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Xiaomi Could Soon Challenge Apple Inc ... in Laptops?

By Leo Sun - Sep 8, 2015 at 5:00PM

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Xiaomi might launch a Linux-powered laptop next year.

Xiaomi could launch its own laptop computers next year, according to recent reports from Bloomberg and DigiTimes. The top smartphone maker in China has reportedly held talks with Samsung to supply the components, while original design manufacturer Inventec and contract manufacturer Foxconn could design and manufacture the laptops.

The reports also claim that the device will have a 15" screen, cost roughly $470, and run Linux instead of Windows. Not much is known about its internal specs, but the device is expected to challenge premium devices like Apple's (AAPL 4.01%) MacBooks with a comparable design and dramatically lower price tag. Let's take a closer look at why Xiaomi might expand into laptops, and what its arrival could mean for Apple.

Apple's new Macbook. Source: Apple.

Xiaomi is building an ecosystem
In addition to smartphones, Xiaomi makes other products like tablets, fitness bands, headphones, smart TVs, and smart home appliances. Xiaomi relies on economies of scale rather than brand appeal to sell its products at lower prices than its competitors.

Xiaomi is often called the "Apple of China," but CEO Lei Jun once told the Financial Post that he preferred for his company to be compared to Amazon (AMZN -0.03%) instead. Just as Amazon sells Kindle tablets and Fire TV set-top boxes at thin margins to tether more users to its ecosystem, Xiaomi applies the same strategy to its phones, tablets, and smart TVs, which all run on its own version of Android, MIUI. Within China, Xiaomi weaves its own Mi App Store into MIUI, which helps it offset low hardware margins with digital revenues.

The popularity of Xiaomi's cheap products also fuels its e-commerce growth, since it sells most of its products online. That's how Xiaomi became the third largest e-commerce company in China earlier this year. That, in turn, drives digital revenue growth and ecosystem expansion.

Xiaomi doesn't just make smartphones. Source: Xiaomi.

But why expand into Linux laptops?
Global PC shipments could decline 4.5% annually this year, according to research firm Gartner, and aren't expected to bounce back until 2016. Expanding into that market as it recovers could help Xiaomi's laptops catch some momentum as customers replace their aging devices.

Moreover, Xiaomi could tap into the growth of the "ultramobile premium" PC market (MacBook, Surface, Ultrabooks), which is expected to rise much faster than sales of traditional PCs. Gartner expects shipments of ultramobile premium devices to avoid the slowdown and rise 32% this year and 39% in 2016. Xiaomi could disrupt that market by selling laptops with similar hardware specs and aesthetic designs as its pricier competitors.

Going with Linux might seem like an odd choice, but Gartner expects shipments of Google's (GOOG 2.15%) (GOOGL 2.37%) Linux-powered Chromebooks could rise 27% annually this year, thanks to their low price tags and tight integration with Google's cloud-based ecosystem. Xiaomi could similarly use low-priced laptops to tether users to its own cloud-based services.

Chromebooks. Source: Google.

Should Apple be worried?
Apple has two notable weaknesses -- its rising dependence on the iPhone, which generated over 60% of its revenues last quarter, and slipping sales of iPads, which have fallen for six consecutive quarters. Between those two figures, Mac sales have remained a steady anchor, rising every quarter as iPad sales fell.

Apple's 9% growth in Macs revenue last quarter, which accounted for 12% of its top line, might not seem impressive, but it sidesteps the slowdown in the overall PC market. According to research firm IDC, Apple and Lenovo were the only PC makers to post positive year-over-year growth during the second quarter.

Apple relies on two strategies -- its brand appeal and its closed digital ecosystem -- to sell its products. That approach worked wonders with the iPhone, and it's what keeps people buying Macbooks instead of Windows laptops. Just like in smartphones, Apple and Xiaomi are focused on two different markets in China -- the former caters to richer customers, while the latter focuses on less affluent ones.

There's room for both
Apple became the top smartphone maker in China in the first quarter of 2015, but Xiaomi reclaimed that title the following quarter with new product launches. That tug of war between the two companies indicates that there's likely room for both companies to sell their laptops in China. But if Xiaomi's Linux laptops experience Chromebook-like sales growth, the subsequent decline in price expectations might hurt other PC makers in China which lack Apple's brand appeal.

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Apple Inc. Stock Quote
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