China's homegrown smartphone firm, Xiaomi, takes on market with low-price strategy

Xiaomi's newest smartphone will be priced at 1999 yuan (US$315), less than half of similar high-end devices are being offered for in China

When Chinese company Xiaomi ended the Thursday unveiling for its second-generation smartphone, the audience, numbering in the hundreds, gave a standing ovation.

The enthusiastic response was not for the device's quad-core processor, its high-definition touchscreen or its new localized OS. It was for the phone's no-contract price, finally revealed to be 1999 yuan (US$315 ), less than half the amount rivals Apple, Samsung, HTC are offering their handsets for.

"Xiaomi is meant to give you a fever for life," said the company's CEO Lei Jun during the event, expressing the excitement around the product.

In a time when China's smartphone market is already filled with competitors, Xiaomi has stood out by building handsets with high-end specs for low prices. The strategy has not only worked, but helped garner the company a special level of popularity, with some in the media calling Xiaomi China's answer to Apple.

The fervor for the company was on full display this Thursday, when company fans, clad in Xiaomi orange shirts, yelled and clapped in support as each feature of the newest phone was detailed. Equipped with a quad-core 1.5GHz processor from Qualcomm, along with a 1280 by 720 pixel touchscreen at 342 pixels per inch, the Xiaomi M2 features cutting-edge specs to rival the latest flagship phones on the market.

Setting it apart from competing devices is the Xiaomi M2's aggressive pricing. A year ago, the company used the same price, 1999 yuan, for its first generation phone, which reached 300,000 pre-orders in two days.

In contrast, Apple's iPhone 4S starts at 4988 yuan, while Samsung's Galaxy SIII 16GB version is at 4999 yuan under no-contract pricing.

It's unclear what profit margins Xiaomi earns from smartphone sales, if any. But one year after releasing its first smartphone, Xiaomi has achieved a strong public following with its pricing strategy, while focusing on strong marketing and selling its product through online sales, said Nicole Peng, an analyst with research firm Canalys.

"They have established a very strong brand awareness," she said. "I think from a year ago, no one expected that they would do such a great job."

Founded in 2010, Xiaomi is run by former executives from Microsoft, Google and Motorola, and has received US$347 million from investors. Along with its hardware, the company has also made a localized OS for its phones, called MIUI, which is based on Android and is a cornerstone to the Xiaomi's business. Every week, the company provides an updated version of MIUI with new enhancements, which can be downloaded to user's phones.

But despite it's popularity, Xiaomi is still far from reaching the sales of smartphone heavyweights like Samsung in China. While the company's first generation smartphone has hit a total of 3.5 million sales, its smartphone market share for the first half of this year was less than 5 percent, according to Canalys. Samsung, on the other hand, led the market in this second quarter, with a 17 percent share, while domestic companies ZTE, Lenovo, and Huawei trailed behind.

Xiaomi's newest phone, however, could further shake up China's smartphone market, putting additional pressure on its competitors, according to experts.

"Overall, I'm impressed with the phone based on the specifications," said Teck-Zhung Wong, an analyst with research firm IDC, who attended the Xiaomi M2's unveiling. "Fans really do seem to love it up and the company seems to have a strong start."

How the company is able to price its product so low was not explained during Thursday's event. But Wong, who was surprised by the pricing, said Xiaomi was likely able to convince its suppliers give them good deals on components and manufacturing.

Fans of Xiaomi were also impressed. In attendance at the event was Luis Lu, 26, who said he will probably buy the handset, after previously purchasing the first generation phone, at a price of 1499 yuan.

"At first, I felt the Xiaomi device wasn't as good as the iPhone. But after I used it for a while, I realized it didn't have much of a difference with the iPhone," he said.

Lu said he also felt Xiaomi was learning from Apple in the way it introduces its new products and focuses on building brand awareness. On Thursday, the company also unveiled an updated version of its first generation smartphone called the Xiaomi 1S, the S standing for Super.

"Xiaomi has become very influential in China," Lu said. But while Xiaomi's newest phone offers high-end specs, Lu said the phone's user experience and localized OS are what he liked the most about the product. "The hardware isn't always the most important," he said. "More important is the user experience."

The Xiaomi M2 will launch in October. It comes with 2GB RAM, 16GB memory, a rear-facing 8 megapixel camera, and a front-facing 2 megapixel camera. Built with a 2000 mAh battery, the phone is also installed with a Chinese localized version of Android 4.1.

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Michael Kan

IDG News Service
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