Samsung's Been Hit, and Now Apple Is Under Attack

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Xiaomi Shows Off
Jeff Chiu/AP
A company that's been giving smartphone makers fits in China is starting to make a stateside push. Xiaomi -- pronounced "show" as in shower and "me" -- announced plans last week to begin selling its headphones, wearable fitness trackers and other accessories in this country through its online store.

We won't be seeing Xiaomi's signature smartphones and tablets when Internet sales start up in the U.S. in a few months through its website. That will inevitably come later. However, the fact that Xiaomi is setting its sights on entering the U.S. market after succeeding in a few overseas territories is notable.

Xiaomi the Money

Xiaomi's success has left its mark on Samsung (SSNLF), but Apple (AAPL) would probably be faring even better if it didn't have Xiaomi to contend with in China, India and other Asian countries. Apple is doing great. The iPhone 6 and iPhone 6 Plus are selling at record levels, and the stock recently hit new all-time highs. The rub here is that Xiaomi is growing even faster.

Industry tracker Gartner reports that Xiaomi catapulted to become the world's fourth-largest smartphone manufacturer in terms of units sold during the third quarter of last year. Gartner's data find Xiaomi selling nearly 15.8 million of its Mi phones to vendors during the third quarter, up nicely from the 3.6 million handsets it shipped a year earlier.

That's not a big number compared to the 301 million smartphones shipped worldwide during the quarter, but Xiaomi's market share has gone from 1.5 percent to 5.2 percent over the past year. Samsung at 32.1 percent and Apple at 12.7 percent are bigger players. However, in terms of growth, Xiaomi sold 12.2 million more handsets during the third quarter than it did a year earlier. Apple only sold 7.9 million more iPhones, with global leader Samsung posting a decline of 7.2 million units.

Xiaomi's secret recipe is a combination of new media sizzle, stylish panache and razor-thin margins. Its flagship phones are based on a modified version of the Android operating system that Samsung has been championing for years, tweaked to provide a user interface that is more in line with what Apple is doing with its iOS. Xiaomi takes a page out of the Apple playbook in making lavish presentations when it has new products to unveil, complete with the "one more thing" bonus that Steve Jobs milked in his prime.

Xiaomi also uses social media and Web-based distribution to generate buzz and provide cheap distribution, passing on the savings to consumers. Xiaomi's phones cost roughly half as much as comparable Apple products. That may not be such a big deal in the U.S., where wireless carriers subsidize handsets, but it's a game changer in most of the other countries where folks have to pay full price for their devices.

An Apple a Day

Growth is accelerating at Apple. It sold nearly 75 million iPhones during the holiday quarter, more than the roughly 60 million that Xiaomi sold all year.

This doesn't mean that Apple can ignore a company that's becoming a cult fave in developing markets as it maps out a strategy to enter new territories. Xiaomi's latest smartphone entry point is Brazil, but with the online store in the U.S. launching in a few months, it wouldn't be a surprise if Mi phones become available here later this year. With wireless providers tiring of subsidizing phones, it would be a case of perfect timing for Xiaomi.

Apple bulls may argue that iPhone fans are a loyal and growing lot. That's certainly true, and historically developers have paid more attention to the iPhone than the Android despite the smaller audience size, because folks on iOS are more engaged than folks on other devices. Late last year an interesting study by Web traffic analytics specialist Flurry showed that Xiaomi users may be even more engaged. Sampling 23,000 smartphone users in China, it found that Samsung owners spent 14 percent less time on apps than iPhone owners, but Xiaomi users were interacting with apps 7 percent more than iPhone owners.

The good news for Apple investors is that the market is growing so quickly that there's room for more than one winner. However, with Xiaomi's heady growth and 100 million people now on its operating system, it's a fast-growing rival that Apple can't ignore.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.​
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