Will Xiaomi’s Mi 4 Crush Apple’s iPhone 6 and Samsung’s Galaxy Note 4 in China?

Apple's (AAPL 0.52%) iPhone 6 Plus and Samsung's (NASDAQOTH: SSNLF) Galaxy Note 4 will soon go to war all across China. According to e-commerce site JD.com (JD 1.13%), preorders for the iPhone 6 are closing in on 5 million, which hint at an explosive launch for Apple on Oct. 17. Those big numbers apparently scared Samsung into launching the Galaxy Note 4 early on Sept. 26, instead of mid-October.

L to R: The iPhone 6, Galaxy Note 4, and the Xiaomi Mi 4. Source: Company websites

But amid all that noise about Apple versus Samsung, there's one sly competitor that could spoil the party for both companies: Xiaomi, China's biggest smartphone vendor. In late July, Xiaomi launched its new flagship, the Mi 4, for approximately $320 (16GB) to $390 (64GB) unlocked. The Mi 4 is a highly disruptive competitor which crushes the iPhone 6 in price and performance, while nearly matching the Note 4's specs at less than half the cost.

Sources: Industry and company websites; *U.S. contract-free prices except for Xiaomi

Xiaomi can afford to sell its phones at such low prices because it spends nearly nothing on marketing, relies on online retailers instead of brick-and-mortar ones, and is willing to accept lower profits per unit to gain market share.

Those strategies helped Xiaomi claim 14% of the Chinese market during the second quarter, according to Canalys, up from 5% a year earlier. By comparison, Samsung, Lenovo, and Yulong each claimed 12% of the market, while Apple controlled 6%. Looking ahead, should Apple and Samsung investors be worried about the meteoric rise of Xiaomi and the new Mi 4 in China?

What the Mi 4 means for Apple's iPhone 6
Despite selling a technically inferior phone at a much higher price tag in China, Apple shouldn't really worry about Xiaomi, since the two companies appeal to different kinds of customers.

The iPhone has become a top status symbol in China, where increasingly wealthy consumers are eager to show off their wealth with high-end purchases. In addition to the aforementioned preorders, CNN claims that grey market iPhone 6 units from Hong Kong are being sold in China for more than double the retail price. Meanwhile, a recent survey from research firm Upstream polling over 4,500 customers across five emerging markets found that 42% of Chinese consumers planned to purchase an iPhone, while only 32% wanted a Samsung handset as their next device.

Apple Store in Beijing. Source: Flickr

There also aren't any iOS alternatives for a current generation iPhone, but there are plenty of alternatives for an Android-powered Note 4 or Mi 4. However, that doesn't mean that Apple should take the Chinese market for granted. Xiaomi's growing user base, unfavorable side-by-side technical comparisons, and patriotic support of Xiaomi as the "Apple of China" could all throttle Apple's market share growth.

What the Mi 4 means for Samsung's Galaxy Note 4
Samsung, on the other hand, could be in trouble. The Galaxy Note 4 is priced to compete against the iPhone 6 Plus, but there aren't any headlines about millions of preorders, smuggled phones, or vendors doubling its retail price. At the time of this writing, vendors on Alibaba's Taobao are selling the Hong Kong version of the Note 4 to mainland customers for its suggested retail price of 4,800 RMB ($780).

The problem for Samsung is that high-end consumers will flock to the iPhone 6, while low to mid-range Android customers will favor cheaper devices like the Mi 4. To make matters worse, Xiaomi has lowered Chinese price expectations to the point that domestic rivals have launched even more impressive devices than the Mi 4 at comparable prices. For example, the OnePlus One is powered by nearly the same hardware as the Mi 4, but offers a much larger 5.5-inch screen for only $299.

Samsung expects operating profit to plunge around 60% year over year in the third quarter, which doesn't put the company in the position to aggressively cut prices to be in line with Xiaomi and One Plus. Faced with those odds, the only option left for Samsung is to fight tooth and nail against Apple in the premium market.

The Foolish takeaway
Xiaomi is a dangerous competitor in China, but it poses more of a threat to Samsung than Apple.

Looking ahead, I expect Xiaomi and its domestic peers to gobble up the low and mid-range market, while Apple gains market share in the premium market. Samsung will be crushed between the two and be faced with a hard choice -- should it fight harder to protect its premium branding, or should it sacrifice margins to regain market share?