Xiaomi Mi Note
Lei Jun, chairman and CEO of China's Xiaomi Inc. presents the company's new product, the Mi Note on Jan. 15, 2015 in Beijing, China. ChinaFotoPress via Getty Images

Why Xiaomi Terrifies the Rest of the Tech World

Mar 11, 2015

You can tell a lot about the state of the tech industry by looking at the company that's currently scaring the crap out of everybody. A decade ago, it was Google. More recently, Facebook became the 800-pound gorilla in social media and photo sharing. This year, the heavy is one that was unknown in the US until a year or so ago: Xiaomi.

Out of countless smartphone makers that have emerged to build on the Android mobile operating system, Xiaomi has not only broken apart from the herd, it's quickly given other smartphone manufacturers a run for their money. Xiaomi's share of the global smartphone market rose to 5.3% in late 2014 from 2.1% a year earlier, according to Statista.

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A big reason for Xiaomi's sudden success is that it designs its own hardware as well as the firmware that rides on top of Android's open-source software. Xiaomi's MIUI interface evokes the speed and sleekness of an iPhone or a high-end Samsung phone, but often retails for half the price. Most Android phone sellers, by contrast, rely on similar design templates offered by third-party manufacturers like Foxconn.

Xiaomi's simple strategy of high-quality gadgets at lower prices is threatening the business models of some of the biggest names in technology, including:

Samsung. In China, where the bulk of Xiaomi's phones have been sold to date, the company's market share has risen to 15% from 5% a year earlier. Samsung's, meanwhile, has fallen to 12% from 19%. According to IDC, Samsung's smartphone shipments in China declined by 22% in 2014, while Xiaomi's surged 187%.

Samsung has been a big presence in other emerging economies, but Xiaomi announced in January that it would be pushing aggressively into Brazil, Russia and other emerging markets. After launching in India in July, Xiaomi already has a 4% market share. And the company raised $1.1 billion in December, proceeds that could go to building manufacturing and marketing presences in new countries.

Apple has emerged as the predominant smartphone company at the high end of the market. So with Xiaomi offering stylish phones at lower prices, Samsung may find itself pinched between iPhones and low-cost commodity Android phones. Now Xiaomi is gunning for another core Samsung market: TV sets. In November, Xiaomi paid$200 million for Midea Group, a maker of consumer electronics, and said it would spend $1 billion to build out its TV ecosystem.

GoPro. Xiaomi is also planning on launching a site to sell its goods in the US. But for various reasons like the complex subsidies US carriers pay to offset sticker prices, Xiaomi won't sell smartphones here but instead will sell its fitness tracker, headphones and other accessories.

Earlier this month, Xiaomi said it would also start selling the Yi Camera, a 1080p high-definition action camera that sounds a lot like the best-selling Hero sold by GoPro. Only the Yi will sell for $64, or about half the price of the Hero. The Yi even improves on the Hero with a 16-megapixel camera shooting 60 frames a second. So again, high-end quality at half the price.

GoPro's brand is much stronger in the US than Xiaomi's. If that changes, GoPro faces a tough choice between slashing the Hero's price or watching its market share erode. GoPro's stock has already lost 39% this year amid concerns about whether it can maintain its torrid growth pace. The bigger the splash that Xiaomi's camera makes in the US, the more those concerns will grow.

Google. As a thriving smartphone company built on Android, you'd think Xiaomi's success would be a positive for Google, which still makes the vast bulk of its revenue from online ads. But Google's services and mobile apps are either blocked or hamstrung in China, so local companies like Alibaba and Baidu have long since learned to work on Android phones without Google's API.

Google has never had a strong footprint in China. What isn't clear is what role Google apps will play on Xiaomi's phones sold outside of China. On the one hand, Google takes a hard line on companies that use Android without its services. On the other, Xiaomi VP (and former Googler) Hugo Barra indicated last week that Xiaomi may not export to new markets the app store it uses for its Chinese customers.

Apple. Given the popularity of the iPhone 6 in China and across the globe, Apple seems to be immune for now to any threat posed by Xiaomi. But glance a few years down the road and it's not hard to imagine the Chinese manufacturer competing with the best products offered by the reigning king of Silicon Valley.

Xiaomi's MIUI is several years younger than Apple's iOS. But despite Apple's early lead, Xiaomi has quickly created an interface that is not only drawing more comparisons with the look and feel of iOS, it's designed to be used on a wide array of devices from phones to tablets to wearables.

Xiaomi's expansion trajectory also looks a lot like Apples: a smart TV console that streams digital content, a fitness tracker that could easily mature into a smartwatch, headphones that offer stylish looks and gold-colored metal. There were even reports this week of a Xiaomi electric car–spurious, to be sure, but it fits the idea that the most innovative companies are interested in the car market.

Apple's earlier iPhones suffered phases when their features weren't terribly distinctive from other top phones on the market. If that happens again, and Mi's user experience comes closer to that of the iPhone, Xiaomi could steal some of Appple's market share. In the meantime, the two emerging rivals have already taken tothrowing shade on each other.

Xiaomi is sure to face speed bumps as it races forward, like the patent suits it's already facing in India. Competitors may use patent litigation to slow Xiaomi's global expansion, but then again, a company worth $45 billion and planning an IPO can easily raise enough cash to buy a substantial patent portfolio of its own. Beyond that, it's hard to see what will slow Xiaomi's steady march ahead.

Read next: The Biggest Misconception About Apple

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