Xiaomi - The Apple of the East

I really love Apple, it’s high end products, how the company operates internally, to the die-hard fanboy culture they’ve created – their history is long and distinguished and their name is synonymous with computing, smartphones, modern apps and future technology – not to mention it’s products have consumers drooling over them and coming back for more time and time again. The ever insightful Apple even removed “computer” from it’s logo as they knew that the smartphone (iOS) would be the next computer.

Apple (AAPL) is in the limelight more so now than ever before. Apple is a standard. Consumers typically spend more time seeing what others are buying than what they are buying is any good when a product becomes a standard; we measure everything in terms of Apple or the iOS of late. Apple is the perfect inspiration for other company’s when seeking a marketing business model that works and has proven it over time and time again. Especially a company that already has a distinct advantage of existing in the largest consumer market the world has today, Xiaomi has the technological might and manufacturing power to become a major player in the smartphone in the very near future.

Steve Jobs, was a man famous for his approach with people by (a) either seducing them (b) ignoring them (c) or castigating them. He was a man that cared about design, user experience not just about money like his counterpart Bill Gates; the fact that he didn’t care about money is what made him so dangerous. Xiaomi (XIAOMZ:CH) is a Chinese electronics company headquartered in Beijing, and it’s controlled by men like Lei Jun and Hugo Barra who model their entire approach and seduce their market by blatantly copying from not only the best, but the best of the best – Apple. They explicitly say that their selling model is unlike both Samsung and Apple however it doesn’t take a rocket science to figure it out. Xiaomi takes Pablo Picasso’s quote: “good artists copy, great artists steal” and transcends it to whole new level with their most recent release of their new mobile, the iPhonesque Xiaomi Mi4 powered by the latest Qualcomm (QCOM) Snapdragon wafer.

The wars of Apple and Android have escalated throughout the years and this is China’s chance to make a bold statement of their own: “we are the largest market of consumers in the world and our technology companies are coming to the rest of the world”. Well, as bold as they are they’ve only targeted the Asia Pacific market and mainland China and I bet you can guess why – global domination has yet to come and how the position themselves in the future will be critical to their overall success in their initial market segments.

The point I am getting to is even though Xiaomi blatantly copied Apple, their motive was pure profit and to give China the very best smartphone that they’ve seen; in their eyes they believe that their product is even better than the iPhone itself. The management makes bold claims like “even the white is whiter” than that of the iPhone. The shear manpower of the labor market and cost of cheap labor makes a high-end, low-priced gadget a ritual for the likes of Xiamoi in China. The Xiaomi sells at $320 in China while Apple’s iPhone 5s sells for $700; an expensive tag for most middle class working Chinese people. These people love gadgetry, mobiles and are known to even jump into sewers to save their iPhones – imagine what they would do with Chinese made iPhonesque gadgetry? The new Mi4 will go on sale in increments in markets like China, Singapore and Taiwan – the rest of Asia Pacific will be looking on and the scarcity strategy not only boosts desirability of Xiamoi brand but also allows the company to avoid keeping pricey unsold inventory in warehouses.

Let’s briefly analyze the relationship between Apple and China in terms of assembly:

35% of profits Apple would have to pay for US-made iphones, instead of the current 2% on overseas profits
If Apple brought iPhone manufacturing to the US it would cost them $4.2B
Apples suppliers ramp up US capacitty but also have substantial manufacturing globally in countries like Italy, Malaysia, Philippines, Mexico, Thailand and of course China. (TI, Corning, Cirrus Logic, Qualcomm)
85% of all iPhones are assembled in China
The period to hire 8,700 engineers to manage 200,000 factory workers is 09 months in the USA and 15 days in China.
60% of Foxconn (2354:TT) electronics are made in Chinese factories
iTouch is made in China but designed in the USA
I could go on…
Though everything is designed in the USA, China accounts for 85% of the manufacturing or assembly of the iPhone. That is a huge margin, they have the specifications (to what extent I don’t know as Im not an expert), however one would imagine that it with all the precision machinery and specifications it wouldn’t be impossible to copy the iPhone with ease. Samsung does it, however not as tastefully as Xiaomi does. The China propaganda machine also attacks Apple, the latest of which was broadcasted on television highlighting the dangers of the iPhones location-based service software. For the average citizen of China the subcounsous effects and inner patriotism will automatically gravitate them towards Chinese made products. Apple is already at a big price disadvantage in China, and know to be humble when accused by the CCTV.

Copying is copying – it’s ridiculous how much Xiaomi has copied from Apple and many others and there is no excuse but lack of imagination, time and creativity. That said there is an unseen war going on and the consumer is ultimately the victim. Sun Tzu and his book “The Art of War” could very well be the inspiration that the Chinese men need to win this war, it’s going to be a tough battle. If it wasn’t going to be Xiaomi leading the nebulous attack, it will be another electronics manufacturer and I bet that that has been going through the minds of senior management at Xiaomi till today.

There is no doubt that Apple’s products are superior, but they can’t risk become just a niche player in the world’s largest smartphone market. Xiaomi has become the fastest growing and most loved company in mainland China over just the last four years, even Samsung (SSNLF) say it cannot keep up with the pace of China.

Xiaomi might be close to becoming a standard in mainland China and their iconic mascot will be in the hearts and minds of the largest smartphone market the world has ever seen and they’ll continue to be borrow and steal.