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This New Smartphone Could Be the iPhone's Biggest Competition in China

By Sam Mattera - Mar 14, 2016 at 3:23PM

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Xiaomi's Mi 5 nearly matches Samsung's Galaxy S7 in specs, but retails for just a fraction of the price.

Xiaomi Mi 5. Source: Xiaomi.com

Last month's Mobile World Congress was big for smartphones.

Samsung (NASDAQOTH: SSNLF) unveiled its latest flagship handsets, the Galaxy S7 and Galaxy S7 Edge, and LG announced the specs of its heavily redesigned G5. These phones should be big sellers, and challenge Apple's (AAPL -1.80%) iPhone in Western markets. But in China, Apple could face a more formidable rival in the form of a homegrown competitor.

Xiaomi, the Chinese smartphone giant, also unveiled its 2016 flagship device at Mobile World Congress, and it's arguably even more impressive than anything Samsung or LG announced. With high-end specs and an attractive price tag, the Mi 5 could draw interest from hordes of consumers in China -- a market that's of increasing importance to Apple.

$415 can buy you quite a phone
Xiaomi will offer the Mi 5 in two different configurations. The standard edition sports a Snapdragon 820 processor, 3GB of RAM, a 16-megapixel camera, 3,000 mAh battery, 32GB of internal storage, and a body made of metal and glass. The Pro model boosts the internal storage to 128GB, adds an extra gigabyte of RAM, and replaces the glass back with one crafted from ceramic -- a rarity among smartphones.

In terms of specs, Samsung's Galaxy S7 is almost identical to Xiaomi's Mi 5 Pro, also boasting a Snapdragon 820, 3,000 mAh battery, and 4GB of RAM. To its credit, it has a QHD display, a slot for microSD cards, and water resistance -- three features the Mi 5 lacks. But where the Mi 5 really sets itself apart is on price: Xiaomi is charging just 2,699 RMB for the Pro model; 1,999 RMB for the standard edition. That's about $415, and $307, respectively. Samsung's Galaxy S7, in contrast, retails for nearly $700 in the U.S., and around 4,888 RMB ($750) in China.

Competing hard on price is nothing new for Xiaomi. Since its inception, the company has embraced a strategy built around razor-thin hardware margins. By selling high-end handsets at bargain prices, the company has attracted a strong following in China and grown rapidly. Although the firm was founded less than six years ago, it's now the fifth-largest seller of handsets in the world. Last year, it shipped nearly 71 million smartphones, according to research firm IDC.

Xiaomi isn't growing as fast as it once was
That was up from about 58 million in 2014, giving it an annual growth rate of nearly 23% -- marginally better than Apple's 20.2% growth, and much better than Samsung's meager 2.1%. But it wasn't as great as Xiaomi had hoped. Management had projected 2015 smartphone shipments of 80 million to 100 million at the beginning of last year, and it fell far short of that target. Xiaomi is looking to the Mi 5 to help it return to its previous trajectory.

Nevertheless, Xiaomi is still a major player globally, and a significant force in China. Although both Apple and Samsung outsold the firm worldwide in 2015, Xiaomi was more successful in its home market. Xiaomi displaced Apple as the largest seller of smartphones in China in the second quarter last year, according to research firm Canalys. It fell to second place in the third quarter, when Huawei surged ahead, but it still sold more smartphones to Chinese buyers than Apple.

Apple's second-largest market
Last quarter, more than 24% of Apple's revenue came from Greater China. It also accounted for almost all of Apple's revenue growth, as sales rose 14% on an annual basis. It's now Apple's second-largest market, and management expects it to eventually overtake North America as Apple's most important region in the years ahead.

The Mi 5 is Xiaomi's most impressive phone yet, but it doesn't fundamentally shift the company's strategy. Still, it may offer Chinese buyers their most compelling alternative to the iPhone.

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