Apple Overtaken by Chinese Upstart Xiaomi in Key Metric

Forget Samsung (NASDAQOTH: SSNLF  ) -- Apple's (NASDAQ: AAPL  ) fiercest rival for mobile computing dominance could be Chinese upstart Xiaomi. Using a heavily modified version of Google's (NASDAQ: GOOG  )   (NASDAQ: GOOGL  ) Android operating system, Xiaomi's smartphones have seen staggering sales growth in recent quarters, outselling even Samsung in China.

But what's most impressive about Xiaomi's handsets is not that they've moved massive quantities; rather, it's to what extent they're being used. Recent research indicates that Xiaomi's customers may be more engaged than Apple's.

Apple's preferred metric
According to analytics firm Flurry, Chinese smartphone users with Xiaomi's handsets spend more time in apps than owners of Apple's iPhone. Not by a large margin -- just 7% -- but it is noticeable, and highly significant.

Apple's management has, in recent years, downplayed the market share of its iPhone and iPad, instead focusing on user-based metrics. At the D11 conference last year, Apple's CEO Tim Cook said he that prefers to focus on engagement, commerce, and customer satisfaction, rather than market share.

So far, Apple has won that battle. Although Google's Android powers the majority of smartphones and tablets, users of Apple's devices spend more on apps, shop more online, and browse the Internet more often. Apple's top management often emphasizes this fact in earnings calls. Last quarter, for example, Apple's CFO boasted that in North America, the iPad generates "almost four times the web traffic of all Android tablet users combined."

The fact that Xiaomi's customers spend more time in apps than Apple's do is significant in the sense that Xiaomi is beating Apple at its own game. The notion that handsets powered by Google's Android are simply dumb phones (and are thus not a competitive threat) does not apply to Xiaomi's devices.

Can Xiaomi go global?
Given its high level of user engagement, Apple may struggle against Xiaomi in China, especially because Xiaomi's handsets are so cheap. Xiaomi's 2013 flagship Mi 3, for instance, retails for just a fraction of the price of Apple's iPhone 5s.

But it's not clear if Xiaomi can compete outside of China. It is trying -- last year, Xiaomi hired former Google executive Hugo Barra to help expand its business into foreign markets; Barra recently announced that Xiaomi would enter India later this month. But Xiaomi relies on a unique business model that may not scale outside of China.

Unlike Samsung, which profits directly from the sale of hardware, Xiaomi sells its gadgets at (or near) cost. Rather than make money when the phone is sold, Xiaomi profits on the sale of digital goods and services.

In order to make that business model viable, Xiaomi must use a heavily modified version of Android -- called MIUI -- that strips out Google's cloud services and app store in place of its own.

Although MIUI is based on Google's mobile operating system, it exists in a distinct mobile ecosystem. In emerging markets where smartphone penetration remains low, Xiaomi may be able to win over customers -- in developed economies where the smartphone market is near saturation and Google's services and the Google Play app store are well-established, it may be far more difficult.

Apple is being beaten at its own game
With fantastic sales and a high level of user engagement, Xiaomi appears to beating Samsung and Apple in China. And even though it uses a form of Google's mobile operating, Google's services are not present, giving the search giant little reason to cheer Xiaomi's rise.

For now, Xiaomi is contained to China, but if it can succeed internationally, it could emerge as a major competitive threat to nearly all of the mobile industry's most established players.

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  • Report this Comment On July 10, 2014, at 11:08 AM, zippero wrote:

    Sam, Xiaomi's profit margin is 0.01%. If you're betting on Xiaomi beating Apple on hardware innovation, you've picked the wrong horse again, just as you did with Samsung.

  • Report this Comment On July 10, 2014, at 3:06 PM, ConstableOdo wrote:

    Only time will tell if what Xiaomi is doing is sustainable. Samsung was able to make a big push for a few good quarters but it's not sustainable. I'm not taking anything away from Xiaomi, but it honestly doesn't make any sense at all to compare Xiaomi with Apple. You really should use some other company. Xiaomi sells some really inexpensive smartphones so they're taking market share away from other companies. Is the company making enough money to invest in R&D and how is their customer service? How are their products holding up over two years?

    I'm truly happy for Xiaomi doing well as a local Chinese company. I don't want to see smaller companies always getting crushed by larger ones. Apple should not even try to take Xiaomi's low-end business away. If Xiaomi has some metric better than the iPhone then more power to them. However, it's not going to hurt Apple at all. Honestly, NOT AT ALL. All you need to do is compare each company's financials. Apple makes more PROFIT in one QUARTER than Xiaomi makes in REVENUE in one YEAR. Do you get my point?

    They call Xiaomi the Apple of China but it's more like the Apple wannabe of China and the gap between the two are as wide as the distance from California to China. As far as app usage is concerned it's possible Xiaomi offers more and better Chinese-based apps than the iPhone offers.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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