Xiaomi is a Big Threat to Samsung, Not Apple Inc.

By Markets Fool.com

Fast-growing Chinese smartphone maker Xiaomi has been cited as a major threat to Apple with increasing frequency in the past year or so. Indeed, Xiaomi went from a start-up to the world's third-largest smartphone maker in the span of just 3 years. By mid-2014, it was the leading smartphone brand in China by shipments.

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Xiaomi sells high-quality smartphones at very low prices. Photo: Wikimedia Commons

Xiaomi clearly has ambitions to rival Apple. In revealing Xiaomi's latest high-end smartphones, company founder Lei Jun made frequent comparisons to Apple's iPhone 6 Plus. He argued that Xiaomi's products were as good as or better than the iPhone 6 Plus, despite costing half as much (or less).

However, as much as Xiaomi may talk about Apple, it really has Samsung in its crosshairs. That's because Apple has two key advantages over Samsung in the fight against Xiaomi: more brand cachet and a differentiated hardware/software ecosystem.

Xiaomi vs. Samsung
These three points meant that first, Xiaomi didn't have a big hurdle to convince Samsung users to consider Xiaomi phones. Second, it could significantly under-price Samsung, particularly for high-end devices. Lastly, it meant that Xiaomi phones were compatible with Samsung devices, minimizing switching costs.Samsung was an obvious target for Xiaomi. First, Samsung sells phones covering a wide range of price points which limits the brand's "premium" prestige. Second, Samsung's high-end phones (the Galaxy S and Galaxy Note models) are sold at big markups. Third, most of Samsung's phones run on the open-source Android operating system.

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Xiaomi has convinced a large swath of Chinese consumers that its phones are just as good as (or better than) their Samsung counterparts, despite costing less. This has allowed Xiaomi to cut deeply into Samsung's market share. For all of 2014, Samsung's Chinese market share appears to have declined by about one-third, with the share losses worsening as the year progressed.

Xiaomi vs. Apple: a different story
For Apple, the threat from Xiaomi is much more manageable than for Samsung -- a point that is reinforced by Apple's stable market share in China. Apple has two key advantages: a unique level of brand cachet (manifested in strong customer loyalty) and its own operating system that is designed to "play nice" only with other Apple devices.

This means that to win customers away from Apple, Xiaomi needs to convince them to give up any iOS apps they may have purchased and deal with a potentially clunky process of migrating other data from their old iPhones. It's not impossible -- especially for people who don't own any other Apple products -- but it's still an uphill battle.

It's also important to note that Apple doesn't offer low-end smartphones and barely participates in the mid-range market. Xiaomi sold 61 million phones last year, bringing in about $12 billion. That means its average selling price was less than $200. By contrast, the average selling price for an iPhone is about $600 globally -- and likely higher in China.

The iPhone has become a major status symbol in China and elsewhere in Asia. Photo: Apple

For the most part, media outlets have interpreted this as a problem for Apple. (I.e. Xiaomi sells great smartphones for less than half the price of an iPhone.) But another way of looking at this vast discrepancy is that iPhone buyers in China aren't concerned about saving money on their phone purchases.

In fact, the opposite may be the case. The iPhone has become a major status symbol in China in recent years, precisely because of its high price tag. As one Hong Kong-based columnist put it earlier this month: "Apple products have become synonymous with a particular lifestyle. Everyone wants to look young, wealthy and carefree."

A manageable problem
Thus, Apple's decision to maintain premium pricing for all iPhones may counterintuitively stimulate more demand in China. The vast majority of Chinese consumers simply can't afford to spend the equivalent of nearly $1,000 for an iPhone. But there are still hundreds of millions who can, and a large proportion of them are doing just that.

On the margin, Apple will undoubtedly lose some sales to Xiaomi among more practical consumers who will pocket the savings and buy a Xiaomi phone that still carries a good deal of cachet in China. But since Apple never had a realistic chance of dominating the Chinese market with pricey iPhones, this shouldn't be a big concern.

By contrast, Samsung's strategy of building a phone for every niche in the market appears to be backfiring in China at the hands of Xiaomi. Samsung phones don't match iPhones as high-end status symbols in China, but they cost significantly more than comparable Xiaomi models. As a result, Samsung will have a much harder time maintaining its market share in China than Apple in the next few years.

The article Xiaomi is a Big Threat to Samsung, Not Apple Inc. originally appeared on Fool.com.

Adam Levine-Weinberg is long January 2016 $80 calls on Apple and short January 2016 $120 calls on Apple. The Motley Fool recommends Apple. 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.