Xiaomi’s Mi 3 has been its flagship smartphone.

AUG. 5, 2014 • Xiaomi Corp. is now the best selling smartphone brand in China having pushed past Samsung Electronics Co. According to research firm Canalys, Xiaomi’s sales exploded from 4.4 million units during the second quarter of 2013 to 15 million units for the same period this year. Samsung’s unit sales dropped from 15.5 million to 13.2 million year-over-year. Chinese manufacturers Lenovo, Yulong and Huawei saw modest increases, as well. Xiaomi now commands a 14.4% share of the Chinese market and sells enough smartphones to make the company the 5th largest manufacturer worldwide. China accounts for 97% of Xiaomi’s shipments but the firm has also launched its smartphones in India and Singapore. Xiaomi has plans to enter the Indonesian, Mexican, Russian, Thai and Turkish markets during the second half of 2014.

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Impact: We fully expected over time that domestic Chinese smartphone makers would rise to command that market. But what is intriguing about Xiaomi’s huge 240% year-on-year growth is how they got there. The company has only been around since 2010 and employs a very different business model. First, Xiaomi has no retail stores. Sales are made online and progressively via online chat platforms such as WeChat. Second, marketing costs are kept down by relying mostly on social media and word-of-mouth to sell phones. Xiaomi also uses social networks to actively engage users to get regular feedback. Third, the company forked the Android OS to create a heavily modified interface called MIUI with distinct similarities to Apple’s iOS. This sets Xiaomi’s hardware apart from most Android-based phones in China. Lastly, the firm operates on seriously thin margins, choosing to set MSRPs very close to the cost of materials and assembly. Xiaomi can sell its phones for about a fifth of what Samsung charges in China. The company can survive these low margins because it will sell specific models for up to a year and a half, which allows Xiaomi to get the benefit of cheaper component costs over time compared to competitors that update their smartphones every 12 months or less.

The Mi 4 was introduced on July 22nd.

Although marketing expenditures will be higher we see no reason why Xiaomi cannot be successful with this model outside China. Last month the firm introduced its Mi 3 model in India and sold out the available supply of 10,000 in 40 minutes. In India the Mi 3 is sold exclusively through the Flipkart ecommerce platform. The second batch of 10,000 was made available on July 30 and sold out in five seconds. Flipkart said more than 250,000 people had attempted to buy the phone on that date, which was four times the record peak rate the online retailer had experienced previously. Another 15,000 were made available today and sold out in two seconds. A fourth batch is scheduled for Aug. 12. Based on low pricing and features, DFC expects that Xiaomi will be successful outside China. But as India is showing, supply issues can be a major problem if too many consumers become frustrated with getting their hands on the product. For a business model that depends so much on social outreach and word-of-mouth, Xiaomi cannot afford minuscule supply numbers in new markets.