Cheap iPhone Rival Gaining China Market Share

TAIPEI ( TheStreet) -- Whoever sowed "small rice" knew exactly what China wanted: A smartphone that looks like an iPhone but sells for much less, is simple to use and connects to the Internet with ease.

Now those "farmers" and their domestic market are getting a bumper harvest. Smartphones under the Xiaomi (translated as "small rice") brand have grown since 2011 to the country's fifth most popular smartphone, according to market research firm TrendForce. I expect this company to keep growing and eat away at the top world smartphone brands in one of their core world markets.

It's the perfect China revenge story.

First come the foreign smartphone brands, carefully researched and expensive pieces of technology that have become status symbols in a country that already respects foreign brands more than domestic products. Then a local firm with keen business sense copies the foreign design (though not in a legally dangerous way yet), uses the free Google ( GOOG) Android operating system and cuts prices to a level in reach of everyday users.

The brand's private company, Xiaomi Technology, founded in 2010, sold about seven million units last year worth $1.9 billion, and expects sales to double this year, according to the news service. The brand has eroded Apple's ( AAPL) and Samsung's ( SSNLF) lead in a country where 71 million smartphones were sold in just the second quarter of this year.

Part of the formula is design. An iPhone-like design raises appeal. Likewise its multiple features and simple interface, says Mark Natkin, managing director with the Beijing-based market research firm Marbridge Consulting.

Prices of $320 for the Xiaomi Phone 2 grab only more attention, surprising management and even depleting supply since its release a year ago.

Fertilize all that with marketing that just makes people want one all the more.

"Xiaomi has done an excellent job of product marketing, creating artificial scarcity of supply and bleeding out bits of newsworthy information in regular press releases, much of which could be consolidated into larger, less frequent releases, to grab mindshare among users and industry followers," Natkin says.

Its chief buyers are Chinese users under age 39, with male buyers liking the handset's Internet connectivity, TrendForce says. The brand has stolen away formidable numbers of former Lenovo ( LNVGY) and ZTE smartphones fans, with less, though still significant, impact on people once partial to Huawei (002502.SZ), Nokia ( NOK) and Samsung.

Apple also should be prepared for a drop in the rankings, Avanti says.

"Apple continues to lead in terms of innovation, with the iPhone 5s currently out ahead of Xiaomi with a 64-bit processor and fingerprint scanner, but even considering features like these, many users in both China and overseas markets may find it increasingly difficult to justify the big price differential between the two brands," the Taipei-based market research firm said in an Oct. 4 report.

Now small rice is being planted in Taiwan and Hong Kong through deals with telecom providers. Like a lot of Chinese companies, Xiaomi needs new markets to ensure long-term success via diversification. It's not a talked-about species of smartphone in Taipei, where I live, and I learned about it only when I saw an advertisement on a taxi. It's too early to forecast the eventual harvest, but Xiaomi may be ready to bloom.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.