At a Goldman Sachs technology conference in February, Apple (NASDAQ:AAPL) CEO Tim Cook said that he wasn't particularly worried about Xiaomi, the top smartphone manufacturer in China.
But a few days later, Xiaomi unveiled its plans to enter the U.S. market. Since Xiaomi lacks major partnerships with any of the top U.S. wireless carriers, the company won't initially sell its Android phones in America. Instead, Xiaomi will enter the market by selling 4K TVs, routers, headphones, air purifiers, and other items which made it the third largest e-commerce player in China.
Will this unusual strategy catch Apple off guard, or will American consumers ignore Xiaomi's products?
Understanding Xiaomi's core strategies
Xiaomi used three core strategies to conquer the Chinese market. First, it sells mobile devices at much lower margins than overseas rivals. Second, it spends very little on marketing, instead relying on word-of-mouth advertising via social networks. Lastly, it sells devices directly online instead of through brick-and-mortar retailers, which gives it better control over its inventory. Xiaomi then inflates demand by selling a limited quantity of devices during periodic "flash sales," which also generate free publicity. Leaning on those three pillars helped Xiaomi sell 61 million phones last year.
Xiaomi then applied that strategy to other products like 4K TVs. Last May, it launched a 49-inch 4K Android TV for just $640 -- undercutting comparable units from Samsung (NASDAQOTH:SSNLF) which cost around $1,000. In July, Xiaomi launched a fitness band which offered comparable features to Jawbone and Fitbit's devices for a mere $13. It also launched a sleek air purifier, a blood pressure measurement kit, and power banks for mobile devices to diversify its product line beyond smartphones. It's too early to tell if these products will challenge existing competitors, but Xiaomi clearly wants to evolve into a consumer electronics giant like Samsung.
Xiaomi is also building its own software ecosystem. Since Google Play is banned in China, Xiaomi opened its own App Store, which hit 10 billion downloads last November. Its own version of Android, MIUI, now has over 100 million users. Xiaomi also installed MIUI on its smart TVs, which can be considered a precautionary response to similar "smart home" plans from Samsung, Apple, and Google.
Testing the waters
For now, Xiaomi is just testing the waters to gauge demand for its non-smartphone products. If Xiaomi sells its Mi Bands and 4K TVs in the U.S. at the same prices as in China, they would undercut most comparable products. Exclusively selling its products online would cut out the brick-and-mortar middlemen and keep costs and inventory low.
The main challenge, however, is for Xiaomi to build brand awareness beyond the tech enthusiasts who have heard about Xiaomi's growth. Xiaomi is adept at employing viral marketing strategies, but it needs to take those efforts to the next level to challenge deeply entrenched competitors like Samsung, Fitbit, Bose, and Sony in TVs, fitness trackers, and headphones.
As for smartphones, Xiaomi co-founder Bin Lin told the Associated Press that the company has no plans to launch its smartphones in America. Xiaomi's low-margin approach with its smartphones works well in China, where consumers often buy unlocked phones at full price, but it would likely fail in the U.S., where top handsets like the iPhone are heavily subsidized. Moreover, Xiaomi would need to secure patents -- a risky move which could expose it to costly legal battles against industry giants like Apple and Samsung.
Different companies, different goals
The media loves comparing Xiaomi to Apple, since they are now the two top smartphone companies in China. Yet the two companies aren't competing with one another -- Apple is targeting the premium "status symbol" market, while Xiaomi is aiming at the low to mid-range markets.
Apple focuses on selling a tighter range of phones, tablets, and PCs. Xiaomi is simultaneously targeting Samsung's home electronics and appliance businesses, expanding its hardware and software ecosystem, and challenging other e-commerce sites in China.
In the unlikely event that Xiaomi gains enough confidence to launch its smartphones stateside, I expect the exact same split between premium and mid/low range consumers to occur. Xiaomi's entrance will likely hurt struggling Android players like Samsung, Sony, and HTC, but Apple will remain immune thanks to its established brand loyalty, iOS exclusivity, and status symbol appeal. Therefore, Xiaomi's entrance in the U.S. market could help the company expand its brand, but it arguably won't matter much to Apple in the long run.
Leo Sun owns shares of Apple. 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.