After Dominating Apple in China, Can Xiaomi Conquer the U.S.?

Chinese smartphone maker Xiaomi surged past Apple and Samsung in China, but its success in the U.S. looks less likely.

Aug 24, 2014 at 5:00PM

Xiaomi's surge to the top of the Chinese smartphone market didn't take long. Despite only being founded in 2010, Xiaomi sold more smartphones than Apple (NASDAQ:AAPL) in China last year. Since then, its sales have continued to increase rapidly, and in the second quarter of this year the company overtook Samsung (NASDAQOTH:SSNLF) to become China's largest smartphone vendor.

Not only does Xiaomi sell more smartphones than Apple or Samsung in its home nation, but its customers are also more engaged, spending more time in apps than their iPhone- and Galaxy-using counterparts.

With its penchant for moving fast and offering dirt cheap hardware, Xiaomi has clearly emerged as a major competitive threat. After dominating in China, could Xiaomi take over the U.S.?

Xiaomi's pricing policy
Xiaomi has begun expanding into other markets, notably India, but has so far largely remained mum on its North American plans. Xiaomi global expansion chief Hugo Barra, in a discussion with Android Authority, indicated the company is planning its U.S. rollout, but gave no definitive timeline.

At least for now, it's difficult to imagine Xiaomi finding much success.

For starters, Xiaomi's rapid rise to the top of the Chinese market appears to have been spurred by the unprecedented value its handsets offer. Unlike American consumers, Chinese smartphone buyers don't often have the luxury of subsidies, and those that are available are relatively modest and in decline -- China Mobile, for example, recently announced a plan to reduce the subsidies it pays to handset manufacturers.

In a subsidy-free environment, it's easy to see why Xiaomi's handsets would be so attractive. Its latest flagship, the Mi4, offers a 5-inch, 1080p display, Snapdragon 801 processor, 13-megapixel camera, and LTE connectivity. In other words, it's comparable to both Samsung's Galaxy S5 and Apple's iPhone 5s, but at roughly $320, it retails for less than half the cost of its rivals' latest flagships.

That pricing policy is obviously attractive to Chinese consumers, but American buyers may be less impressed. Despite retailing online for just $349, the Nexus 5 has made little headway against Samsung and Apple's much more expensive handsets. Buyers in the U.S. seem to have been trained to purchase through their carrier -- either on a subsidized plan or, increasingly, with a no-interest loan.

Xiaomi's unique take on Android
The other issue for Xiaomi would be ecosystem. Although Xiaomi's phones are technically powered by Android, the Chinese company uses a heavily modified version of Android -- called MIUI -- that strips out Google's services and the Play app store.

For first or second-time smartphone buyers that may not be a problem, as they have not had time to grow accustomed to a mobile ecosystem. In an established smartphone market such as the U.S., however, that would be a major issue, as buyers who have owned Apple's iPhone for several generations would struggle with the prospect of losing their app and media purchases. Even Samsung and other Android manufacturers would be insulated, as purchases made through the Play app store would not carry over to Xiaomi's MIUI-powered handsets.

Xiaomi could adopt a more traditional approach to Android, releasing a handset in the U.S. with access to Play and other Android services. However, such a move would undermine Xiaomi's business model -- the company uses its MIUI services to monetize its bargain hardware.

Contained to the emerging markets
Xiaomi's handsets are clearly attractive to emerging market consumers, and its rapid rise in China and potential in nations such as India, Indonesia, and Brazil are certainly a threat to Apple and Samsung's handset sales in those markets.

But it's difficult to imagine Xiaomi succeeding in the United States. The factors that have made Xiaomi so successful in China -- cheap handsets, an Android fork -- would, at least for now, have little appeal to American buyers.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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