In Rapid Rise, Xiaomi Not So Much Like Apple After All

In Rapid Rise, Xiaomi Not So Much Like Apple After All

Going for volume

Xiaomi became the world's third largest maker of smart phones this year and has often been accused of copying Apple's products, promotional videos, and media event presentations. But with the China firm poised for a massive international expansion in 2015, it's come to light that Xiaomi isn't like Apple at all in some key areas. Like some other up-and-coming Chinese electronics firms, Xiaomi is thriving on a diet of razor-thin margins.

Like the company's carefully orchestrated media events, that too is by design. Founded in 2010 by CEO Lei Jun, Xiaomi pursues a dramatically different business model than its closest competitors. It is run like a cash-strapped startup and sells high-quality but inexpensive devices—Xiaomi has quickly expanded past smart phones into tablets, fitness bands and smart TVs—almost exclusively over the Internet. It recently invested in a company that makes Internet-connected home appliances as well.

Its margins are laughable by the standards of the market leaders, Samsung and Apple: Xiaomi earned a net profit of $56 million on revenues of $4.5 billion in 2013, for an operating margin just 1.8 percent. The operating margin for Samsung's mobile unit was 18.7 percent in 2013, and Apple's was an even loftier 28.7 percent.

But then Xiaomi could one day displace both companies. The firm's appearance this year as the third largest maker of smart phones was the first time it had ever cracked the top five. And Xiaomi is now the largest seller of smart phones in China.

That's important because China isn't just the world's largest market for smart phones, it is the world's largest market for smart phones by far. In 2015, consumers in China are expected to purchase over 500 million smart phones in China alone. That's over three times as many smart phones as will be sold in the United States, the second-largest market.

Xiaomi isn't relying on China alone, though Mr. Lin says the company will continue to ignore "developed countries with tightly controlled carrier networks"—that is, the United States and Western Europe—to focus its growth on large emerging markets: India and Indonesia first and then Brazil and Russia.

Xiaomi is still privately held and is currently valued at over $10 billion. But a coming round of financing could push that value upwards of $30 billion, and of course an eventual public stock offering will be a major event.

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