‘China’s Apple’ knocks Samsung off top spot in China

China's upstart smartphone maker, Xiaomi, has overtaken Samsung as the biggest smartphone vendor in China, intensifying pressure on the South Korean technology company.

In the second quarter of this year, Xiaomi took a 14 percent market share in volume China – the world's largest smartphone market – knocking Samsung off the top spot for the first time since the end of 2011, according to research by Canalys.

Read MoreChina's Xiaomi makes strides in smartphone race

The news comes after Samsung reported a larger-than-expected fall in second-quarter profit last week, citing slowing smartphone sales growth. In spite of being the world's largest smartphone vendor, increasing competition from low-cost Chinese vendors is taking its toll on Samsung where operating profits for the mobile business, its cash cow, .

'Phenomenal achievement'

Eight out of 10 of the top vendors in China are local companies, accounting for or a total of 70.7 million units and a 65 percent market share. Apple and Samsung are the only international players in China in the top 10 list.

Xiaomi: Aiming to produce a million phones
Xiaomi: Aiming to produce a million phones

"This is a phenomenal achievement for Xiaomi," Shanghai-based Canalys research analyst Jingwen Wang said in a press release.

"Undoubtedly this was helped by an anticipated, temporarily under-strength Samsung performance during the quarter. But that is only half the story - Xiaomi has also executed on its strategy to grow volume shipments. It has delivered compelling products at aggressive price points."

Will Xiaomi work outside of China?

Xiaomi laid down a further challenge to Apple and Samsung when it unveiled its Mi 4 smartphone with specs that rival its competitors' top-end offerings. But the Mi 4 will retail at around $320 for the 16 gigabyte model or $400 for the 64 gigabyte model, while Apple's iPhone 5s and Samsung's Galaxy S5 retail at around $649.

Read MoreXiaomi takes a crack at India, can it succeed?

Nearly all (97 percent) of Xiaomi's smartphone sales were in mainland China, but the company is now looking to expand into markets including Mexico and Turkey. However, analysts warned it would face challenges with its business model.

Xiaomi's phones sell little over cost price and further savings are made by the fact that customers can only buy phones through the company's online shop. Xiaomi also has its own app store, but when it expands to other parts of the world, particularly Western markets, it would have to distribute its apps through Google Play, cutting out a key revenue stream.

Xiaomi headquarters in Beijing, China
Edmond Lococo | Bloomberg | Getty Images

"I am bullish in that I think if they keep pursuing the model of selling relatively high spec devices at low prices, then they will do well," Daniel Gleeson, mobile analyst at IHS, said in a phone interview.

"My issue is that I'm not sure that business model can work outside of China."

Apple 'insulated'

Apple had a strong year-on-year performance in China, with shipments up 58 percent in the second quarter. In December, Apple signed a deal with China Mobile, to bring its iPhones onto China's 4G network.

Read MoreDoes Xiaomi threaten Apple's ambition in China?

The Cupertino, California-based technology giant has been "insulated" from the challenges of China's local players because of its high-end offering.

"Apple and Xiaomi play in different price segments. Apple's brand is the primary reason why it has been insulated from problems affecting an awful lot of smartphone players because they are able to charge that premium," Gleeson said.

- By CNBC's Arjun Kharpal