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Apple's Chinese Competitor Releases a New Smartphone

By Jamal Carnette, CFA - Sep 24, 2015 at 7:00PM

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Xiaomi's releasing a new Mi unit to preempt Apple in China.

Unless you've been living under a rock, you know Apple's (AAPL -2.46%) next-iPhone iterations, the iPhone 6s and iPhone 6s Plus, will hit the market later this month. And according to the company, initial signs are positive as the company is "on pace" to beat last year's record of 10 million unit sales during the last generation's initial weekend. For Apple investors, this is obviously a great sign, as year-over-year sales comparables are quite difficult after Apple's monster prior-gen iPhone 6 and iPhone 6 Plus release.

If there's one big change from last year's initial weekend of sales to the current year for Apple it has to be the inclusion of China in its initial sales push. Last year, due to a licensing delay, Apple did not begin unit sales in China until mid-October. And if you've been following Apple closely over the past year, you know the majority of its year-over-year revenue growth comes from the most-populous country. On a total-revenue basis, this is Apple's growth in China:

While it's certainly wrong to say that Apple's not succeeding in China, as it clearly is, it's not quite a perfect market for Apple. Perhaps the biggest drawback for Cupertino in China is macroeconomic-related, as the developing-market GDP/capita makes it hard for the average Chinese citizen to buy the product. And that's where Apple's toughest Chinese competitor's -- Xiaomi -- new smartphone fits in.

Meet the Mi 4c
In an apparent attempt to pre-empt Apple's big release, Xiaomi was set to release the Mi 4c on Sept. 23, according to tech site Engadget. It appears to be a China-only version of the prior Mi 4i it released in April, but with a beefier Qualcomm Snapdragon chipset. The new unit boasts the top-notch 800 Snapdragon series (Snapdragon 808) versus the prior-gen, lower Snapdragon 615. For new users, however, this is somewhat of a free upgrade, as Xiaomi kept its price point similar to the prior-gen's cost of $204 for the 16GB version.

The latter is the biggest problem for Apple, as Xiaomi has rapidly grown by essentially copying Apple's design, adding Android's open-source ecosystem, and then undercutting Apple on price. The company has been accused of copying Apple even to the point its CEO Lei Jun wears Steve Jobs' signature black top and blue jeans during product unveilings. But more recently, that's showing signs of wear. Xiaomi has struggled with unit growth as a trade-up to Apple, strong offerings from fellow low-cost competitors, and a slowing Chinese smartphone market have put a crimp in sales.

After a while, don't you want the real thing?
Interestingly enough, Xiaomi's strategy of copying Apple at a lower price point may help Apple in the end. Considering Xiaomi is content with copying Apple, it stands to reason the primary reason users chose the former is due to price considerations. The latter will be moderated somewhat as a growing middle class with more disposable income continues to develop. As China's GDP/capita increases, look for more trade-up opportunities to buy the newest version of Apple's iPhone.

And a recent change by U.S. carriers may be bullish for Apple in China. After years of offering device subsidies, many carriers are now offering short-term phone financing options instead. With the newest iPhone 6s model, even Apple's getting into the phone-leasing business. At some point, the lightly used phone inventory this creates could become lower-cost, off-gen units that could be used to introduce new Chinese consumers to Apple's ecosystem. While Xiaomi can monetize Apple demand for a short period, eventually users will want the real thing. 

 

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