As China’s economy slows down, Apple (AAPL) could face problems of its own in the world’s second largest economy. Depending on which measures you believe, Chinese technology giant Xiaomi recently became the largest seller in the smartphone market, taking a market share of 13.7% during the last three months of 2014 compared to 12.3% for Apple during the same period, according to market intelligence firm IDC. While an alternate report by Canalys shows Apple as the top seller, another research firm, Kantar WorldPanel, also ranked Xiaomi as the market leader.
Beyond these reports, Apple’s phones continue to be popular in China. The company saw explosive growth during the last quarter, but Xiaomi’s ascendance could become a headache for the iconic American brand, as it has for the biggest Android phone maker in the world, Samsung (SRX). In 2014, Xiaomi’s market share in China jumped by 186% from the previous year, while Samsung’s declined by 22% during the same period.
Xiaomi’s competitive advantage? Price.
While the average price of an iPhone 6 rose to $687 at the end of last year, the average price of Android phones fell to $254 – a significant gap. Xiaomi’s phones, which have a similar design aesthetic to Apple’s but runs on a modified version of the Android system, are even cheaper at an average price of $220 per phone.
The fact that Chinese consumers have a significantly cheaper option could impact Apple sales if China’s economy remains sluggish and consumers become increasingly cost-conscious. In 2014, China’s economy slowed to 7.4%, the lowest level in decades, and is expected to slow down further in the next few years, according to the International Monetary Fund.
This is especially significant because China is one of Apple’s key markets. Even though the company did not sell more phones in China than in the U.S. in 2014, as analysts initially speculated, its sales are reportedly on track to get there, partly due to its partnership with leading telecom provider China Mobile. In addition, the approximately 700 million smartphone users in China represent a vast market opportunity for Apple’s future growth.
It’s a safe bet that Apple will continue to see hefty profits from the region, but fast growing competition from Xiaomi and other Chinese smartphone makers like Huawei could slow that progress and represents a threat to be taken seriously; and not just because of the impact in China either.
As Xiaomi expands its presence internationally, the popularity of its low-priced smartphones could impact Apple in other large markets, too, especially those where per capita income is low and a cheaper alternative to the iPhone is attractive.
In India, for example, which is the fastest growing smartphone market, Apple only has a 2% market share because of a high price point, which makes it extremely vulnerable to competition. Xiaomi also has a modest market share of 4% so far. However, the important metric is that 64% of smartphones shipments during the fourth quarter were priced at less than $200, according to research firm Canalys. That’s a price range Xiaomi would find much easier to match than Apple.
On the flip side, Apple could potentially benefit from regulatory hurdles that Xiaomi faces, such as in India where a court ruled that the Chinese company can’t sell phones that violate Swedish phone maker Ericsson’s patents until further hearings (although Xiaomi is temporarily back on Indian e-commerce site Flipkart). Another factor in Apple’s favor is that its status as a luxury brand in emerging markets, combined with its marketing expertise, could enable it to keep market share despite higher prices.
What all this means is that while Apple will certainly remain one of the dominant players in the global smartphone arena, emerging competition from aggressive low-cost technology companies like Xiaomi could still make a serious dent in Apple’s growth trajectory in some of its biggest markets.
Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius Capital. Sanghoee holds an MBA from Columbia Business School. He does not hold shares of Apple, Samsung, Xiaomi, or Huawei.