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Why Apple Should Buy China's Xiaomi

Dec 29 2013, 10:36am CST | by

Why Apple Should Buy China's Xiaomi

Photo Credit: Forbes

Let me be clear from the beginning. I don’t have any information regarding whether Xiaomi — China’s low-cost smartphone maker – is for sale or not. And I have no information concerning whether or not Apple is interested in buying Xiaomi either.

But in a global economy, almost every company can be an acquisition target and a would-be acquirer — provided that the synergies, the time, and the price are right.

As discussed in a previous piece, Xiaomi is part of China’s “entrepreneurial sector,” where –  having learned a great deal from their US counterparts  — companies are now private ventures, owned and managed by a new generation of entrepreneurs for the sake of consumers rather than government bureaucrats.

Xiaomi has taken its cue from both Google and Apple. From Google, Xiaomi has adopted an open operating platform that has won consumer enthusiasts. From Apple, Xiaomi has learned how to master the brand buzz. It has also learned how to compete on innovation rather than imitation.

Lessons from Google and Apple have helped Xiaomi build sufficient buzz to challenge Apple in China, where it has a price advantage.

Here are two reasons why the purchase of Xiaomi by Apple would make sense.

First, it would eliminate a competitor in the world’s largest and fast growing market, doubling overnight its market in China. Xiaomi has a 5% market share in China according to Flurry Analytics. A larger market share would help Apple compete effectively against the market leader Samsung.

Second, it would allow Apple to enter the low-cost smartphone market in rural China and Southeast Asia without undermining its brand image, a growing concern for Apple as the smartphone market moves closer to maturity in developed markets. Xiaomi’s smartphones sell for less that half the price of iPhones.

To be realistic, such a strategic move is very unlikely. Apple has a tradition of relying on organic growth rather than acquisitions. In addition, acquiring a Chinese company is a tricky business, as property rights aren’t well defined in China. This means the word “private” has different meaning in China than in the US, which complicates matters, especially when the acquirer is a foreign company. Besides, there are all sorts of issues that make it difficult to complete a deal in China.

Simply put, the synergies between Apple and Xiaomi may be there, the price shouldn’t be a problem given Apple’s cash chest, but the time may not be ripe.

I wouldn’t bet on such a deal. But I wouldn’t be surprised if Apple enters such deal with a low-cost smartphone maker sometime in the future, as smartphone wars shift into the “bottom of the pyramid” — the large number of consumers with low per-capita income.

Source: Forbes

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