Xiaomi, the Chinese maker of cheap smartphones with high-end specs, has just launched a new fitness tracker in China. The tracker, known as the Mi Band, is comparable to other fitness bands on the market -- it monitors daily activities, wakes up users when they oversleep, lasts 30 days on a single charge, and is water resistant. The Mi Band connects over Bluetooth to Android 4.4 devices, and can also unlock a user's Xiaomi handset.

Xiaomi's Mi Band. Source: Xiaomi.

But what makes the Mi Band stand out from other fitness bands is its jaw-dropping price tag of 79 RMB (less than $13), which undercuts every fitness band on the market. Comparable fitness bands, like the Fitbit Flex, Jawbone Up24, and Nike+ (NYSE:NKE) Fuelband, generally cost between $80 to $150 in the U.S.

While Xiaomi hasn't revealed plans to launch the Mi Band in international markets yet, this low cost wearable could turn the entire fitness band market upside down.

The big business of fitness bands
Xiaomi's Mi Band highlights the fact that fitness bands are sold at sky-high margins.

Last October, IHS Teardown Services reported that the $100 Fitbit Flex only cost $17 to manufacture. That same month, research firm Endeavor Partners revealed that the Nike+ Fuelband, which originally cost $149, only cost $25 to manufacture. Jawbone's Up24, which costs $150, likely cost around the same price.

Fitbit, Jawbone, and Nike are the three biggest names in fitness bands, and together accounted for 97% of all devices sold in 2013, according to research firm NPD Group. Fitbit was the clear market leader, with a 68% market share, followed by Jawbone with 19% and Nike with 10%.

L to R: Fitbit Flex, Jawbone Up24, and Nike+ Fuelband SE. Source: Company websites.

Looking ahead, research firm Canalys believes that fitness band shipments could rise 350% year-over-year to 8 million in 2014, then soar to 23 million by 2015 and over 45 million by 2017. That steep growth trajectory clearly indicates that there's still plenty of room for new competitors like Xiaomi to disrupt and dominate the market.

Why Xiaomi can sell such cheap devices
Xiaomi is such a threat because it is willing to sell its products at razor-thin margins. That's why it sold the Mi 3 smartphone for around $230 -- less than half the price of the comparably powered Samsung's (OTC:SSNLF) Galaxy S5. That low-margin, high-volume approach helped Xiaomi overtake Samsung as the top smartphone maker in China with 15 million shipments last quarter. Xiaomi cuts costs by relying on word-of-mouth advertising and launching shipments in limited batches instead of accumulating large inventories.

If Xiaomi can sell the Mi Band at $13 for a tiny profit, then other Chinese companies are also probably developing similar devices. Shortly after Xiaomi launched its first smartphone in August 2011, domestic competitors like Oppo, K-Touch, Lenovo, and Huawei scrambled to match Xiaomi's prices and specs.

This means that even if Xiaomi isn't ready to flood overseas markets with cheap fitness bands, its rivals could launch pre-emptive strikes.

What the Mi Band could mean for the big three fitness band makers
If the Mi Band is launched in America, fitness band makers would have to significantly lower their prices to stay competitive.

Telecom companies and other Android handset manufacturers could consider bundling Mi Bands with new Android phones. Sony (NYSE:SNE) has already employed that tactic by bundling the Smartband SWR10 with its Xperia Z2 handset in India. That strategy could steal the Android market away from Fitbit and Jawbone in one fell swoop.

Fitbit and Jawbone are also facing intense pressure from lower-end smartwatches such as $150 Samsung's Gear Fit, which feature a heart rate monitor and an AMOLED screen for smartphone notifications. The Fitbit Flex and Jawbone Up24 both lack heart rate monitors and screens. That's probably why Nike, which laid off the majority of its FuelBand team in April, will reportedly abandon the fitness tracker market to help Apple with its long-rumored "iWatch." Therefore, between low-end Mi Bands and low-end smartwatches, there won't be much room left for the Fitbit Flex and Jawbone Up24 to grow.

Samsung's Gear Fit. Source: Samsung.

The Foolish takeaway
In conclusion, smartphone and wearable makers should be very scared of Xiaomi -- it's a company that isn't afraid to undercut high-end competitors with shockingly low prices.

In the past, tech companies profited from the difference between the cost of parts and labor in China with big markups in developed markets. Xiaomi's business model cuts those companies out of the loop, selling its products directly to customers for a much smaller profit per device. In other words, it makes overseas competitors look greedy.

Xiaomi realizes that what it lacks in margins, it can make up in sales volume and market share -- a solid strategy that could result in much cheaper fitness bands in the near future.