Apple's Growing Problem in China

No, this isn't Apple's new iPad. It's the $240 Xiaomi Mi Pad. Source: Xiaomi.

Apple's (NASDAQ: AAPL  ) made a lot of gains in China over the past few years. The country has become one of the company's most profitable regions, it just launched the iPhone on China Mobile, and it continues to build new retail stores in the country.

But a few years ago, a small problem started with Apple in China and it's since grown much bigger. Xiaomi, the private tech company that sells smartphones and now tablets, has its sights set on Apple -- and it's paying off. 

The Xiaomi Mi 3 smartphone. Source: Xiaomi.

The real iPhone killer
Just three years ago, Xiaomi began selling Android-powered smartphones after focusing primarily on software when the company started in 2010. Xiaomi's phones run a modified version of Android, which looks more like iOS 7 than any version of the green droid.

In Q1 2014, Xiaomi had 10% smartphone market share in China, putting it in the No. 3 spot behind Samsung and Lenovo. Meanwhile, Apple took the No. 4 spot with 9%. This comes after Apple recently launched the iPhone on China Mobile's massive network with 781 million subscribers. Obviously, that partnership may take a while for all the benefits to pan out, but so far, it hasn't helped Apple outsell Xiaomi in China.

But the problem for Apple isn't just that Xiaomi is doing so well in China's smartphone market, but that the company isn't satisfied with stopping there.

The Xiaomi Mi Pad has the same high-resolution screen specs as the iPad Mini with Retina display. Source: Xiaomi.

Striking a familiar pose
Just last week Xiaomi debuted its first tablet, a 7.9-inch device that's the spitting image of Apple's iPad Mini and with all the colors of the iPhone 5c. Xiaomi's Mi Pad has the same 2,048x1,536 high-resolution screen as the iPad Mini with Retina display and very-capable NVIDIA Tegra K1 processor.

The high-end specs, hardware, and software designs are more than just a nod to Apple; they're a way of tapping Apple's fan base by offering a very similar device with a price tag of just $240 -- $160 less than Apple's lowest-priced iPad Mini.

It's hard to say exactly how many tablets Xiaomi will sell in China, considering it's the company's first attempt at a tablet. Though the iPad is a dominant device in China's tablet market, the lower-priced Xiaomi device could persuade buyers who want the look and feel of Apple's tablet but can't afford the high-end prices.

Foolish thoughts
Xiaomi's influence in the smartphone and tablet market is limited to China right now, which prohibits the company from fully taking on Apple. But Chinese consumers have already shown that they'll buy large quantities of the company's devices, and the new tablet likely won't be any different. As Apple continues to make China a priority, Xiaomi's growing presence in the country (and blatant copying of Apple's iPad Mini) should make Apple investors a little nervous.

But aside from just increased competition in China, I think the Mi Pad proves yet again that Apple needs to update its devices -- or create completely new ones -- that truly set itself apart from the competition. When a four-year-old company like Xiaomi creates a tablet that looks nearly identical to a high-end device like the iPad Mini and runs software that looks just as sleek, it should be a clear sign to Apple that it's time to up its game.

Forget tablets, this is going to be much bigger
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Read/Post Comments (10) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On May 20, 2014, at 2:11 AM, HiramWalker wrote:

    So cheap copies are out, so you want apple to give them something new to copy? Years to develop, months to copy. What's the point if trade dress and new ideas are not protected?

  • Report this Comment On May 20, 2014, at 2:30 AM, zippero wrote:

    Xiaomi is a joke, as is this author. You can't produce high quality forever at zero margin. Capitalism doesn't work that way. Can BMW and Mercedes sell their cars forever at cost and maintain and improve quality every year without any profits to incentivize them to do so? No. As Android commoditization increases, quality naturally decreases. With zero margins, Xiaomi only ensured from the get-go that it will stay a commodity product forever. Even Lenovo is tired of zero margins and working its butt off for peanuts. It's trying to move up the value chain. But Lenovo can't because the price wars in the Chinese Android OEM industry are cutthroat, and a 1% average profit margin for the industry is the best-case scenario. Even Samsung makes just a 1-2% margin on its low-end phones. So what is the future of Android? Just look at the Windows PC makers that are struggling and making pennies selling their Windows PC junk, while any decent, self-respecting person out there has already bought a Mac.

