Chinese smartphone maker Xiaomi sets sights on Samsung's throne

Chinese smartphone maker Xiaomi will announce quarterly earnings at 8 a.m. ET Wednesday. But from data on the company’s smartphone shipments, analysts already know Xiaomi had a bumper second quarter.

In the three months to June, the Hong Kong–listed brand cinched first place in Europe, shipping 12 million units and occupying 25% of the market to become the Continent’s leading smartphone brand for the quarter. Xiaomi edged ahead of Apple in global sales too, surging 83% year over year to become the world’s second-largest smartphone maker by shipments for the first time ever.

Now founder Lei Jun has set his sights on taking the top spot from Samsung.

“Our current task is to cement the No. 2 position in the global market,” Lei said earlier this month during a launch event for Xiaomi’s latest flagship phone. “We aim to become global No. 1 in three years.”

That task won’t be an easy one for the 11-year-old company. For starters, Samsung operates in a tier above Xiaomi, selling phones that target the higher-end premium market. And, although Xiaomi is ahead of Apple now, it will likely fall behind again by the end of the year, when Apple launches the iPhone 13.

When Xiaomi launched in 2010, pundits derided the Beijing-based company’s ultracheap smartphones as simple iPhone copycats. Xiaomi has proved its ingenuity since then—launching the world’s first “bezel-less” phone display—but has yet to crack into the higher-priced premium market commanded by Apple and Samsung.

“Xiaomi will have to build a new selling point in order to achieve the image of a premium brand smartphone manufacturer,” says Will Wong, an analyst at market research company IDC, suggesting Xiaomi might have to invest more in chipsets in order to secure premium status.

Samsung and Apple both design their own smartphone computer chips, enabling them to build chipsets customized to suit their phones’ software. In 2017, Xiaomi announced it was designing chipsets, too, but the project went dark in 2019 and wasn’t revived until earlier this year.

Developing reliable chipsets will take time. Xiaomi risks creating an opportunity for Apple to knock it back into third place. Apple’s iPhone sales are cyclical, falling into troughs during Q2 and peaking again in Q3 and Q4 when Apple releases new models. Analysts at Counterpoint Research predict Apple will return to second place in Q4, after the iPhone 13 is out.

“Xiaomi will probably be number No. 3 for full-year 2021,” says Yang Wang, senior analyst at Counterpoint Research. Xiaomi is currently third in its home market, China, where Vivo and Oppo—budget brands both owned by parent company BBK Electronics—rank at No. 1 and No. 2, respectively, according to IDC.

“In China, offline sales still account for some 60% of smartphone sales, but Xiaomi is stronger in online sales,” says Wong.

In 2010 Xiaomi pioneered a “flash sale” business model of selling phones exclusively online and in small batches. The approach helped build hype around new product launches and kept overhead low by limiting excess stock. Xiaomi ventured into offline sales in 2015 but is still building its network of retailers in mainland China, particularly in low-tier cities where Vivo and Oppo are already well established.

According to Counterpoint’s Wang, retailers in China are more inclined to push customers toward Vivo and Oppo brand phones, because the profit margins are higher than with Xiaomi. Xiaomi’s business model depends on selling cheap hardware as a platform through which the company can push higher-margin digital services, such as advertising. To ensure its hardware remains cheap, Xiaomi has capped its own profit margins on hardware sales at 5%.