Get Smart

By+Zhou+Xiaoyan

Han Yu， a 24-year-old postgraduate student in Beijing， is a rabid fan of Xiaomi Inc.， a Beijing-based maker of smartphones， tablets and televisions. He， like hundreds of thousands of other Xiaomi worshipers， spends hours every day in testing the user interface of Xiaomi cell phone， finding bugs and offering advice to the company. He is in charge of several sections of Xiaomis online forum， a platform for fans to interact with the homegrown smartphone vendor， and， every day， there are over 200，000 new posts from fans on the forum.

Han said his life is Xiaomi-centered and he has since gotten to know many new friends through the Xiaomi forum.

“Xiaomi took my advice about creating a folder for private pictures in its latest update. This is an honor for me. I really enjoy the feeling of being part of it，” Han said.

Xiaomi， whose name translates into the grain “millet，” was founded in April 2010， in Zhongguancun， Beijings technology hub dubbed “Chinas Silicon Valley.” The company is very appropriately named， because it has shown significant growth. Over the past several years， it has risen from an obscure Chinese handset maker to become one of the top smartphone vendors in the worlds largest handset market—China—with a highly organized fan base who love and idolize the company.

Xiaomi is not the only Chinese smartphone maker thats growing exponentially both at home and overseas. Other local brands—Lenovo， Huawei， Coolpad and Vivo—are all also rising into leadership positions held by global leaders Samsung Electronics Co. and Apple Inc. The competitive edge of local brands lies in reasonable prices combined with high-performance hardware and highly customized software. This is very attractive to many Chinese consumers who try to strike a balance between the price and performance.

According to a recent report from the China Academy of Telecommunication Research， domestic cell phone brands owned 78.3 percent of the market share in China in 2014.

In sharp contrast to Chinese smartphone makers boom， the market share of Samsung is trailing off. Samsung accounted for 23.8 percent of the global market in the third quarter of 2014， decreasing from the 32.5 percent in the third quarter of 2013， according to the International Data Corp. In the Chinese market， Samsungs market share shrank to 14 percent in the third quarter of 2014 from the 21 percent in the third quarter of 2013， according to market research and advisory company Canalys.

Prominence

Xiaomis rise has been pretty astounding. Just a few years after announcing their first smartphone model in August 2011， it became the third largest smartphone vendor in the world， according to International Data Corp.， and the largest in China， according to Canalys.

Xiaomi said it sold 61.12 million mobile phones in 2014， up 227 percent. Sales revenue totaled 74.3 billion yuan （$12 billion） in 2014， up 135 percent from 2013. The company hopes to sell 100 million units of smartphones globally in 2015. At the end of last year， Xiaomi said it had raised $1.1 billion in a new round of funding， putting the company at a valuation of $45 billion， the highest among all unlisted tech firms.

Despite its outstanding performance last year， Lei Jun， founder and CEO of Xiaomi Inc. said there is no time for complacence as competition in Chinas handset market is “unbelievably brutal.” Xiaomi is mired in heightened competition with domestic rivals Lenovo and Huawei.

Xiaomis cross-town rival Lenovo， the worlds largest maker of personal computers， is focused on an expansion in smartphones amid a global decline in PC demand.

After purchasing Motorola from Google in a $2.91-billion deal in October 2014， Lenovo claimed it has become the third largest smartphone vendor in the world and said the space between it and the top ranked smartphone makers is decreasing. Lenovo announced in January that it will bring Motorola phones back to China in the first quarter， reintroducing the brand to the worlds largest market after an absence of more than two years.

“Motorolas brand is well liked and respected in many markets， especially being a U.S. brand with a long legacy in mobile” said Jessica Kwee， a Singapore-based analyst with Canalys. “It is something that Lenovo can leverage.”

Smartphone shipments of Huawei， a leading information and communications technology solutions provider headquartered in Shenzhen， south Chinas Guangdong Province， rose 40 percent to 75 million in 2014.

Huaweis latest models—Honor 6 and Honor 6 Plus—have made a splash in China and the company said sales of its Honor Series， a flagship series that the company created to compete against Xiaomi， increased 30 times in 2014.

Alan Chen， an analyst with TrendForce， a market intelligence provider， said in a research note that Huawei， Xiaomi and Lenovo will battle to be the top Chinese smartphone vendor in 2015.

“How Lenovos Motorola acquisition plays out and whether Xiaomi can replicate its home market success overseas will be key factors in determining who becomes the top Chinese brand in 2015，” Chen said.

Prospects

Wang Yanhui， Secretary General of Mobile China Alliance， an industrial association in the country， said the victory of local brands has resulted from their thin profits.

“The decrease of Samsungs market share is because the manufacturing technology for smartphones has become standardized. After Chinese brands have acquired the know-how， they will definitely enjoy a sweeping victory in price-sensitive markets with their exceptional high cost-performance ratio. If Samsung doesnt lower its price， its market share will further decline，” Wang said.

Wang， however， said Chinese smartphone makers can hardly be expected to dominate the global arena.

“The dominance of Samsung is partly attributed to its strong supply chain， and the success of Apple is because of its IOS system. Although Chinese smartphone makers have made certain progress in core technologies， they still have a long way to go，” Wang said.

“Their status as top smartphone vendors globally is backed by their enormous sales data in China. The global market share of Chinese smartphone makers combined is quite limited，”Wang said.

“Huawei has developed its own patented chips， but its supply chain lags far behind that of Samsungs. The sales volume of Xiaomi is increasing rapidly， but its profit margin is very thin， much lower than Samsung.”

Wang said a lack of global sales network and patents will be major obstacles in the overseas forays of Chinese smartphone brands.

For instance， when expanding overseas， Xiaomi started from price-sensitive emerging markets including India， Indonesia and Pakistan. But even so， the company was sued in December 2014 by Ericsson AB for patent infringement when it tried to expand in India， the worlds second most populous country.

The absence of high-end smartphone models is another reason why domestic makers can hardly be expected to compete with Samsung globally. Chinese smartphone makers are mainly focused on models priced at below 2，000 yuan （$322）.

“Its hard to imagine that a smartphone maker will be a global success without high-end models，” Wang said.

“If they want to surpass Samsung， they need to do three things first： set up a globalized sales network， solve the patent problem and focus on being the runner up to Samsung，”Wang. “To date， no domestic maker has fulfilled the aforementioned.”

Li Yi， Secretary General of the China Mobile Internet Industrial Association， said the smartphone market as a whole will shrink in coming years.

“Desktops used to be popular， but they were replaced by laptops. Several years later， tablets replaced laptops. Now， the tablet market is dwindling. Once-popular consumer electronics products will always be replaced after three to five years，” Li said. “The smartphone will be no exception.”

In several years， wearable devices will replace smartphones， and the smartphone market as a whole will shrink， said Li. “Realizing this， global heavyweights like Apple and Google are all transforming. Otherwise， they wont have any room for development in the future.”

“Although domestic smartphone makers are prospering both at home and overseas， their primetime can only last for three to five years. As the technology further advances， smartphones may not exist in the future. Its functions will be integrated into a watch or a pair of glasses，” Li said.