Xiaomi Fast Emerging as the Apple Rival To Watch

It wasn't long ago that everybody wondered whether Apple Inc. could effectively compete against a tough bunch of homegrown smartphone makers in China.

Then came the company's blowout earnings report this week, which included a stunning 70% year-over-year increase in its China region revenue, driven by its new iPhones.

That answered the question in the affirmative -- but it doesn't mean Apple can breathe easy. Chinese smartphone makers are growing fast, led by an aggressive company hardly anyone in the U.S. had heard of until recently: Xiaomi.

Based in Beijing, Xiaomi is fast emerging as the Apple rival to watch -- not just in China, but around the world. Last year it sold 61 million smartphones, more than three times its 2013 total. A few weeks ago, the 5-year-old company raised $1.1 billion in new funding at a valuation of $45 billion.

"The trend over the last couple of years has been for local vendors, plus Samsung, to dominate the market and make it hard for others," said Chris Jones, principal analyst on the mobile team at research firm Canalys. "They've been driving down the prices of smartphones and driving up the screen sizes and quality."

Xiaomi sells smartphones at about half the cost of the iPhone. That's a big deal in a country such as China, where average incomes are a fraction of those in the U.S.

Besides selling relatively inexpensive phones, Xiaomi's strategy has been to primarily sell its phones online, which boosts profit margins by taking expensive real estate out of the equation.

It also uses a savvy "pre-order" system, manufacturing the phone after an order is placed and paid for by the user; with the price of smartphone components constantly declining, Xiaomi ends up benefiting because the cost to produce the phone ends up being cheaper than when the phone first went on...

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