Huawei tries to take a bite out of ‘China’s Apple’

Chinese smartphone maker Xiaomi has taken its home market by storm, but one domestic rival has stepped up its game in an attempt to gain the ground it lost to "China's Apple."

Huawei, whose main area of business is telecoms networking equipment, said on Tuesday that it had shipped 75 million smartphones in 2014, a 45 percent rise from the year before, with the aim of hitting the 100 million mark this year.

Xiaomi in comparison sold 61.1 million smartphones in 2014, up from 18.7 million in the year before.

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Huawei is looking to promote its Honor brand to capture territory from Xaiomi. The Huawei handsets– of which there are several models – sell in the same approximate $350 price category as Xiaomi's phones. The Honor range is promoted through creating a buzz on social media and is sold online.

"For the first time Xiaomi is seeing a strong competitor on online channels, so Huawei is taking the game directly to them," Neil Mawston, mobile analyst at Strategy Analytics, told CNBC by phone.

Honor is still a small part of Huawei's overall smartphone portfolio but revenues for the range rocketed to $2.4 billion last year from $109 million in 2013 and accounts for roughly 20 percent of the company's consumer business group. Huawei also sees software and services being a big driver of revenue – just like Xiaomi. Around 25 percent of Honor's revenue came from software and services last year.

This approach is also crucial to Xiaomi, whose philosophy is based on selling smartphones at razor-thin margins to gain scale and then monetizing users through selling software. This strategy has led to Xiaomi being the number one smartphone player in China and third globally, according to analytics from both Canalys and IDC.

Huawei 'making ground'

Xiaomi, which recently raised $1 billion from private investors valuing it at $45 billion, focuses on those mid-tier devices with high-end features.

But one advantage for Huawei is its premium offering. Shipments of its mid-to-high-end devices such as the Huawei P7 rose 18 percent in 2014 compared to the year before.

But Hauwei will face challenges in its attempt to tackle the Xiaomi dominance, analysts said.

Read MoreWhat's behind rapid rise of 'China's Apple' Xiaomi?

"Winning over customers in China already loyal to socially-engaged brands such as Xiaomi will be a problem," James Moar, research analyst at Juniper Research, told CNBC by phone.

And Huawei is not alone in its fight against Xiaomi. ZTE has a separate brand called Nubia with a similar business model to the Xiaomi and Honor.

Expansion plans

Beyond the battleground of the Chinese market, all the Chinese smartphone players will be looking to expand and the emerging markets are an obvious bet. But the model that has given Xiaomi success in China might not work elsewhere, analysts warn.

Xiaomi sells its own software and apps giving it a revenue stream in China mainly because Google's own app store is absent. But as Xiaomi looks to expand into markets where Google is the dominant player it could run into headwinds. And this is where analysts suggested Huawei is better positioned, thanks to its network infrastructure business.

"Where Huawei can challenge Xiaomi is in the areas that are foreign to it; Xiaomi is focused on online-only distribution, whereas Huawei also has a brick-and-mortar presence. Internationally, it also has more connections to the industry through its infrastructure business that it can leverage," Moar said.