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Xiaomi’s Mi 1 smartphone stands out among domestic rivals as the first Chinese handset to use a dual-core processor, and with a 1.5GHz processor from Qualcomm. Samsung’s new Galaxy Nexus model runs off a 1.2GHz dual-core processor. (www.xiaomi.com)
Xiaomi’s Mi 1 smartphone stands out among domestic rivals as the first Chinese handset to use a dual-core processor, and with a 1.5GHz processor from Qualcomm. Samsung’s new Galaxy Nexus model runs off a 1.2GHz dual-core processor. (www.xiaomi.com)

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Chinese consumers are getting a second run at what could be the world’s best smartphone deal, and their response will be closely watched as an indicator of Chinese companies’ prospects in the fast-growing market for mobile devices and services.

Xiaomi Technology, a Beijing-based start-up, on Monday resumed online sales of a touchscreen handset featuring specifications that rival the fastest mobile phones from international brands, but which sells for half the average price of devices with similar processing power.

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Xiaomi’s smartphone stands out among domestic rivals as the first Chinese handset to use a dual-core processor, and with a 1.5GHz processor from Qualcomm. Samsung’s new Galaxy Nexus model runs off a 1.2GHz dual-core processor.

In early September when the company first started offering the Mi 1, which sells for Rmb1,999 (about $315), it had to halt sales after its website was swamped with more than 300,000 pre-orders in less than two days.

While ZTE and Huawei, China’s two largest telecoms gear makers by sales, are courting consumers with increasingly high-end smartphones and Lenovo, the world’s second-largest PC vendor by unit shipments, is seeking to expand its mobile device business, a handful of smaller Chinese handset makers are also trying to build brands both at home and abroad.

Industry experts say they face many challenges.

“It will be difficult for the smaller Chinese handset makers to capture significant market share because they [can]compete on hardware, but that is no longer the key. It is services and applications where you need to differentiate yourself,” says Dale Gai, an analyst at Barclays Capital.

Recognizing that dynamic, alongside their mobile devices Huawei and Lenovo have launched personal cloud services similar to Google’s. Global handset makers have followed Apple’s lead in creating revenues from services as handsets become increasingly commoditized.

Xiaomi, a start-up less than two years old and with fewer than 500 employees, wants to play in this league.

The company, whose name contains a reference to the acronym for “mobile internet” but also means “little grain of rice” in Chinese, received $41-million in funding from Morningside Capital, Qiming Ventures, IDG and its founders.

Lei Jun, the serial entrepreneur and angel investor who is Xiaomi’s founder and chief executive, once joked that in order to take on Apple, he would have to combine Google, Microsoft and Motorola.

In fact, the company’s seven founders include executives who once worked at those three companies, and in spite of being a start-up, Xiaomi is using the same parts and manufacturers as bigger competitors. The Mi 1 is assembled by Inventec, the Taiwanese contract manufacturer that also works with Motorola.

It is this combined expertise in software, internet and hardware that Xiaomi believes many larger rivals have failed to master.

“Motorola, Huawei or Lenovo are fine hardware companies and they have deep pockets, but internet services are just not in their blood,” says Lin Bin, Xiaomi president. “When I was still at Microsoft, I thought our company was invincible. But after I joined Google I saw how they developed software in a completely different way because as an internet company they had grown up with the constant interaction with users.”

Xiaomi’s first product was MIUI, an Android-based mobile user interface launched in August 2010 and which is already being used by half a million people.

The company has since introduced Michat, a mobile messaging tool, and a series of other applications, all of which are free so far. Chinese consumers are not used to paying upfront for online music, games or movies, but Mr. Lin says Xiaomi expects to make money once it has built up a large user base.

It then hopes to expand revenues by selling handset accessories as well as value-added mobile services.

That is where the handset comes in. Xiaomi does not expect to make a profit on the device but aims to use it to raise the profile of the company and operating system. The handset is being sold only via the company’s website, and with each order, an account for Xiaomi services is set up for the purchaser.

China Unicom, the country’s second-largest mobile operator by subscribers, has committed to taking up a large batch of the handsets for subsidized distribution to subscribers. Mr. Lin expects that to bring total shipments of the Mi 1 to at least 1 million units.

“But we could end up selling as many as 3 million if things go well,” he says.

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