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China’s Xiaomi ‘new disruptive force’ in smartphone market

Lei Jun, CEO of Xiaomi
ChinaFotoPress | ChinaFotoPress | Getty Images
Lei Jun, CEO of Xiaomi

Chinese smartphone maker Xiaomi isn't a household name just yet, but the company is gaining a cult-like following in its home market and could soon become a "disruptive force" in the global smartphone arena.

"One company that particularly stands out to us as a potential game-changer is Xiaomi, with its huge fan base and unique business model. It is enjoying success due to super cheap high-spec phones sold on-line," Mark C. Newman, senior research analyst at Sanford C. Bernstein wrote in a note on Thursday.

"Xiaomi is emerging as a new disruptive force with two recent product announcements: the Hongmi smartphone and the Mi3 smartphone," he said.

(Read more: Apple supplier shares slump on iPhone 5C pricing)

After only three years Xiaomi, or "Little Rice" in English, has taken great strides. In the second quarter Xiaomi overtook Apple in China's smartphone market, with a 5 percent share, compared with Apple's 4.8% share, according to market research group Canalys.

The attractive pricing of its smartphones is a key driver behind the company's growth, whose investors include the likes of Singapore sovereign wealth fund Temasek and U.S. chipmaker Qualcomm, according to the Financial Times.

The specifications of its lower-end Hongmi, or "Red Rice", smartphone, which was launched in July, are competitive with Apple's iPhone 5C, but priced at a fraction of the cost, said Newman. It sells for $130, compared with $733 for Apple's low-cost handset in China.

Meanwhile the Mi3 device, which was unveiled earlier this month, compares favorably with other high-end handsets, he said, but again with a significantly lower price tag. It sells for around $330, compared with $864 for the iPhone 5S in the mainland.

(Read more: Smartphone price drop: Is this when it starts?)

"How can Xiaomi offer such strong specs at such attractive prices? The strategy is to sell high-end smartphones at or slightly above bill of materials costs and monetize the user base through software and services," he said.

Additionally, the company is able to keep its distribution costs low, through relying on online sales instead of carrier channels, he said.

Apart from being reasonably priced, another factor behind Xiaomi's growing following is its focus on user engagement. The company regularly takes feedback from its customers to make improvements to its handsets.

(Read more: Apple granted China Mobile license, but no deal yet)

While Xiaomi smartphones are currently available in China, Hong Kong and Taiwan, Newman expects it is planning to grow its foothold beyond Greater China.

"The fact that Xiaomi recently recruited Google's Android Vice-President, Hugo Barra, to serve as Global Vice- President is a key sign that the company intends to expand internationally at some point," he said.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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