At noon on August 12, Xiaomi Tech’s latest smartphone goes on sale in China. Priced at just 799 yuan ($130), the Android-powered Hongmi, or “Red Rice,” is expected to be this year’s smash.
Even without the Hongmi, Xiaomi sells more smartphones than Apple AAPL +1.85% in China. The Canalys Q2 rankings put the Cupertino-based company in seventh place with 4.8% of the Chinese market. Xiaomi, which means “Small Rice,” is one notch above with 5.0%.
Apple may be just a shade behind Xiaomi in China, but it is miles from Samsung, which sold 17.6% of the smartphones there last quarter to take the top ranking. Four domestic companies—Lenovo, Yulong, ZTE , and Huawei—ended up in spots two to five.
Lagging behind in China makes a difference. More than a third of the world’s smartphones were sold there last quarter, according to Canalys, and Apple is sinking fast in that market, losing almost half its share in a year. Its fans are waiting for the successor to the iPhone 5, but even a hit will not make much difference for a high-end company in China’s increasingly low-end market.
Yet Apple’s China problems go well beyond being trapped in the saturated top segment of the market, so the budget iPhone, rumored to be in the works, may not do well in that country. For one thing, the iconic company is losing the “cool factor” there, and introducing a budget phone, which is thought to be designated the iPhone 6, will not help a fading image. As Gartner’s Sandy Shen and others have pointed out, competing in the bottom of the market is “a self-acknowledgement” that Apple now is just another phone manufacturer.
As Apple continues on the road from “absolutely must have” to “boring,” its new budget phone will have to compete on price. Yet Xiaomi is getting the hang of manufacturing for the mass market and will be an even more ferocious competitor in the segment Apple needs to enter. At this stage, there is little Apple can do to cut costs as its third-party contractors in China, notably Foxconn and Pegatron, are under intense international pressure forallegations of illegal and unsavory practices, like the use of child labor. Manufacturers for China’s domestic brands, on the other hand, do not attract as much scrutiny.
Apple has more than a cost disadvantage to contend with. The company’s stand-alone marketing strategy is out-of-synch with the times. Its eight stores in China are gorgeous, but there are not nearly enough of them for a country the size of the U.S. The company lacks cross-promotional partnerships in China while competitors are linking up with social sites, a craze in Chinese phone marketing at the moment. Xiaomi, for instance, has a deal to sell the Hongmi on QZone, Tencent’s social network. With 712 million registered users, it is China’s largest social site.
There are, of course, risks for phone makers when they partner up. For instance, Xiaomi will be shut out of QZone’s rival, Sina Weibo, the popular Twitter-like service. Yet there is little arguing with Xiaomi’s extraordinary success. Formed in 2010 in Beijing, it sold its first smartphone in September 2011. Last year, it had sales of 7.2 million. This year, chief executive Lei Junpredicts his “small and beautiful company” will sell 15 million of them.
An amazing replacement for the iPhone 5 could change the buzz about Apple in China—as it would most everywhere else. Yet the next offering, the iPhone 5S with a convex fingerprint sensor, does not look like it will be a game-changer when it hits the stores, apparently sometime in the latter part of September.
Even a big success should not deter the executives in Cupertino from rethinking their strategy for China and coming up with a mid- to low-end phone. China, after all, is a big enough market for a company like Apple to sell in multiple segments at the same time. If it does not challenge Xiaomi in its home market—the world’s largest—it will eventually have to do so closer to home.
Today, Xiaomi sells only in two countries, China and Taiwan. Yet as it builds up experience, cash, and confidence, it will not hesitate to go after competitors abroad, and it is in fact thinking of selling elsewhere beginning next year.
When Xiaomi expands, it will be following other Chinese companies. Yulong, third place in China, already sells its Coolpad smartphone in the U.S.
And which company is the fastest-growing in the mobile phone market in America? That would be ZTE, with 85.7% growth in the U.S. in the first quarter over the same period in 2012. That puts the Shenzhen-based business in either third or fourth place in America, depending on the survey.
While Cupertino execs need to look over their shoulder at the advancing Chinese, they also should think about the past, especially General Motors ceding the low-margin compact segment to Toyota. Yes, there are reasons for Apple to protect its profitability and shun the bottom of the Chinese market, but the company must realize that GM has never fully recovered from its fundamental mistake.
Corollas do not prevent Toyota from offering Lexus models. That’s the lesson Apple needs to learn now—and learn quickly. Xiaomi, in sixth place in China, is not about to give seventh-ranked Apple time to catch up.
