Photograph by Simon Dawson — Bloomberg via Getty Images
By Scott Cendrowski
September 9, 2015

The race to the bottom has begun in Chinese smartphones.

When a Lenovo unit head tells the Wall Street Journal, “You can use someone else’s model to defeat them,” and he’s referring to the low-cost Xiaomi brand that prides itself on being an Apple imitator for half the price, you know almost everyone is jumping in.

This has been building for a while. It began last year when the country’s legacy brands like Huawei and ZTE were rolling out special “available online only” phone-brands in a blatant imitation of Xiaomi, which earned a $45 billion valuation thanks to saavy distribution and cheap phones. Now as China’s smartphone sales growth peaks and the next wave of the competitive cycle begins, one in which already thin margins are squeezed and companies will survive because of new innovations or market share, almost everyone is rushing to capture low-cost market share while they still can.

Among the unlikely brands unveiling new cheap brands this year are Internet-TV firm LeTV and an anti-virus software company called Qihoo 360.

The move downmarket is an explicit bet on the Chinese market, the world’s biggest. Even though the average selling price of a smartphone has increased dramatically in the past year (to around $250), it’s still far below the global average. The Chinese will pay up for phones like the iPhone if they can, but most can’t, creating an ultra-competitive market of cheap alternatives. Separately, Huawei, ZTE and others are trying to sell premium-priced phones in overseas markets like the U.S..

This should have little effect on Apple’s high prices in China (where an iPhone 6 costs more than $1,000) because the company is seen as a luxury brand in the largest cities and among the country’s richest, for which a high price is justified. Samsung Electronics Co. (SSNLF), however, is squarely in the crosshairs of Chinese brands that feature the same Android operating system and appeal to the masses that can’t afford Apple. It lost half its market share in the last year and now commands barely 10% of the world’s biggest market.

The new introduction of cheap brands is really a return to China’s smartphone past, before the arrival of Android and smartphones, when hundreds of small brands sold candy-bar “feature phones” at the lowest possible price. Eventually, they all went bankrupt when smartphones arrived because they only competed on price, not innovation.

It’s a good time to be a Chinese smartphone brand, politically at least. The state-run CCTV recently ran reports criticizing the camera performance of the iPhone 6 and Samsung’s Galaxy S5, before Apple’s unveils the iPhone 6S. Left unmentioned in the report: Xiaomi and Huawei. At the same time, some Chinese social media users are calling Apple a tool of American imperialism.

A good time for Chinese brands, but only if they can compete at the bottom.

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