Xiaomi smartphones becoming a youth favorite

Moments after Lei Jun finished his keynoteaddress at the Global Mobile Internet Conference (GMIC) inBeijingin May, the CEO of Chinese smartphone maker Xiaomi was mobbed by young volunteers working the event, all eager to take pictures of the mop-haired 43-year-old and claim an autograph of their hero. 

Since that May conference, Xiaomi's rock-star status inChina, spearheaded by Lei, has grown exponentially. Founded in 2010 by a team of seven experienced tech entrepreneurs led by Lei, the Beijing-based company's cut-rate, high-spec phones have gained a cult following. Online product launches sell out in minutes and analysts are gushing about a recent $10 billion valuation, with $4 billion revenue expected in 2013 and expected sales of 20 million phones. In the second quarter, Xiaomi surpassed Apple to control 5 percent ofChina's lucrative smartphone market, the world's largest, expected to grow to 360 million shipments by 2013, according to global marketing consultants IDC.

The right price

Where Android powered Xiaomi has excelled is in catering toChina's acutely price-sensitive consumers. Its current phones, the more advanced of which stack up favorably against Samsung's Galaxy Series, are priced between 799-1,799 yuan ($128-290), compared to at least 4,000 yuan ($645) for high-end models from Samsung and Apple. In September, Apple's vaunted launch of a 4,488 yuan ($724) "budget" model, the 5C, was met with only tepid fanfare in the Chinese market. According toChina Daily, data fromChina's online commerce giant Alibaba in 2013 shows that 61 percent of mobile phones sold on its popular Taobao marketplace and the Tmall.com platform were priced below $165, 20 percent cost $165 to $330, and only 18 percent cost more than $330.

"Marketing has been Xiaomi's real winner," said Calvin Smith, Director of International Relations at the Great Wall Club, a mobile Internet networking and advisory firm that hosted the GMIC conference.

"They have absolutely rabid fans. They gained this through creating a sense of pride in both the company and the users. Xiaomi is the underdog, its buyers are underdogs in society - they are individuals in a society where everything is a fight unless you're at the top. Xiaomi has done a brilliant job of weaving that message into its marketing."

Matt Cheung, a Hong Kong born attorney with experience working in aBeijinglaw firm, purchased a MI2 smartphone 10 months ago. Like other Xiaomi users, Cheung was looking for a balance between price and performance and found a fit with the Xiaomi phone. He admits it's less flashy than an iPhone or top-model Samsung, but said he's satisfied so far.

"I think Xiaomi has similar, or the same capabilities as other high-end phones such as iPhones and Samsung Galaxies. It has a good camera, a lot of apps, and best of all you can customize your phone like how you do with your computer such as wallpaper and themes," Cheung said.

Big challenges

With the release of its newest model, the MI3 in mid-October, and the imminent opening of its first flagship store, inBeijing's upmarket Wangjing Mall, Xiaomi has attracted a crush of recent media coverage. Analysts' chatter has centered around the move of Google's former VP of Product Management for Android joining Xiaomi in October, to lead company's global expansion.

Lydia Bi, a research analyst at market research and advisory company Canalys, said hiring Hugo Barra means Xiaomi is definitely eyeing the international market, although the company is not yet in a position to roll out its devices on a big scale internationally. She said issues of gaining trust from overseas buyers, differentiating itself from existing smartphones, and navigating international intellectual property issues were challenges for the Xiaomi brand.

At the September 5 launch for the newest MI3 (starting at $330) and a low-priced Smart-TV ($490) also released in mid-October, Barra reportedly told theBeijingaudience, "I believe it is time for the world to know about Xiaomi." Currently, Xiaomi sells its phones through its exclusive online store in the Chinese mainland, Hong Kong andTaiwan.

"It is totally feasible [for Xiaomi to globalize]," said Mark Tanner, Managing Director of Shanghai-based China Skinny, a market advisory firm. "I'd say they will be especially huge in the most price-sensitive markets of Asia, Africa and Latin America, however they will still do well in the developed markets, with theUnited Statesbeing the toughest market for them."

Tanner acknowledges that barriers do exist, however. "Their thorniest barrier will be the negative perception aroundChina, for both quality and, more likely, Big Brother [Government oversight]. TheU.S.obviously has a lot of paranoia about Chinese products - just look at the barriers Huawei has faced there."

Beyond the stigmas that many in the West attach to companies coming out ofChina, Xiaomi faces another, persistent, criticism: its tendency to model itself after, or even "copy" Apple.

Apple clone?

The similarities begin with the company's boyishly handsome CEO, Lei Jun, who Forbes ranks as the 55th richest person inChinawith a net worth of $1.75 billion. Although Lei has recently shunned away the comparisons between his company and Apple, he often appears publicly in jeans and dark shirts, a la Steve Jobs. The company's rock concert styled product launches and interior décor of its new flagship store are no doubt influenced by Apple, and Xiaomi phones, although Android-based, share some user-interface features with the more expensive iPhones. 

Stijn Schuermans, senior analyst at VisonMobile, a London-based mobile research firm, who has written about Xiaomi's market emergence, thinks that the Apple comparisons are misguided.

"Yes, in the beginning, Xiaomi styled itself after Apple, but as time has passed, Xiaomi looks less and less like Apple, and more and more like Xiaomi," Schuermans said.

 "Lei Jun was smart. He recognized the cultural dominance of Apple at the time inChina, piggy-backed on some of that culture to gain recognition, and now has transformed it into his own brand."

Smith shares this perspective.

"Is Lei Jun the Chinese version of Steve Jobs? No, but there is one place they share traits. It's not hardware, it's marketing. He has created a brand and persona with cult-like following by tapping into the emotions of the consumer."

As Xiaomi's star rises and media coverage mounts, it is the phone maker's ability to tug on these emotions, and keep its user base excited, that will ultimately determine its survival.