How Apple and Xiaomi Are Winning the Smartphone Market Race

Source: IDC.com

The latest data from two major market research firms are in, and both firms’ data appear to show that Apple and Chinese smartphone maker Xiaomi are two of the biggest winners in the worldwide smartphone market during the third quarter of 2014. On the other hand, despite maintaining its No. 1 spot in overall sales, Korea-based Samsung saw its share of the worldwide smartphone market actually decline during the quarter ending in September.

According to IDC, the worldwide smartphone market sustained unexpected growth during the third quarter due to strong sales in emerging markets and several new smartphone releases, including Apple’s latest iPhone models. IDC researchers reported that vendors shipped a total of 327.6 million units during the third quarter of 2014 for a year-over-year growth rate of 25.2%. Strategy Analytics researchers found an even stronger year-over-year growth rate of 27%. Either way, both market research firms agreed that emerging markets were a key driver of the unexpected growth.

“Despite rumors of a slowing market, smartphone shipments continue to see record-setting volumes,” said IDC Worldwide Quarterly Mobile Phone Tracker program director Ryan Reith. “We’ve finally reached a point where most developed markets are experiencing single-digit growth while emerging markets are still growing at more than 30% collectively. In these markets, smartphone price points are making mobile computing possible where we once expected feature phones to remain dominant. This is great news for overall volumes, but the challenge has now become how to make money on devices that are quickly becoming commodity products. Outside of Apple, many are struggling to do this.”

Source: Blogs.StrategyAnalytics.com

Despite worries that Xiaomi would challenge Apple in the high-end segment of China’s burgeoning smartphone market, it appears that both companies are instead squeezing Samsung’s market share. The Galaxy smartphone maker saw its share of the worldwide smartphone market shrink by 8.2% from last year to 23.8% in this year’s third quarter, according to IDC. As a result, Samsung was “the only company among the top five to see its shipment volume decline year over year,” said IDC. Strategy Analytics documented a similar year-over-year decline, from 35% to 25%.

Meanwhile, Apple reported iPhone sales of 39.3 million units during its September-quarter earnings call, according to a transcript provided by Seeking Alpha, for year-over-year growth of 16%. IDC credited Apple’s strong iPhone 6 and iPhone 6 Plus sales but also noted a “sustained demand for its older iPhone 5S and 5C models, which comprised the bulk of its volume for the quarter.”

Xiaomi showed up in both market research firms’ top five rankings for the first time, at the No. 3 position. IDC researchers said Xiaomi had a 5.3% share with 17.3 million units shipped, while Strategy Analytics researchers documented 18 million units and a 5.6% market share. Either way, there is no question that Xiaomi achieved the most impressive growth of any smartphone vendor, with a year-over-year growth rate of 211.3%, per IDC data.

While Apple and Xiaomi were the biggest winners during the third quarter of 2014, the companies each used very different approaches to the smartphone market. Despite not competing in the fast-growing low-cost segment of the smartphone market, Apple has continued to achieve steady growth in the smaller high-end segment due to its latest larger-screen models and the appeal of its premium brand. This is in contrast to Samsung, Apple’s primary competitor in the high-end segment.

Wang Zhao/AFP/Getty Images

On the other hand, Xiaomi found success through a much different strategy. Although many of Xiaomi’s devices offer technical specifications that are comparable to the high-end devices made by Samsung and Apple, the company has attracted more new customers by keeping its prices significantly lower than both competitors. Xiaomi achieved this by selling its devices exclusively online and operating on a razor-thin profit margin. For example, Xiaomi’s 16GB Mi4 smartphone model features a 13-megapixel camera and a 5-inch, 1920-by-1080-pixel resolution display. Despite its high-tech specifications, Xiaomi sells this device for only $399 through its online store.

Samsung’s Galaxy S5 that features a comparable 16-megapixel camera and a 5.1-inch 1920-by-1080-pixel resolution display sells for more than $600 unlocked. Xiaomi’s cost-cutting approach to the smartphone market appears to have hurt Samsung the most, since its market share has dropped by 8.2%.  Meanwhile, Apple is still able to sell plenty of its entry-level iPhone 6 that costs $649 without a contract, despite only featuring an 8-megapixel camera and a 4.7-inch, 1334-by-750 pixel resolution display.

In other words, despite the increasing importance of emerging markets where lower-cost devices will presumably perform better, Apple has maintained a steady rate of growth. This is likely due to the appeal of the iPhone’s associated apps and services, as well as the power of Apple’s brand. Meanwhile, Samsung’s growth has suffered as China-based competitors like Xiaomi have figured out how to undercut the world’s biggest Android-based smartphone maker through clever marketing and lower prices. Samsung’s falling smartphone sales were reflected in its third-quarter earnings, which saw a 60% decline in operating profit, according to CNN Money.

Besides maintaining a steady rate of growth, Apple has also long had the advantage of taking the lion’s share of the smartphone market’s profits. As Canaccord Genuity analysts cited by Apple Insider reported, Apple took approximately 65% of the handset industry’s profits in the first quarter of 2014. While it remains to be seen if Xiaomi’s strategy will work for as long as Apple’s strategy has, there is no question that both of these companies are currently the smartphone market’s biggest winners.

Follow Nathanael on Twitter @ArnoldEtan_WSCS

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