What Xiaomi’s success tells us about emerging markets

Xiaomi emerged as the top smartphone vendor in the world’s largest smartphone market during the second quarter, Canalys said this week, selling 108.5 million units in its homeland of China. The four-year-old company claimed a 14 percent share of that market, overtaking Samsung and marking 240 percent year-over-year growth. The news comes just a week after Strategy Analytics reported Xiaomi was the fifth-largest smartphone manufacturer worldwide in the second quarter with a 5 percent share of the global market.

Android really is forkable, and that could be trouble for Google

Some analysts have questioned Canalys’s figures – smartphone sales in China are notoriously difficult to track — but Xiaomi has clearly become a major player in that market. And a large part of that success has been Miui, Xiaomi’s Android-based operating system that includes localized features and is updated weekly. Miui has become a key differentiator for Xiaomi, and it is the underpinning of the company’s mobile apps and services businesses. That’s a strategy Samsung had tried to execute until recently, when Google began to exert increased pressure on its manufacturing partners that aggressively look to use Android to push their own apps and services. Google withholds access to key components like Google Play and Maps from those manufacturers in a move that some have said make Android unforkable.

But Xiaomi’s success proves that it’s possible to build a thriving ecosystem with a forked version of Android. And Xiaomi isn’t alone: ABI Research reported this week that production of smartphones running a forked version of Android increased 20 percent just from the first quarter of 2014 to the second quarter. Android has cemented its position as the world’s dominant mobile operating system, but Google faces a daunting task in fully taking advantage as smartphone sales in emerging markets soar.

The lowest price doesn’t always win

Xiaomi’s hardware strategy has been to emulate – or, some would say, slavishly copy – the iPhone’s design and marketing, then selling handsets for very low margins, enabling it to undercut Apple’s pricing substantially. But Xiaomi’s handsets typically sell for $130 to $300, which is substantially higher than many of the bargain-basement smartphones that have launched recently in China, India and other regions. Emerging markets are often portrayed areas where smartphone vendors are in a race to the bottom when it comes to pricing, but Xiaomi’s ascent indicates that in China, at least, consumers are willing to pay a bit more for devices and services that provide increased value.

Whether Xiaomi can maintain its impressive momentum in China is far from clear: Growth will slow for the overall market as it nears the saturation point, just as it has in more mature markets, and the Miui ecosystem will have to evolve as the penetration of 4G networks increases.

Meanwhile, the company has set its sights on emerging markets away from home. Roughly 97 percent of its smartphone shipments in the second quarter were into mainland China, according to Canalys, but it recently launched handsets in India and plans to expand to Mexico, Russia, Thailand and Turkey later this year. China is unquestionably a unique market where local manufacturers have a decided edge, — particularly if they can churn out handsets running a customized, localized OS – so I fully expect the company to struggle to gain a foothold in other markets. Even if it fails to do so, though, Xiaomi has provided something of a blueprint for fellow manufacturers looking to gain a foothold in emerging markets.