  • Report this Comment On May 20, 2014, at 2:49 AM, peterg wrote:

    Nice article Chris - try to ignore the flaming iHobbits who spout the same old rhetoric at every writer that does not worship jobs or aapl products - the chinese are going to dismantle aapl in china = it is pure arrogance to think otherwise - also

    One has to remember that Chinese and Korean consumers are on average smarter / higher iq

  • Report this Comment On May 20, 2014, at 2:52 AM, peterg wrote:

    Nice article Chris - try to ignore the flaming iHobbits who spout the same old rhetoric at every writer that does not worship jobs or aapl products - the chinese are going to dismantle aapl in china = it is pure arrogance to think otherwise - also

    One has to remember that Chinese and Korean consumers are on average smarter / higher iq than their us counterparts so its not really that they can't afford the ipad, its that they demand greater value - apple jihadists think that if you don't buy apple you can' t afford one - even tho walmart sells apple - its really a question of IQ - really smart people think for themselves they don't follow herd like some isheep do. smarter folks don't spend money on lower value products.

  • Report this Comment On May 20, 2014, at 5:47 AM, mushrumps wrote:

    An iPhone killer -- is it here, is it there? They are looking for it everywhere!

  • Report this Comment On May 20, 2014, at 7:01 AM, Chiam wrote:

    Just got a Xiaomi phone ordered from China and let me say the author is right. This is a better iPhone than iPhone.

    Total copy of Apple's opsys but better. But my phone was broken at first. I called the company and found their genius bar (known as the menu bar) was greatly concerned and sent out a pretty lady to replace my phone. I could not believe it when she offered me a massage. That really was the icing on the cake.

    Feeling relaxed I started to play with my new phone and was amazed at the features. It didn't have a Sapphire screen with is the second hardest mineral after diamonds but it did have a diamond display. I was amazed. I still felt that I needed to get screen protectors and I called up Xiaomi to ask them if the screen could still scratch.

    An hour later 2 Chinese Olympic skaters came to my home and proceeded to skate on the display of my phone. Not a scratch. I could not believe it. Then they offered me a massage. 4 hands wow.

    The next day, I was walking in NY and I saw a bevvy of limos heading down the street. I eyeballed a placard on the side of one and it said Xiaomi CEO. I ran up to the car at the light and the window rolled down and it was the CEO right there in person. I told him how I loved the phone and he thank me and told me to get into the limo.

    There he gave me the best massage I have ever had.

    I love Xiaomi and Apple should be plenty worried.

  • Report this Comment On May 20, 2014, at 7:08 AM, Chiam wrote:

    Future Xiaomi predictions.

    Xiaomi will eventuall go out of business because after it puts Apple out of business it will not be able to copy any future innovations and will then die itself.

  • Report this Comment On May 20, 2014, at 9:54 AM, GaryDMN wrote:

    Android vendors compete with Android vendors, not Apple. Apple is selling record numbers of iPhones even though there are Android price wars, that will intensify as more players enter the Android market.

  • Report this Comment On May 20, 2014, at 10:34 AM, Rocwurst wrote:

    Umm Chris, Every Android smartphone manufacturer bar Samsung has been posting multi-million dollar losses - why exactly should Apple follow their example and slit their throats on the altar of the Church of Market Share?

    Apple will in the next few months pass the mark of a billion high-end iOS devices sold and now captures 84% of the profit share of the entire mobile phone industry up from 72% the previous year and the iOS ecosystem continues to completely dominate Android in all the metrics that actually matter such as developer revenue, Ad ROI, e-commerce revenue etc.

    Tell us again why Apple should cut themselves off at the knees and try to compete in the profit-less segment of the market when they are doing so well with their premium, high quality strategy?

  • Report this Comment On August 01, 2015, at 12:17 PM, brotherStefan wrote:

    Here we are now -- fewer than three months have expired...

    How is your "iPhone Killer" prediction working out there, Chris?

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Chris Neiger

Chris has covered Tech and Telecom companies for The Motley Fool since 2012. Follow him on Twitter for the latest tech stock coverage.

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