Why Samsung and Apple should be worried about Xiaomi and Lenovo

Phil Goldstein

We are now entering a new phase of competition in the global smartphone market and the likes of Lenovo and Xiaomi are poised to make life a lot more difficult for market leaders Samsung Electronics and Apple (NASDAQ: AAPL). How Samsung and Apple respond will go a long way to determining whether they can maintain their status as market leaders, though I think Samsung has a lot more to worry about right now than Apple does.

As industry analyst Keith Mallinson recently detailed in FierceWireless:Europe, Nokia (NYSE:NOK), Ericsson (NASDAQ: ERIC) and BlackBerry (NASDAQ:BBRY) once reigned supreme in the handset market, but were slow to catch on to the shift to true multitouch smartphones.

Now we are at the precipice of another transformation, one where growth is mainly happening in emerging markets via lower-end phones. Xiaomi and the newly combined Lenovo/Motorola are leading the charge in this area. But how have these companies snuck up on the market leaders?

Xiaomi, founded in 2011, has enjoyed spectacular growth--it was the third largest smartphone maker in the world in the third quarter. The company sells its low-cost, relatively high-end phones online and makes the bulk of its revenues from the services--books, app, games and more--it sells to its users. Lenovo, for its part, has enjoyed success with its own relatively inexpensive smartphones boasting relatively high-end specs--and now that its purchase of Motorola is complete, Lenovo is now the world's third-largest smartphone maker by market share.

In countries like China and India, where there are huge numbers of mobile users who haven't yet purchased their first smartphone, companies like Xiaomi and Lenovo have grown by delivering quality products at prices below the competition. Creative Strategies analyst Ben Bajarin said their ascendance is "simply indicative of this growth we're seeing of connecting people for the first time with a smartphone, and the role these brands are playing in connecting the unconnected."

But Samsung also sells inexpensive smartphones in emerging markets like China and India, so why have Samsung's mobile sales and profits fallen this year? Bajarin noted that Lenovo and Xiaomi have a "home field advantage" in that they are better at spotting trends in consumer behavior and desires, and in providing local services. Samsung, as a global player and market leader, has been trying to be all things to all people, providing a range of smartphones at a dizzying array of price points with devices that are sometimes indistinguishable (as The Verge cleverly mocked in August).

"Samsung is losing to competitors who are doing a much better job of competing for China or India than they ever could because they are playing [as] a much more global brand," Bajarin said.

And why is this not a problem for Apple, which doesn't offer any low-cost phones? Apple has consistently played in the high end, sacrificing market share for profits and margins. As IDC analyst Ramon Llamas told me, Apple has a "hugely loyal, rabid base" of users and there is "no alternative to using iOS on another device." In contrast, Samsung doesn't have the same kind of hold on Android users' loyalty, he said.

Additionally, as Bajarin noted, Xiaomi has been monetizing its user base through services, including its own cloud services, and app, games and book stores--aping Apple in some respects. "They are doing a lot of the same things Apple is doing from an ecosystem standpoint," he said.

Of course, Apple can't get complacent, but it's not under as much pressure as Samsung, which is being hit from all sides.

The biggest challenge for both Xiaomi and Lenovo is expanding beyond their power bases in China and moving into the West. For Lenovo, this will be less of a problem thanks to its Motorola deal, since Motorola has a strong brand in the U.S., Latin America and Western Europe. (Indeed, Lenovo CEO Yang Yuanqing warned that China's "hypergrowth" is coming to an end.) For Xiaomi, which has plans to expand to Brazil and Mexico and eventually North America, a major challenge will be getting carrier distribution. Will carriers want to allocate more resources to another Chinese brand, at a time when Huawei and ZTE are fighting to build up their own brands after years of working with North American operators? Xiaomi also runs the risk of having a company like OnePlus replicate its own strategy to displace it.

Despite the challenges, Lenovo and Xiaomi are in enviable positions now. They are expanding on the part of the market where most of the growth will be coming from for the foreseeable future. Apple may be able to weather these changes better than Samsung, but both should be on their guard for a changing of the guard.--Phil