3 reasons why Apple should watch out for Xiaomi

A Xiaomi Redmi smartphone runs on Google's Android operating system.
Brent Lewin | Bloomberg | Getty Images

At first glance, it may seem easy to dismiss Chinese smartphone maker Xiaomi (pronounced "shao-mee") as a viable competitor to Apple. The company's phones aren't as technically advanced or simple to use. No one really knows the phones outside of China.

However, there are reasons why Apple might want to watch its back.

1) XIAOMI WANTS TO CONQUER THE EMERGING MARKETS. For most of its four years, Xiaomi has only been in China. However, since Hugo Barra, the former Google executive, joined the company as vice president for global operations, Xiaomi has set its sights on the big emerging markets. It's already started selling in India and, according to Barra, plans to push into Indonesia as well as parts of Latin America.

Countries such as India and Indonesia have big populations with cost-conscious consumers just starting to go mobile. Why not hook them in first with a (relatively) cheap and cheerful Xiaomi Mi smartphone and get them loyal early? Dominate the large, up-and-coming markets with huge growth potential, and you might have a chance to compete one day with the industry titans such as Apple and Samsung in their own backyards.

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2) XIAOMI'S SMARTPHONES ARE COST COMPETITIVE. Even the company's latest model—the Mi4 (pronounced "mee-4") will only set a consumer back $416 at most. The new phone jumps on the bandwagon along with most other handsets—featuring a now bigger 5-inch screen. The phone has two cameras: A 13 megapixel camera at the back and an 8 megapixel camera at the front (for better selfies, Barra tells CNBC) and runs on the advanced Android 4.4 OS.

However, the 64GB version costs RMB 2,499 (US$416) and the 16GB model only RMB 1,999 (US$333). Not a bad price point for consumers, particularly those in developing countries looking for a new thing without breaking the bank.

3) XIAOMI IS WATCHING APPLE. At the Mi4 product launch, it wasn't difficult to see why Xiaomi is often referred to as China's answer to Apple. Its founder Lei Jun paces a stage in front of his adoring staff and fans much like the U.S. tech giant's senior executives. The showroom available for the Mi4 looked like a near replica of an Apple store, complete with wooden display tables and young staffers in casual -shirts eager to help.

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Yet, the crowds of excited people at the launch reveals an important lesson Xiaomi is learning from Apple: how to create a feeling of exclusivity and a belief that the phones aren't just a way to call your mom or surf the Internet, but a way of life and a statement about who you are. Xiaomi has figured out how to build a culture around its products and, in doing so, is nurturing a loyal fan base. How well it continues to create the culture could be worth watching for Apple as well as its investors.

By CNBC's Eunice Yoon