The Monster Smartphone Maker You Haven't Heard Of - Yet

Unlike Apple (AAPL) or Samsung (SSNLF), China's Xiaomi doesn't have a brand name that's easy for Westerners to read or say. (It's basically "Show me," if the first word is pronounced like the initial syllable in "shower.")

In spite of this, and of its almost nonexistent brand recognition in this part of the world, Xiaomi is a runaway success in its home market. Its current growth rate is nothing short of astounding, and it might start to become a household name in other parts of the world if it effectively realizes its plans.

Calling on Growth

In almost no time flat, Xiaomi has become China's leading smartphone manufacturer in terms of shipments.

Founded in 2010, it pushed aggressively into the market, and in the second quarter of 2014, it overtook Samsung to become the No. 1 smartphone maker in the country, with a 14 percent market share compared to the Korean company's 12 percent. The figures from just the previous quarter: Xiaomi 11 percent, Samsung 18 percent.

All told, according to its own data, Xiaomi sold 61 million smartphones last year, more than three times the nearly 19 million in 2013. Sales, meanwhile, more than doubled to over $12 billion. Xiaomi has managed to grow as fast as it has because it knows its market -- and how to sell a lot of product to it.

The Price Is Right

A big part of this has been pricing. In China its 16 MB Mi4, unlocked, costs around $320. That's far less expensive than a comparable iPhone 6, which has a list price of $649 on Apple's e-store but typically costs much more in China. Meanwhile, Samsung's Galaxy S5 has a list price in excess of $600 online.

In spite of their low prices, Xiaomi's phones are powered by components from top manufacturers and have feature sets that stack up well against the competition's. For example, the Mi4's processor is a fast one supplied by Qualcomm (QCOM), and the 13-megapixel rear camera comes from Sony (SNE).

In terms of software, the devices run a modified version of Google's (GOOG) (GOOGL) popular Android operating system, putting Xiaomi's apps on par with models that cost significantly more.

Xiaomi can afford to sell its handsets for less, because unlike its competitors, it doesn't aim to make money from them. Rather, the idea is to break even on the hardware in order to turn a profit on the software -- the apps and services users want/need to enhance their experience with the phone or tablet.

In many ways, the company's business model is similar to (AMZN). The American retailer sells its Kindle tablets at cost in order to drive customers to its content, like books and videos.

International Expansion

Like many firms that have done well in their home countries, Xiaomi has ambitions to make a stronger push abroad.

The company has recently rolled out its wares in nearby Asian countries, as well as in cost-conscious lands such as India, Mexico and Turkey. If all goes well, it'll make a play for deep-pocketed locales such as the U.S. and Western Europe in the future.

But those places might be a tougher sell. First, they are hotly competitive markets dominated by companies that are much larger and richer. Xiaomi's 61 million smartphones sold last year is an impressive number, but Apple moved almost twice that many in the first nine months of the year alone.

Another potential hindrance is the design of Xiaomi's products -- its offerings are strongly reminiscent of iPhones. The narrow slot of a speaker at the top of the headset seems very Apple-y, for example, as does the "home" button on the bottom. The thin, minimalist overall look also feels quite similar to the American company's famous line.

In markets such as the U.S. that have a big iPhone customer base, that resemblance could hurt Xiaomi's chances. Smartphones are communication devices and fashion/lifestyle choices. The Chinese company's goods, then, might quickly acquire a damaging reputation as Apple knockoffs for cheapskates.

Killer Instinct

Still, Xiaomi is likely to be a tough competitor once it begins a serious expansion throughout the world. Its rapid growth indicates that it has the instinct every consumer-goods company needs for mass success: the sense for what its customers want, need, and are willing to pay for. It's managed to do well in China with that talent, so we shouldn't be surprised if the company uses it to win over legions of foreign customers, too.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends, Apple and Google (A and C shares), and it owns shares of, Apple, Google (A and C shares) and Qualcomm. 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.​
Read Full Story