Xiaomi, China's largest smartphone company, will begin selling headphones, smart wristbands and accessories online in the U.S. in the coming months, taking its first tentative step onto Apple's home turf without its signature Mi 4 mobile devices.
Last year was a blockbuster year for Xiaomi. Behind Samsung and Apple, Xiaomi is now the third-largest phone manufacturer worldwide. A round of new investment puts Xiaomi's worth at $45 billion, making it the most valuable private tech company worldwide. So far, this year is off to a rollicking start, as the five-year-old company introduced in India its Mi 4i, the first of its smartphones to make its public debut outside of China.
A round of new investment puts Xiaomi's worth at $45 billion, making it the most valuable private tech company worldwide.
Now Xiaomi, well known for its array of inexpensive smartphones sold only online, is aiming to build a global brand. In February, Xiaomi announced it would begin reaching out to markets in Latin America: It has plans to start selling its smartphones in Brazil this year, which would mark Xiaomi's first time taking its Android-powered smartphones outside of Asia.
Hugo Barra, vice president of Xiaomi's global operations, has said the company is in talks with manufacturing partners in Brazil to skirt the country's high taxes on foreign-made electronics. The company also announced it would establish an online store in the U.S. sometime this year to begin selling headphones and other smart accessories, including its smart TV and fitness wristband—a starting point for Xiaomi to muscle its way into the U.S. smartphone market and potentially challenge Apple's dominance.
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"Apple is a great role model for many Chinese companies because of its ultimate brand value and high-quality products," said Edith Yeung of the 500 Mobile Collective Fund, which invests in mobile apps start-ups in China and the U.S. "Chinese companies no longer want to just copy, but to innovate, so they can be compared to Apple."
Xiaomi's tentative step into the U.S. with its smart products is a savvy play to try to win over American consumers who might be reluctant to surrender their iPhones but may be more willing to try a different set of headphones. In the process, that'll naturally put Xiaomi in competition with Apple, which looks to be a brewing battle. At the end of April, Apple announced that sales of the iPhone rose 72 percent in China, where Apple hopes to expand business just as Xiaomi hopes to expand business in the U.S.
Still, there are uncertainties for Xiaomi. As a young company, its portfolio of patents is small compared to other companies, and it will need to beef up its own intellectual property as it looks to expand outside of China to protect itself from claims of technology infringement. (In December, Ericsson sued Xiaomi in India, alleging the Chinese tech company hadn't licensed Ericsson inventions that allow connections between wireless devices and networks.)
What's more, expanding into the U.S. could make Xiaomi a bigger target for Apple, not only in the market but also in the courtroom. Last October, Apple design chief Jony Ive accused Xiaomi of copying Apple's designs. After Xiaomi released its MIUI 6 software for its Mi 4 smartphone last summer, Cult of Mac called the software the "most blatant ripoff of Apple to date." (A call and email to Apple was not returned before press time.)
But the ever-increasing global footprint of Xiaomi is indicative of a growing trend of successful Chinese tech companies that have prevailed at home and are now trying to make inroads in the West, first by going to emerging markets in Latin America—Brazil, Argentina, Mexico—where it's easier for consumer-facing technology companies to get established, before cracking into the entrenched U.S. tech market.
The Latin connection
China continues to strengthen its ties to Latin American countries, as evidenced by the meeting of the Community of Latin American and Caribbean States held in Beijing in January. In 2014, Chinese banks lent $22 million to Latin American countries, and outbound foreign direct investment by China eclipsed $100 billion for the first time in 2013, according to China's Ministry of Commerce. (In Latin America that year, China's investment grew by 133 percent.)
"What makes Latin America, attractive to Chinese firms are large country markets that have a fairly large middle class," said Margaret Myers, director of the Inter-American Dialogue's China and Latin America Program. "These Latin consumers are interested in consumer electronics, especially those at a lower price."
And Chinese tech companies like Xiaomi, whose Mi 4i smartphone retails for $205, are well positioned to take advantage of the trend. Brazil and India, respectively, are the third- and fourth-largest smartphone markets in the world, according to data published last September by the mobile industry trade group GSMA.
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"Right now, technology is definitely one of the most attractive plays in Latin America because of the demand for Internet access and e-commerce products," said Cate Ambrose, president of the Latin American Private Equity and Venture Capital Association. According to LAVCA data, capital funding to Latin American markets hit $10.4 billion in 2014.
Inroads in the U.S.
But Chinese tech companies have also been pushing into the U.S., even as they work to grab hold of markets in Latin America. According to a report published by the Asia Society in 2014, Chinese investment in high-tech sectors in the U.S. has topped $1 billion every year since 2010.
Consider some of the investments that have already taken place: social-networking company Tencent, which owns the Chinese mobile-messaging app WeChat, opening a U.S. WeChat office and investing in SnapChat; e-commerce company Alibaba buying a stake in mobile video app Tango for $220 million and contributing funds to ride-sharing start-up Lyft's $250 million raise; Baidu, the Google of China, opening a $300 million R&D center in Silicon Valley; and, of course, Xiaomi announcing its forthcoming U.S.-facing consumer-tech store.
"Previously, the Chinese interest was more focused on identifying early successful start-ups whose models could be re-engineered to better serve the Chinese market," said Joel Backaler, author of "China Goes West" and an associate vice president at Frontier Strategy Group. "Now, however, Chinese firms are also watching Silicon Valley for potential investment opportunities to get their feet wet in the tech capital of the world."
The Asia Society
By making such investments in the U.S., Backaler said Chinese tech firms will not only gain access to new talent pools but also "experience and confidence" in new markets. Like Chinese firms across industries today, Xiaomi is looking to go West as they set their sights around the world, he added.
"Conquering the U.S. market is the ultimate dream for many Chinese companies and entrepreneurs," Yeung added. "Of course, the U.S. is a great smartphone market—now No. 2 in the world after China—for Xiaomi. It's the one market that inspires all Internet entrepreneurs in the world."
—By Andrew Zaleski, special to CNBC.com
