Recently, technology research firm Gartner came out with its third quarter mobile phone sales report. In a previous article, I outlined three key takeaways for consumers and investors. Most notably, one of the bigger takeaways from this report is the rapid adoption of multifunction smartphones among slowing industry growth overall. According to Gartner, this is due to increased smartphone growth in developing markets as those consumers abandon "dumb" phones.
So when it comes to mobile phone makers, it shouldn't be that shocking that a smartphone vendor that specializes in developing markets is growing rapidly. But what is shocking is just how rapidly this company has grown: By growing an astonishing 336% on a year-over-year basis, China's Xiaomi is the fastest mobile phone maker -- growing faster than even Apple (NASDAQ:AAPL), which reported nearly 26% growth. The chart below, courtesy of our friends at Statista, gives proper context:
You can't own Xiaomi, but may not want to anyway
Xiaomi (pronounced: shiao-me), appears to be a classic growth story. From its first phone release in 2011, the company is now the fourth-largest smartphone maker. By concentrating on its native market, China, the company has put considerable pressure on top smartphone maker Samsung (NASDAQOTH:SSNLF) in that country. Faulted by many for taking heavy cues from Apple in phone design and interface, Xiaomi has developed a cult following in the Middle Kingdom.
However, it appears an exploding top line hasn't led to an entirely prosperous company. According to a recent uncovered filing by Reuters, Xiaomi reported a profit margin of just 1.8% in 2013 (although it should be noted a company spokesman disputed the profit figure, but did not further elaborate on profit margin nor provide updated figures). For perspective, during fiscal year 2013 (an imperfect comparison considering Apple's fiscal years start in September) Apple reported a profit margin of 21.7%.
Xiaomi's story represents the conundrum for smartphone vendors. In a weird way, the entry-level smartphone market is quickly becoming commoditized. With these pricing pressures, it is hard to acquire significant market share and turn a respectable profit on your product.
And that's why Apple will never lead on market share
From time to time, concerns about Apple's market share bubbles to the surface. Typically this occurs after a "disappointing" quarter or when Wall Street needs a high-interest company to discuss. However, in its actions Apple has shown they are unconcerned with being the largest vendor by market share. Many long-term investors remember Apple's iPhone 5s and iPhone 5c iterations: What did the "c" stand for -- was it "China?" "Cheap?"
In the end, the "c" could have stood for "cashflow" considering the differences between the previous edition -- the iPhone 5 -- and the iPhone 5c were mostly negligible, outside of Apple lowering its bill of materials cost by using a plastic case rather than an aluminum enclosure. Although the iPhone 5c cost less than the then-current flagship iPhone 5s, the pricing was in line with previous iteration markdowns. So, a lowered bill of goods with the same sales price leads to increased cashflow for shareholders, ceteris paribus.
Could the company aggressively cut prices to acquire market share, sure, but the company's focus is presenting the best product possible -- not to ship more units than competitors.
Samsung as a cautionary tale
For those following the mobile phone industry, market leader Samsung has been struggling. The company pursues a bifurcated strategy in which it competes against Apple at the high end and a host of smartphone makers at the low end.
In this Gartner report Samsung was one of the biggest losers in mobile by reporting a near 20% decrease. And although its losses in smartphones weren't as bad, it still dropped nearly 9% year over year and found itself the only smartphone vendor in the top five to ship fewer units than last year's corresponding quarter.
In short, Apple may not be the biggest nor the fastest growing handset maker, but it's by far the gold standard when it comes to making money on its phone line. And that, as investors, is what we should focus on.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Gartner. The Motley Fool owns shares of Apple. 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.