's operating profit margin is approximately 28%, by comparison, was Xiaomi's operating profit margin just 1% in 2013, according to a Xiaomi financial filing. Since the company is privately-held, is it difficult to analyze their business. However, many believe that Xiaomi is planning on going public soon, we will have to wait and see.
Their business model is to produce devices that look and feel like Apple's products, yet are much cheaper.
The media is obsessed with portraying the low-cost smartphone maker Xiaomi as a huge competitive threat to Apple. Their financial position is very weak and not at all in line with Apple which has a much stronger business. Xiaomi is often described as the "Apple of China". It's because their business model is to produce devices that look and feel like Apple's products, yet are much cheaper. This means that those who buy Xiaomi devices do it mainly because out of the low price. This is not true competition to Apple because they would probably still not buy an Apple device. With this one can argue that Xiaomi is not taking market share from Apple but from other low-cost smartphone manufacturers in China, such as Lenovo (Hong Kong: 0992.HK) and to a certain extent Samsung.
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Xiaomi recently unveiled its new smartphone, the Xiaomi Mi 4i, on stage in India. It's the first time that they present a big product outside of China. Xiaomi is not particularly well-known in the West, they relatively recently expanded outside China and is so far not present in Europe or North America. They focus on the emerging markets, such as India and China, as their low price devices are more attractive there. The company is currently preparing to move into Brazil, they don't intend to expand to Europe and North America for a "few years". Xiaomi poses a greater threat to Google (NASDAQ: GOOG) than Apple in these markets. Although Xiaomi's devices are running Android, they use a forked version of the operating system that doesn't come with Google's services. Besides, are their devices even cheaper than the average price of an Android device.
However, Apple has very high margins and is, and will always be, a premium brand.
Even though Apple has much higher margins and is a premium brand, they can't ignore Xiaomi. The company has also developed a loyal fan base that they frequently throw parties and flash sales order. This is something unique to an Android manufacturer and CEO Lei Jun has also mocked Apple during product launches in the past. In only five years, has Xiaomi become the world's most valuable startups in the world, worth estimated $45 billion. Even if the incredibly rapid growth continues a long time to come, will the company have a hard time with their small margins. Xiaomi is, however, taking a large part of the market and increasing the competition for manufacturers selling low-end devices.
Apple has built a powerful business in China and it was their fastest-growing geographic region in 2014. Apple's growth continues to be high in China especially when we look at their wider ecosystem. Apple is opening stores at breakneck speed and has a market share in Japan and China at 51% respective 12%, according to a report by Counterpoint Research. Their latest Q2 earnings showed that Asia is now their biggest market. By comparison, Samsung's total revenue fell by nearly 4% year-over-year, last quarter. Furthermore, it might be good, as I have written before, to keep an eye on Xiaomi in the future. But the numbers speak for themselves, Xiaomi is not a major threat to Apple at the moment. Xiaomi has razor-thin margins, because of its low-priced devices. However, Apple has very high margins and is, and will always be, a premium brand. I have written a post where I explain why you should buy Apple for a long-term investment, you can read it here: My First Stock: Apple
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