Watch Out for Xiaomi: Apple and Samsung Certainly Are

Many U.S. consumers have probably never heard of China’s Xiaomi, but that’s about to change.

Xiaomi comes to use, but no Xiaomi phones yet

Source: Xiaomi

After launch of its Mi Store, Xiaomi now has an online retail presence and with deals like the $14.99 Mi Band fitness tracker, you can bet people will take notice. You still can’t buy Xiaomi phones in the U.S., but Xiaomi’s Western ambitions are clear. And that’s not good news for smartphone leaders Apple Inc. (NASDAQ:AAPL) and Samsung (OTCMKTS:SSNLF).

Much has been made about Apple’s inroads in China, with that country now AAPL’s biggest iPhone market. However, international trade works both ways.

While AAPL was busy laying the groundwork for a push into China, privately owned Chinese technology company Xiaomi was exploding in popularity. Xiaomi only released its first smartphone in 2011 and began expanding internationally at the start of 2014. By last fall, Xiaomi phones were selling so well it leapt past LG and Lenovo Group Limited (ADR) (OTCMKTS:LNVGY) to become the world’s third largest smartphone seller.

And Xiaomi managed this feat without selling smartphones in the U.S. or other western markets.

The key to Xiaomi’s success has been to take an Apple-like approach to design — manufacturing products that are physically attractive — but Xiaomi keeps its products affordable by avoiding cutting edge (i.e., expensive technology) but still using quality components.

The current flagship Xiaomi Mi Note smartphone has a 5.7-inch full HD display, metal frame, curved Gorilla Glass 3 back, optically stabilized camera with a Sony Corp (ADR) (NYSE:SNE) image sensor and a Qualcomm, Inc. (NASDAQ:QCOM) Snapdragon 801 CPU with 3GB of RAM, and it’s only 0.27-inches thick. That’s thinner than the similarly sized iPhone 6 Plus, but while the AAPL phablet starts at $749 off-contract, the Mii Note is $370.

That CPU is over a year old and many flagship smartphones are going with greater than HD resolution displays, but the reality is the Mi Note is plenty of phone for the vast majority of users.

It’s the “good enough” scenario, where lower-priced smartphones are good enough to satisfy consumer demand, only with the added twist that Xiaomi phones give up little to the popular flagships on design or looks.

And if you really want more, Xiaomi offers a Pro version, with an octa-core Snapdragon 810, 4GB of RAM and a 2K display. It’s competitive with anything out there, but even this souped up model remains a relative bargain at $530.

Xiaomi has also expanded into a line of high-tech accessories and products beyond the smartphone. Upset that you won’t be able to buy an Apple-branded TV? Xiaomi makes one, the 47-inch Mi TV with built-in Android gaming.

The U.S. Mi Store is focused on accessories at the moment, but the pricing illustrates the challenge other consumer electronics companies are going to face in having to go head-to-head against Xiaomi.

Take the Mi Band fitness tracker. Compatible with both Android and iOS, the activity tracker is waterproof, tracks steps and sleep, is offered in a variety of colored wristbands and has been soundly trouncing rivals like the $199.99 Microsoft Corporation (NASDAQ:MSFT) Band and $179.99 Jawbone Up 3 in reviews.

You can buy a Mi Band from Xiamoi’s Mi Store for $14.99.

One of the reasons Xiaomi is stepping lightly into the U.S. market, instead of immediately selling smartphones, is that it has faced legal issues related to patents. Assuming the legal obstacle is eventually resolved, and Xiaomi phones like the Mi Note finally go on sale in the U.S., too — how big a threat would this be to Apple on its home turf?

It wouldn’t be good, and worse — it could turn into a ticking time bomb.

Apple’s core customer base would likely be safe. However, there is still a large demographic of potential AAPL customers that lusts for the gear but can’t afford the high price of entry. They like the premium look, feel and the full ecosystem of accessories Apple offers.

AAPL will sell them an iPhone 5c — with a 4-inch sub-HD display and three-year-old CPU — for $450. For $80 less, they can get a Xiaomi Mi Note that compares favorably in looks, build quality and performance with an iPhone 6 Plus.

The potential ticking time bomb of this scenario is that if this demographic chooses Xiaomi phones over iPhones and gets hooked, it may never switch to AAPL, even when income could support it. Worse, those consumers could tell their friends and convince them ditching their iPhones makes sense.

The more likely victim should Xiaomi phones reach U.S. carriers is Samsung.

Already hurting from disappointing sales in 2014, Samsung is trying to go upmarket in design with the new Galaxy S6 and Galaxy S6 Edge, but that Mi Note looks pretty sharp beside the improved Galaxy phones. The Mi Note Pro is able to take on (and in some aspects exceed) the Samsung flagship phones on features — while beating both on price — and $370 base model Wii Note could decimate all those mid-range Samsung smartphones like the Galaxy Alpha.

At this point, the potential danger Xiaomi represents to AAPL and Samsung is conjecture. The Mi Store only sells a handful of accessories and the potential for legal wrangling seems likely to keep Xiaomi moving very slowly when it comes to the U.S. market. It could be years before we see Xiaomi phones in carrier showrooms. Still, Xiaomi is a very real and potent threat, and you can bet Apple and Samsung are watching closely to see how U.S. consumers react to the Mi Store.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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